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How Much Should I Pay For a Car? A Budgeting Guide

May 7, 2024 by Lily Roberts Leave a Comment

Purchase Car

Upgrading your vehicle can make driving around town easier and more enjoyable; however, car prices have never been higher. The average price for a new car in 2024 is $47,244 and $28,371 for a used car. This makes buying a car one of the biggest expenses for most Americans along with purchasing a house or planning a wedding. 

Before you start test-driving vehicles and picking out colors, set a realistic budget for how much car you can afford. Use this guide to map out your finances and learn about your payment options. 

Which Car Can I Afford?

You might need to work backward to determine what kind of car you can afford. Start by calculating your ideal monthly transportation costs, including insurance and gas costs. Some websites have car loan calculators so you can see what different monthly payments would look like based on the vehicle price. 

The down payment you have for the vehicle will also determine what you can afford. The larger the down payment, the smaller your monthly payments should be. The loan terms also impact your payment amount — a longer loan will result in smaller payments but could potentially have higher interest rates.

Digital tools can give you a car budget so you know what vehicles to look for. This lowers your risk of buying a car that is too expensive for your income level.   

Setting a Realistic Car Budget

Financial experts recommend spending no more than 10% of your gross monthly income on transportation. If you earn $5,000 per month, then your transportation budget should be $500. 

However, this does not mean that you can afford a $500 car payment. Your transportation costs also include gas, insurance, and maintenance. When you create your car budget, break down these line items so you have a clear picture of what your actual car payment should be. 

The True Cost of Car Ownership

Any car you buy requires upkeep, even new cars and electric vehicles. You will have to account for insurance costs, gas prices, and regular maintenance. 

Fuels costs are the first thing to consider. While gas prices can fluctuate, you can look at your current gas usage to get an idea of how much you spend on this expense each month. Most Americans spend between $150 to $200 on gas each month. Your new car could either lower your gas bill if it is more efficient or increase your gas costs if it gets worse fuel mileage. 

The next thing to budget for is maintenance. Keeping up with the management of your car can extend its lifespan and help you get more value from this purchase. Even if you don’t use your maintenance budget each month, you can set aside money to pay for car repairs. 

Finally, make sure you have enough room in your budget for car insurance. While car insurance costs vary by state, the average person pays $2,314 annually for full-coverage car insurance. This comes out to $192 per month on average. 

Depreciation: The Hidden Cost

If you need to sell your car, you may discover that depreciation has significantly reduced its value. On average, cars lose 20% of their value during their first year. In the next 5 years, cars lose 15% of their value each year. This reduces their resale value and limits how much you can borrow against the vehicle. Keep depreciation in mind as your car gets older. 

Financing Your Car Purchase

There are multiple ways to finance your car purchase so you can get your ideal vehicle while staying within your budget. Here are a few options to consider. 

Traditional Car Loans Explained

One of the most common ways to purchase a vehicle is through financing by the dealership. With this option, the dealer provides the loan and you pay them back every month. This is one of the fastest ways to buy a car because you won’t need to seek out financing from third parties before starting the purchase process. 

Auto loan interest rates can range from 5-22% depending on the size of the loan, your credit score, and the condition of the vehicle. The lender also sets rates to make sure the loan is profitable. One of the drawbacks of securing financing through the dealership is that you have to use their proposed rate. You may prefer to meet with your bank or credit union to see if you can get more favorable loan terms. Lower annual percentage rates (APRs) mean that you pay less for the loan which means that you can potentially pay off your car faster. 

Leasing a Car

Instead of buying a car, you can lease it from a dealership. With this option, you essentially rent the vehicle for a few years until you are ready to switch to a different option. Most people lease new vehicles and trade them in after a few years. The dealership then sells the car to another buyer as pre-owned.

Leasing could be an option if you don’t have a large down payment or don’t want the stress of owning a car. However, you could end up paying more to lease your vehicle for a few years than if you bought it outright. 

Stock Loans as a Financing Option

You can also take out a loan against the stocks and shares you currently own. Stock loans offer secured financing by using investments as collateral. You aren’t selling your stocks, and get to keep this investment, but are simply borrowing money based on their value. 

If you worry that the dealership isn’t going to give you favorable interest rates, see if stock loans are better and more affordable for your needs. Use the stock loan calculator to see how much you could be approved for. 

Tips for Negotiating the Best Deal

When shopping for a car, you don’t have to accept the sticker price at face value. By carefully reading the contract and knowing what you can negotiate, you could get a better deal on your new vehicle. Here are a few tips to get a good price:

  • Shop around. Visit multiple dealers who sell the same brand of car to see if one offers more favorable rates. 
  • Don’t focus on the monthly payment. While you should know how much you can afford monthly, don’t bring this up at the dealership. Instead, focus on the full price of the car once fees and interest are added, and keep insurance, gas, and maintenance expenses in mind too.
  • Read the contract for excessive fees. Some dealers charge cleaning fees and try to upsell you on insurance options or add-ons that raise your overall costs. It’s worth your time to read the fine print. 
  • Focus on the APR, not the interest rates. The APR includes all of the extra costs and fees associated with the loan. It better reflects the cost than the interest rate. 

You can also bring a friend or family member with you if they are more comfortable negotiating car prices. This person can be your support system to ensure you get a good deal. 

Avoiding Common Car Buying Pitfalls

It’s important to have your finances in order before you start test-driving vehicles, but there are other factors to consider as you navigate the car-buying process. Avoid these common pitfalls to make sure you are happy with your purchase. 

  • Buying the wrong vehicle. You don’t want to buy a car that is too big, too small, not fuel-efficient enough, or falls out of your price range.
  • Not shopping around. Visit multiple dealerships and car sales locations to find the best model. The average American consumer is willing to drive 469 miles to get a good deal on a car. 
  • Not negotiating the price down. Never accept the car price at face value, you might be surprised how much you can save by negotiating. 
  • Not reading the paperwork. Check for any unexpected fees or costs that the salesperson doesn’t review with you. Many of these can be removed. 
  • Not being ready to ready to walk away. You have the power in the purchase process and should not feel pressured to buy a car you aren’t comfortable with. 

By properly preparing, you can buy a car that you love and that meets your needs for several years to come. 

Filed Under: Articles Tagged With: financing

Lily Roberts

About Lily Roberts

Lily Roberts is a seasoned financial writer with a strong academic background in history, having graduated from Hamilton College in 2015. Her unique blend of analytical skills from her history major and her deep understanding of financial concepts has allowed her to craft insightful and engaging content in the financial industry. Prior to her writing career, Lily gained valuable experience working as an intern at a reputable investment firm, where she honed her expertise in market analysis and financial communication. Her commitment to delivering accurate, informative, and accessible content continues to resonate with audiences seeking trustworthy financial education and information.

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