How much should you spend on a car?
Buying a vehicle can be one of the most costly expenses for households, and with the average monthly car payment for a new vehicle in the U.S at $523 a month, cars aren’t getting any cheaper. On the contrary, the median household income in the United States was only $62,175 as of June 2018. Based on this information alone, many Americans are unable to afford the average cost of a new vehicle.
So, how do you avoid overspending on a vehicle?
In this article you’ll discover techniques and guidelines to help you establish benchmarks for your auto payments and strategies to find a car you can afford.
How much car can you afford?
To ensure you are making the best financial decision when it comes to purchasing a new vehicle, we recommend following a few simple guidelines and rules. After all, everyone’s lifestyle and saving habits are different.
Map out your Expenses
Estimating your auto budget depends on multiple factors with the main one being your total monthly expenses. Which may include your mortgage, student loans, personal loans, rent, cable bills, daycare, and more.
Mapping out your expenses allows you to visually see the amount of disposable income you have. This will help you determine how much you can afford to allocate towards a monthly car payment.
Anticipate Your New Expenses
You should predict any additional expense you could incur as a result of purchasing a new or used car. This might include car insurances, monthly maintenance, and more. You want to have an idea of how these new expenses could impact your budget and savings.
Figure out your ideal monthly car payment
Your monthly car payment can be impacted by many factors. These factors include the initial down payment, trade-in value of current vehicle, state sales taxes, interest rates, your credit score and more. All these factors could influence how much you have to pay for a car upfront and may impact your monthly payments.
When trying to determine what your ideal monthly car payment amount should be, the auto affordability calculator is a great tool to use. This valuable and FREE resource will help keep you within your budget.
After mapping out your current expenses, anticipating new expenses and determining your ideal monthly payment, you can now compare your budget with some general car buying guidelines.
Here are a few common vetted budgeting tips for purchasing a vehicle:
- The 20/4/10 Rule: You should put 20% on a down payment for your auto loan while financing the car for a loan term of no more than 4 years. You should also make sure your monthly payment is under 10% of your salary*.*Note this includes principle interest on the loan and car insurance expenses.
- The 36% rule: Unlike the 20/4/10 rule, this rule encompasses any of your loan payments. When utilizing this principle, your total loan payments should be no more than 36% of your salary. This includes your mortgage, car loan, personal loans, student loans and credit card minimum payments.After adding up all of your debt you can see how much you have left for your car budget.
- The 20% Rule: This rule encourages you not to spend more than 20% of your annual salary on a car.
It’s important to know how much you should spend on your car. Especially since a car can be one of the most expensive purchases in a household. Hopefully these tips help you come up with a good game plan and a solid framework for evaluating how much you should spend on your car.
Looking for a car? Check out our article 2019 Best Used Cars to Buy Under $15,000.
Need an auto loan for your next vehicle purchase? Check out Mariner Finances car loans.
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