What is the best budget to buy a car?

Budget Considerations When Buying A Car

If you find yourself in the market for a new vehicle, it’s important to ask yourself how the monthly payment will fit into your budget. So, before you head off to the dealership, we thought we would share a few budgeting tips for you to consider as you shop for your next vehicle.

How Much Car Can You Afford?

If this seems obvious, you’d probably be surprised how far down ‘affordability’ lands on people’s priority lists. After all, shopping for a new car is exciting! But before the thrill of a test drive and that ‘new car smell’ influence an impulse purchase, we highly recommend taking the time to evaluate how much you can truly afford. As you think about your budget, consider all the costs of purchasing a car. Down payments, dealership fees, taxes & registration fees are just a few additional costs that will impact what you can afford and should be factored into your car buying budget.

Costs Beyond Your Loan

While it’s appropriate to focus on getting the best terms for your loan, there are other expenses beyond your interest rate and monthly loan payment that are worthy of consideration. Interested in a larger vehicle model like a truck or a family-sized SUV? You’ll want to consider how fuel costs will fit into your monthly expenses. Got your eye on a sleek new luxury sedan? Research the maintenance cost of that specific make and model. The cost and expected frequency of oil changes and other routine repairs might surprise you.

The Age-Old Question: New or Used?

As you consider how a new car might fit into your budget, you’ll have to ask yourself the time-honored question: should I buy new or used? We’ve all heard the statistics about a new car losing a large chunk of its value as soon as you drive off the lot, but dealer perks like free oil changes & additional warranties, plus a lower cost to insure, and the latest technology when it comes to fuel efficiency can significantly close the gap when it comes to total cost of ownership. Set on capturing the savings of buying used? Be honest with yourself about how long you plan to keep this vehicle and how the terms of your loan match up with that plan. This will help you avoid the “upside-down” situation where your vehicle is worth less than what you owe when you might find yourself in the market again. If you’re considering buying used and keeping it long-term, be sure to do some research on average costs for common (and uncommon) repairs.

When it comes to purchasing a new car, it may seem as easy as fitting a car payment into your monthly expenses. We hope we’ve shown that it’s important to take the time to evaluate all of the costs of a vehicle purchase and fitting a new car into your budget in such a way that you can keep your financial goal on track. When you’re ready to move forward with finding a new ride, head over to our Car Buying page, where tools like TrueCar, CarFax, and our Check-In-Hand loans make the vehicle purchasing process quick, easy, and convenient.

Related Articles

• When Is The Best Time To Buy A Used Car?
• Are Zero-Percent Financing Offers Too Good to be True?
• Is Leasing a Vehicle a Good Idea?

7 Easy Ways to Calculate Your New Car Budget

Disclaimer: This site contains affiliate links from which we receive a compensation (like Amazon for example). But they do not affect the opinions and recommendations of the authors.

Wise Bread is an independent, award-winning consumer publication established in 2006. Our finance columns have been reprinted on MSN, Yahoo Finance, US News, Business Insider, Money Magazine, and Time Magazine.

Like many news outlets our publication is supported by ad revenue from companies whose products appear on our site. This revenue may affect the location and order in which products appear. But revenue considerations do not impact the objectivity of our content. While our team has dedicated thousands of hours to research, we aren’t able to cover every product in the marketplace.

For example, Wise Bread has partnerships with brands including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi, Discover, and Amazon.

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So you’re looking for a new car? Congrats! If you’re in the market for a new vehicle, you should first determine what you can actually afford. And if you’re considering leasing or financing a vehicle, you should understand the total costs involved. That’s because the total amount you can spend = the approved loan amount + cash down payment + trade-in amount. Consider the following factors when calculating your new car budget.

1. Total Price

The total cost of your vehicle is more than just the sticker price; it will also include things like the sales tax, title and registration fees, and optional items, like extended warranties. Keep these in mind and leave yourself some wiggle room with your budget when shopping for a new vehicle. Remember that you will also need to worry about auto insurance, gas, regular maintenance, repairs, registration, and other costs associated with owning a car.

2. Monthly Payments

If you will be financing or leasing a vehicle, then you’ll need to calculate your ideal monthly payments. Keep in mind that your monthly payment will include both principal and interest. The loan term, interest rate, and down payment will all affect your monthly payment. If you can wait to make your purchase until interest rates are lower, then you can afford a more expensive vehicle or save money on your payments.

3. Down Payment

Most vehicle purchases are made with a down payment. The more you can devote to your down payment, the lower your monthly bill will be.

4. Trading In Your Old Car

Have you considered trading-in your old car? It will help reduce the total cost of the new vehicle and can improve your loan terms. Trading in your vehicle may also give you more pull when you are attempting new car negotiations. (See also: The Joy of Buying a New Car: 9 Car Buying Tips)

5. The 10%–20% Rule

For drivers who want to be frugal with their purchase, you’ll want to devote about 10% of your income towards your vehicle. This means that if you make $3,000 per month, you’ll want to devote $300 per month towards monthly payments for all of your vehicles. (Most people spend about 20% of their income on their transportation, so this may be a more realistic estimate.)

If you’re not planning on financing your new car, then the 10%-20% rule still applies. You’ll want to take 20% of your annual income to determine what you can afford to spend on a vehicle. For instance, at $36,000/year, you’ll be able to spend $7,200 yearly on your vehicle ($36,000 x .20 = $7,200).

6. Your Total Debt

If you currently have a lot of debt and don’t want to add too much onto your load, then there is a simple 36% rule to follow. Consumer Reports found that it is best to spend no more than 36% of your gross monthly income on debt. Itemize what all of your monthly debt payments are, including mortgage, credit cards, and loans. Once you’ve totaled those, subtract them from 36% of your income to determine how much you can realistically add. For instance, if your income is $3,000 per month and you already spend $800 per month on credit card and loan payments, you can only afford a new monthly auto loan payment of $280, calculated as ($3,000 x .36) – $800 = $280.00.

7. Affordability Calculators

Every person’s situation is different, so only you can determine what your budget is and what you are willing and able to spend on a new car. Fortunately, there are a number of free affordability calculators available online that can help you calculate your ideal price range. They can even account for things like your loan term, finance rate, down payment, and the value of your trade-in (if you have one). An auto loan calculator can also help you find the ideal total price, based on how much you can afford to spend every month.

Do you have other ways of determining how much you should spend on transportation? Please share your thoughts in the comments!

Disclaimer: This site contains affiliate links from which we receive a compensation (like Amazon for example). But they do not affect the opinions and recommendations of the authors.

Wise Bread is an independent, award-winning consumer publication established in 2006. Our finance columns have been reprinted on MSN, Yahoo Finance, US News, Business Insider, Money Magazine, and Time Magazine.

Like many news outlets our publication is supported by ad revenue from companies whose products appear on our site. This revenue may affect the location and order in which products appear. But revenue considerations do not impact the objectivity of our content. While our team has dedicated thousands of hours to research, we aren’t able to cover every product in the marketplace.

For example, Wise Bread has partnerships with brands including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi, Discover, and Amazon.

Wise Bread Picks

• Travel Rewards Credit Cards
• Cash Back Credit Cards
• 0% Balance Transfer Credit Cards

20/4/10 Rule of Thumb for Car Buying

LaToya Irby is a credit expert who has been covering credit and debt management for The Balance for more than a dozen years. She’s been quoted in USA Today, The Chicago Tribune, and the Associated Press, and her work has been cited in several books.

Updated on December 12, 2022
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Figuring out the best way to fit a car purchase into your budget is key to making sure you buy an affordable set of wheels. The 20/4/10 rule of thumb for car buying is one way to quickly narrow down your vehicle options when you’re preparing to finance a new car.

Here’s how the rule works so you can figure out how to apply it to your own finances, plus some insight on when it might make sense to bend the rules to fit your circumstances.

Key Takeaways

• The 20/4/10 rule of thumb for car buying helps you shop for a vehicle that will fit your budget.
• The rule is to make a 20% down payment on a four-year car loan and spend no more than 10% of your monthly income on transportation expenses.
• Because your credit score affects the size of your monthly payment, you may need to buy less car if you have a lower credit score.
• Some car buyers may need to adjust the numbers slightly to better fit their budgets.

How Does the 20/4/10 Rule of Thumb for Car Buying Work?

The 20/4/10 rule uses straightforward math to help car shoppers figure out their budget. According to the formula, you should make a 20% down payment on a car with a four-year car loan and then spend no more than 10% of your monthly income on transportation expenses. That 10% spent on monthly transportation includes your auto loan payment, maintenance, gas, and car insurance.

For instance, under the 20/4/10 rule, a person making $70,000 should aim to spend less than $700 per month on transportation costs.

Note

You can decide whether to use gross or net income to calculate the 10% amount. Using your gross income allows you to spend more on your vehicle, while using your net income provides a more conservative number.

When you calculate 10% of your own monthly income, you can then use your budget to figure out whether you can afford that monthly payment. For example, if your annual income is $75,000, your monthly budget should show you whether you have a surplus of $750 to dedicate to an auto loan payment, plus other transportation expenses.

Why the 20/4/10 Rule of Thumb Generally Works

For most people, the 20/4/10 rule is a simple enough guide to stick to for car shopping. Understanding your budget in advance gives you more negotiating power when you’re shopping around.

Using our example from earlier, someone who makes $75,000 a year and sets aside 10% of their monthly income—$750—for transportation costs.

As auto loan interest rates—and therefore, your monthly payment—hinge on your credit score, they also impact your car loan amount. For example, a car buyer with a very good or excellent credit score of 720 to over 800, could qualify for a low annual percentage rate (APR). On the other end of the spectrum, a car buyer with a low credit score, between 500 and 589, may qualify for an APR that’s four times as high as someone with excellent credit.

Here’s how credit scores translate to your car-buying decision. Sticking to a monthly car payment of no more than $540 means a person with an excellent credit score could borrow $24,000 and manage a total vehicle purchase price of $30,000 (including the 20% down payment). On the other hand, buying with a low credit score could limit you to a loan of around $20,000 and a total vehicle price of $25,000.

Furthermore, the car buyer with the low credit score could ultimately pay around four times the interest on a four-year loan as a buyer with excellent credit who purchases a more expensive vehicle with a four-year loan.

Note

You can use a car loan calculator to plug in your own numbers including your credit score to determine your potential interest rate and monthly car loan payment.

Grain of Salt

The 20/4/10 rule of thumb doesn’t work for all car-buying situations. While the rule does allow you to spend up to 10% of your monthly income on transportation costs, your other monthly expenses may not allow you to spend quite that much. In addition, you may be able to spread your payments over five or six years instead of four to lower your monthly payment.

Note

Be careful extending your car loan beyond four years, especially if you have a bad credit score. Your monthly payment may be lower, but you’ll pay more interest in the long run.

According to vehicle valuation and information source Kelley Blue Book, the average cost of a new car in October 2022 was around $48,000. Assuming your gas and insurance costs are $400 a month, you would need a monthly income of $12,540—or $150,480 per year—to stick to the 20/4/10 rule, even if you have excellent credit.

Adjusting your budget is another option for affording the monthly payment on a new car, if your other monthly expenses are low. If this is the case, you can increase the 10% part of the rule, allowing you to afford a car with a higher price tag.

Frequently Asked Questions (FAQs)

How can I stick to my budget when buying a car?

If you decide to use the 20/4/10 rule, get preapproved for a car loan that fits into that budget before you shop for a car. When you go shopping, be sure to let the seller know that you’ll be sticking to your budget, and only consider cars that fall into that price category.

How much should I budget for a car if I want to pay cash?

Another car-buying rule of thumb says that you shouldn’t spend more than 35% of your yearly income on a car. So, if you make $100,000, you shouldn’t spend more than $35,000 on a car.

Should I buy a new or used car?

While the average cost of a new car was over $48,000 in late 2022, the average cost of a used car was around $28,000 in late 2022. You may have an easier time sticking to your budget if you go the used route.