How Much Should I Spend on a Car? (2024)

Leather interior. Rearview cameras. Automatic emergency braking. While you may dream of a shiny new car with all of these features and more, you may need to prepare for sticker shock.

According to Kelly Blue Book, at the end of 2022, the average new car costs more than $49,500, and used cars average more than $26,500 in early 2023. You have to think about your needs, budget, and other financial priorities, then decide how much you can spend and wish to spend to meet your transportation needs. Whether it’s a used or new vehicle, we’ll try to make the decision easier for you.

How to Calculate How Much You Can Afford to Spend on a Car

When thinking about what you should spend on a vehicle, keep in mind that the purchase price is only one part of your expenses.

To make sure you can comfortably afford the car you want, make sure you account for the following:

1. Income

Spend no more than 10% of your salary on transportation expenses, including car payment, insurance, and fuel. For example, if your salary is $4,000 per month, then you should spend no more than $400 on transportation.As well, it is advisable that your down payment be at least 20% of the total purchase price of the vehicle and that your loan term be 48 months or less.

To be sure, that range is simply for guidance. Depending on your income and expenses, you may have to budget less. For example, if you live in an area with high housing costs, then you’ll have less to spend on a car.

2. Existing Debt

If you have debt like student loans, medical bills, or credit card balances, then your payments may eat up a big part of your income. Lots of debt will trim that car-buying budget.

3. Financing

When you apply for a loan, lenders review your application and your credit score. Once your loan is approved, the interest rate will be set. That rate, based on your credit score, helps determine your repayment amount.

Your interest rate affects both your monthly payments and total repayment costs—a lower rate means you will spend less over the life of the loan.

In August 2023, for a 48-month consumer loan from commercial banks, the average interest rate on a car loan was 8.30%. Borrowers may find a lower or higher rate depending on if they have good or subprime credit.

4. Taxes and Fees

When you buy a car, the purchase price is only part of your total layout. You’ll also pay fees—and, in most states, taxes—including:

• Sales tax: If your state charges sales tax, then you’ll pay that on the purchase price minus any discounts and trade-in allowances. A handful of states don’t tax car sales.
• Registration fee: You must register your vehicle. Registration fees vary by state and can be tied to multiple factors.Depending on the vehicle and where you live, you might pay as little as $15 per year or considerably more than $100 per year.
• Tag and title fee: You will have to pay for the title and license plates for your vehicle.
• Documentation fee or dealer fee: In some states, documentation or dealer fees are common. These fees are in addition to the other costs and vary by location.

To demonstrate how those expenses can add to your total cost, consider an example. If you bought a $30,000 car in Florida, then you also would pay the following:

• Sales tax: $1,800 (6% sales tax)
• Initial registration fee: $225
• New title fee: $77.25
• Original license plate fee: $28
• Dealer fee: $399 (varies by location)
• TOTAL: $2,529.25

5. Car Insurance Premiums

Drivers are required to carry liability insurance in nearly every state. However, most drivers also opt for collision and comprehensive coverage for extra protection.

According to the Zebra, the average U.S. car insurance policy costs $1,759 per year, or about $147 per month as of December 2023. Your premiums are dependent on the type of car you own, your age, your driving history, your location, selected coverage options, and the number of miles that you expect to drive.

Remember that the kind of car you drive affects the amount of insurance that you pay. New, more expensive cars usually cost more to insure, although exceptions to this rule do exist.

6. Maintenance Fees

While you may not be thinking about repairs on a new vehicle, all cars need maintenance. If your car is older, it may need a tune-up or new tires.

In general, maintenance costs 9.55 cents per mile. If you drive 12,000 miles per year, then you should expect to spend $1,146 on maintenance annually.

7. Fuel

If you commute to school or work, gas is another expense to add to your budget. According to a report from the Bureau of Labor Statistics, in 2022, the average person spent $3,120 per year on gas, or $260 per month. However, if you have a lengthy commute or enjoy road trips, then your actual cost may be much higher. To add money back to your budget, buy a car with a smaller motor that burns less fuel.

Deciding Your Budget

Using the above information, here’s an example of how to create a budget for buying a car. For this example, we rolled the cost of tax, title, and fees into the purchase price of the car.

If your annual salary is $100,000 and you follow the 20/4/10 rule (20% down payment, 4-year loan term, and 10% of salary for transportation costs), then you’ll budget about $833 per month for transportation. After subtracting the cost of your insurance and setting aside money for fuel and maintenance, that leaves you with $330.50 per month to use as a car payment.

If you get a 48-month loan with an interest rate of 8.30% and put down 20% of the vehicle price, the most you could afford is $16,687.50. With 20% down, you would borrow $13,350 and have a monthly payment of $328.