How Much Car Can I Afford
In the short driveway of a modest multi-family home in rural New Hampshire is a special vehicle with a memorable license plate. If read phonetically, it says ‘My Money.” It is a new Corvette, and it may be equal in value to the house. In that home is a person living their best life, having made a dream a reality. That person bought a supercar, and if the plate is true, used all of their money.
The question, “How much car can I afford,” doesn’t have just one answer. However, Car Talk understands that, for most people, the question is genuine. Thousands of car shoppers ask it of themselves every day. We dug through endless boring stories from media outlets related to personal finance to bring you an answer.
Never Ask Your Dealer How Much Car You Can Afford
Before we go too far, if you have walked, biked, or ride-shared your way to a car dealership and Googled the story’s title, stop right now! Slow your roll. Whatever you do, never, ever ask this question to a car dealer. It's the equivalent of walking into the dealership with your wallet open and saying, “Please take all of my money.”
Many car dealers (OK, it’s all of them) will try hard to push you away from a budget-based purchase you can afford toward a deal based on “your monthly payment.” They do this because they want to hide away all the hidden costs, fees, and golf club memberships they will stuff into your purchase agreement. Know how much you can spend before you go shopping, and have your loan already sorted out before you even begin to shop online.
How to Determine How Much Car You Can Afford
Get a Loan Before You Shop
If you found this page, we can assume you need a vehicle. However, you also need a place to sleep and food to eat. You need to sort out your budget to determine how much you can afford. Let us give you some advice; Do create a budget, and then search for a loan before you shop for your car. The process of searching for a loan is a fantastic reality check. Most lenders won’t help you beyond ensuring they can get paid, but they have many helpful questions that will open your eyes to how much you can afford to pay each month to them.
Here is Car Talk’s comprehensive guide to financing a car and getting a car loan.
Helpful Guidelines and Rules of Thumb
Looking for a quick answer to the question, “How much car can I afford?” Well, here you go! This is a list of what financial experts say about how much car you can afford:
- NerdWallet - Car buyers should spend no more than 10% of their take-home pay on a car loan payment and no more than 20% on car-related expenses.
- MarketWatch - Spending No More Than 15% of Your Monthly Take-home Pay on Car Payments Is Recommended. Your car-related expenses shouldn’t exceed 20% of your monthly take-home pay
- American Family Insurance - Your car-related expenses shouldn’t exceed 20% of your monthly take-home pay.
- Bankrate - Spend no more than 20 percent of take-home pay on a car — including the cost of car payments, fuel, insurance, and other related expenses.
- MoneyUnder30 - The car’s price should never exceed 35% of your gross annual income. If you're just looking for a basic ride to get to work and back, consider capping the car price at 25% or even 15% of your annual income instead.
There is a pretty tight consensus among financial experts on what your percent of earnings budget should not exceed.
The Actual Cost of Owning a Car
Why Fuel Matters So Much
Here’s something most car publications won’t tell you - If you choose a muscle car or a pickup truck, your single biggest expense for this vehicle, especially a used one - may be fuel costs. Let’s look at the annual fuel costs for some cars and see what we discover:
| Car Model | EPA Annual Fuel Cost Estimates* | Monthly Fuel Cost |
|---|
*Based on national averages for energy costs and 15,000 miles per year driven.
The type of vehicle you select will have a big impact on how much you have left over for the actual car payment. If you are struggling to make the budget for a car purchase add up, start by shopping for hybrids and EVs. Doing so leaves a lot of room for insurance and other hidden costs.
Finance Charges and Insurance Can Spoil The Fun
One thing we can’t offer you is an accurate insurance or finance charge. That’s because how much you pay for these is specific to you. Call your agent, or start with a new one if you need an estimate for car insurance. Your bank can tell you how much of your annual car payment will be finance charges.
Creating Your Budget
AAA recently reported that the average annual cost to own a car has passed the $10,000 mark. That is the average, so it includes inexpensive and pricey models. AAA suggests a comprehensive budget to determine your true costs of ownership. Creating a budget for a new car is not hard, but it is also not what most folks expect. Here is how we would budget for a car:
| Budget Item | Monthly Cost | Annual Cost |
|---|
How Much Car Can I Afford Chart
| Hourly Pay | Annual Income After 10% Tax | Monthly Income After 10% Tax | 15% Per Month For Car Payment |
|---|
*Our chart above assumes that you work 40 hours each week and are paid for each of the 52 weeks per year.
The Fixed Cost of Ownership Model
One reality for many shoppers with limited income is that a car maintenance bill or unexpected repair can break your budget. If you have no choice but to buy an old beater, it will break, and it will be painful to pay a lot for the repair on a car that is not really worth repairing.
But what choice is there? Well, eventually, you will have a choice to opt into financing a new car. This presents you with a new opportunity to obtain a fixed cost of ownership instead of a variable one.
Once you can buy new, you can choose a brand with a long warranty or short one. Included maintenance or pay-as-you-go. Let’s compare two affordable brands that make fine automobiles, Nissan and Hyundai, to illustrate our point.
- Nissan Model: Zero included maintenance, short warranty ending in 60K miles.
- Hyundai Model: Three years of included maintenance, longest warranty ending in 100,000 miles.
As you can see, with Nissan, you start paying for maintenance within a few months of ownership. Oil changes. Tire rotations. Rinse and repeat. By the time you get to year three, you will have paid out about $700 in maintenance costs. If you instead bought a Hyundai model, you would have paid zero on these things.
Now let's say that after driving 15,000 miles per year for about five years, you have a big problem with the transmission. Your Nissan warranty is up. You’re on your own. Shell out $5,000 to fix the transmission. If you bought a Hyundai, you pay zero because the warranty lasts much longer. Don’t get us wrong. We love Nissan vehicles. It’s just that in the world of great cars, some come with no included maintenance and short warranties, and some come with many years of included maintenance and very long warranties. If you are on a tight budget, which would work better for you?
Why “Old” People Buy “Boring” Cars
Related to the warranty and included maintenance topic is reliability. We’ve looked so hard at reliability charts our eyes bled. We wanted to find out which model had the single best reliability in all of the car world. Well, it turns out it is the Toyota Prius. It’s not as good at smokey burnouts as a Camaro SS, but it offers you the very best chance to be on time for a job interview. Or your wedding. Or to take your new baby home from the hospital. Do you see where we are going with this?
Certain brands (Toyota, Mazda, Hyundai, Kia) have a very long track record of real-world reliability and affordability. You may be wondering how this relates to “How much car can I afford.” In our opinion, it is directly related because we assume you really mean, “How much running car can I afford to buy?” If you are looking for a doorstop in the shape of a pretty car, we are not the right source. If you want one that works, think about our examples and head to your favorite consumer advocacy publication to check out the reliability scores of the models you are considering. Even the best brands have some duds and even average brands have some real reliability gems.
Pricey Options To Avoid When Car Shopping
If you made it this far, congratulations! Now you get to read our rant on pricey options. Since you are thinking hard about your budget, don’t blow it at the very last minute. When you buy a car, there is a person sitting in an office waiting for you. The AFTER-SALES PERSON. The job of this loathsome individual is to sell you thousands of dollars in car-related rubbish. Paint protection. Body side molding. Volatile organic compounds to protect your seats. Extended warranties. Stolen car tracking. None of it has any value to a new car owner. Skip it all. You can always go back later and buy it for cash. Never finance this junk.
Read more on How to Buy a Car here. Read more on Common Mistakes to Avoid When Getting an Auto Loan. Read more on How Much Income Needed to Buy a Car here.
