Insurance » Auto Insurance » How Much Car Can You Afford?
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How Much Car Can You Afford?

When buying your next car you want to know that you’re going to be able to afford it and stay within your budget. Here's the right way to make it happen.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. Our opinions are our own.

Table Of Content

When it comes to buying your next car you want to be sure that you’re making the right choice. After all, this is an extremely big decision. You want to know that you’re going to be able to afford it, but that means more than you think.

When you consider cost it’s not just about the vehicle cost. It’s also about insurance, maintenance and even gas. Can you afford all of these things for the vehicle you want? Also, you’ll need to consider the insurance rates that go along with that vehicle.

Historical data compiled by Bankrate on auto loans interest rates for a 60 months new car in the United States shows that Jan 2019 was the highest at 4.77%. In contrast, Jan 2015 was the least at 4.07%. Also, there was gradual increase in interest rates from January 2015 to January 2019 by 0.70%.Chart: Interest Rates on 60 Months New Car Loans in the United States from January 2014 - 2021

So, how much can you really afford to spend on a car?

Stick to 15%

The 15% rule is a financial expert rule that says that your vehicle expenses should be no more than 15% of the money that you take home with you every month. This is an average, of course, so keep in mind that some experts set the bar a little higher and some a little lower.

That means you want to take your current take-home salary (after taxes) and multiply it by 0.15. The resulting amount is how much you can afford (monthly). That should be the total car payment plus all of your monthly expenses for that vehicle.

The reason that financial experts set this number is that you should be able to afford everything you need.

By only spending 15% of your income on a vehicle you have the rest to pay for other expenses. You should be able to afford even more sudden, unexpected expenses.

Example: How Much Car Can I Afford on 50k Salary?

As mentioned, a good general rule of thumb is that you should spend a maximum of 15% of your take home pay each month on your car. So, if you receive $3,000 after taxes, your total car ownership costs for all your vehicles should be less than $600 per month.

However, you should bear in mind that this figure includes all the costs of vehicle ownership including gas, insurance and any maintenance.

If this calculation appears too complex, when shopping for cars, you should look to spend a maximum of 50% of your overall annual income. So, on a $50k salary, you should not be spending more than $25,000.

The True Cost of Owning Your Car

Most people don’t think about all of the extra expenses that go into car ownership. Most are hung up only on the sticker price or the price they pay at the dealership. Insurance may be a consideration and some might even think about the gas that goes into that car, but few (if any) think of all of the associated expenses.

If you drive approximately 15,000 miles in a year, AAA says that you spend about $8,850 each year on that vehicle.

At least, if you have a new car. That’s definitely going to be expensive, right? It takes into account maintenance, license, registration, taxes, monthly payments, interest and just about everything else associated with your vehicle.

That means you should be paying close attention to this number. You should be thinking about whether or not you can actually afford all of these expenses. Also, depreciation is not going to be your friend. It’s going to be around 40% of your total car ownership costs. That’s a big number to figure out. Especially since new vehicles lose a great deal of value in the first year you own them alone.

Determine Your Car Affordability In 4 Steps

We’re going to go through a few steps that will help you decide just how much you can afford to spend on a vehicle. That way, you can make sure you’re getting the best vehicle possible, but not spending so much you are in financial difficulty.

1. Know Your Income & Expenses

The very first thing you’re going to need to know is how much money you have coming in on a regular month.

Those who have a regular, fixed income will have the best experience with this. Those with a variable income will have to estimate their income more carefully.

You will want to know your full expenses as well. How much money do you have to spend each month? This is things like your rent or mortgage statement, insurance and such. You will also want to include things like groceries, general needs and other recurring expenses.

2. Do the Math – Calculate Your Car Payment You Can Afford

This is where you want to do the math for your new car. Do the math to figure out 15% of your take-home income for the month. That’s the maximum amount that you should spend on your new vehicle. After all, you need to be able to afford the payments every month alongside everything else.

The longer the loan term you take out the smaller your payments will be, but then you’re going to pay more interest.

Even worse, you could actually pay more than what the car is worth. And at some point during the loan you may owe more than it’s worth.

3. Understand The Car Loan Amount You Can Afford

Once you know how much you can actually afford to pay you should look at loans. This is where you want to look at how much you can take out as a whole. It’s going to depend on:

  • Credit score (which affects the interest rate)
  • Down payment (which affects the amount you need to take out)
  • Term (which affects how long you’ll be paying)
  • New or used (which affects the interest rate
  • Buying habits

So, just what are buying habits? These are things that determine just what kind of buyer you actually are. Some people like to buy a vehicle and keep it for a while. If that’s you then you’ll want to look into buying a vehicle. You can pay off what you choose and then go for a while without a payment.

Chart: Average Car Insurance Expenditure in the U.S. 2021, by Age (in USD)

For those people who prefer to get a new car more frequently you may want to look into leasing a vehicle instead.

After all, if you take out a loan and purchase a vehicle you’re not going to be happy with it for the entire length of the loan. You could end up owing money when you try to get a new vehicle. That’s definitely not going to keep you on the right track. Instead, look at a lease.

Another option is to actually get a used vehicle. That way you’re getting the full value of the vehicle out of it. You can also get a nice vehicle for less money. You don’t have to go with something really old either. You can just get a vehicle a couple years old.

Use an affordability calculator to find out just how much you can afford including APR, term and the payment for the vehicle itself.

4. How Much You Can Afford?

This is where you’re going to look at the amount of the loan that you can get and what you can actually afford to pay for.

If you have some money to put toward your new vehicle you may be able to get something valued a little higher than the loan amount you’re approved for.

This helps you get a little nicer vehicle or just keep your loan down.

On the other side of things you need to realize that your vehicle isn’t going to be whatever the sticker price is. You’ll end up paying a bit more than that with taxes and fees. So, you have to consider these numbers as well when you add up the cost. If you don’t have a down payment these may need to be factored into the loan you’re able to get.

Take a look at the sticker price on the vehicle and add in 10-15%. This amount will help you account for the additional taxes and fees that you’ll have to pay. Now, you’re going to try and negotiate or haggle the price down a bit, but you still want to make sure you can afford the vehicle. That means having wiggle room on the rest of the cost.

What If It's Not Enough?

When you do spend your money on a vehicle you want to make sure you’re not spending more than you can afford. Especially considering depreciation.

When you go to a bank or wherever you’re getting your loan from they may give you a large loan. In fact, most institutions will. They approve you for far more than you really need. Far more than you might comfortably be able to afford too. Remember, they can take your car if you don’t pay the bill. That means they don’t really care if you go into default.

When you do the math and figure out what you can afford – stick to it. Don’t let the financial institution talk you into something else. If you put too much money into your vehicle you could end up short elsewhere. That’s going to be a big problem for you moving forward. After all, you need to be able to afford your expenses.

While your vehicle it going to be quite expensive overall, you want to keep it down as much as you can.

Should I Buy a Used Car or a New Car?

This comes down to a matter of the available deals. Used cars will always attract less depreciation than a brand new car. As soon as you take that new car off the forecourt, it will immediately have dropped in value. However, this can be offset by manufacturer and dealership offers. You will need to weigh the value of free servicing, years of warranty, free insurance and other freebies against the potential depreciation.

The other plus side of buying a new car is that it will be covered by a warranty. This means that should any mechanical failure occur, you simply take it to an authorized service provider and they will correct the problem with no charge to you. However, it is often possible to obtain a warranty with dealership used vehicles. So, this is not a distinct advantage of new.

Finally, you need to consider the finance offers. Many manufacturers offer 0% financing for a set period, but you need to read the terms carefully. If the rate is excessively high after the introductory period and you’re tied into the finance deal, it may work out more expensive than financing a car for yourself.

Stay Within Your Budget – The Best Tips

So, just how can you make sure you’re getting a great vehicle but not breaking the bank? Well, you’re going to have to go through some important steps. Take a look at these tips to help you.

By the time you get through these, you should be able to make your budget. That way you can get a great car and afford your other expenses.

  • Have a Down Payment

But don’t have just any down payment. Have at least 20% to put down.

Research shows that you’ll lose 9% of the value of your vehicle as soon as you drive it away. Within a single year it’s lost a total of 19%. Putting 20% down means that you’re going to have a vehicle worth more than you owe. That’s important for your peace of mind.

This makes sure that if you decide to sell early you don’t end up losing money. You want to know you can get out of the deal at any time and still at least break even. Also, if you get into an accident you want to know you won’t owe more than the vehicle is worth.

  • Max Term Of 60/36 Months For New/Used Cars

If you get a loan you want to make sure you don’t take it out for too long. The longer your loan term the worse it’s going to be for you.

So, if you’re taking out a loan on a new vehicle you want to get something for a maximum of 60 months. If you’re getting a loan for a used vehicle it should be no more than 36 months.

If you take out loans for too long it means your vehicle will be worth less than you owe. That’s going to be worse for your budget.

  • Stay In Charge

You want to be in charge of the discussion when you’re working with a salesperson. After all, that lets them run the show.

Instead, you want to know what you’re interested in. A salesperson will offer you a new car. They will tell you about low interest and they’ll tell you about how minimal the difference in cost is.

But if you look you’ll see that the rate is entirely different than you might have thought. Plus that new car is going to be much more expensive when depreciation hits.

  • Shop Around

Before you start looking at a single-vehicle you want to look around at different dealerships.

Compare different options and get different offers. This is going to give you better freedom and a better deal.

You’re going to take more time this way but you will definitely get more of what you’re looking for that way.

  • Negotiate

Don't let the salespersons lead you to the point they want. A great way to stay within your budget is simple – negotiate.

For most of us, it doesn't feel comfortable, but it's crucial in almost any purchase, especially when it comes to the big ones.

It can save you a lot of money, and help you to get the car you wanted – without breaking your budgeting plan.

  • Offer a Trade-In

If you have a vehicle you’re getting rid of that’s worth anything then you can trade it in. You may think that your vehicle is worth more than it is. That’s what a lot of people do, but you can get a good amount. You can get a trade-in that will give you access to a more expensive vehicle overall.

Now, keep in mind that you want to get a true trade-in based on your vehicle. That means you don’t want one of those ‘push, pull or drag in’ deals. These will generally give you a set amount for trade-in, but you’re not going to get much in the end.

  • Avoid Optional Extras

Often you’ll be given the option to add-on some extras to your vehicle. You might be offered extra features, new tires, extra miles on your lease, safety features or any number of different bonuses. These things can all sound great.

The problem is that they’re going to cost you a lot of money. And what’s worse is you may end up owing even more than you planned. After all, when you spend that money you aren’t necessarily going to get it back.

You could end up with a vehicle that’s more expensive than it’s worth. That’s fine if you plan to keep it forever, but if you want to sell it at some point in the future you’re going to be in trouble. You’ll owe more than you can sell the vehicle for.

That’s going to make it difficult for you to get out from under it. You’ll find yourself trying to get a new vehicle with less money. If you stick with the expenses you planned it’s going to turn out better for you. You’ll be able to sell the vehicle later for more than you owe on it. And that’s if you owe anything at all.

Don’t let the salesperson talk you into those bonus features unless you’ve already planned for them. Instead, stick to the original plan.

Getting Car Insurance

There are three ways to buy auto insurance coverage. Online quote technology makes it easy for customers to get their own online quotes, but some people prefer to be assisted by an industry expert.

  • Agents – This is a traditional way to purchase insurance. An agent can be reached by phone or in person to discuss your details. An agent will keep track of any discounts or other offers. There are two types: The captive agent represents one insurance company. One is the captive agent. This agent represents one insurance company. The other is an independent agent who works with multiple insurers. Once you have chosen a policy, an agent will review your information and provide you with a binding offer.
  • Brokers – They can help you find the right coverage and rates for your needs. A number of brokers can work with an insurer or agent to provide a binding quote, and close the sale of a policy. A broker is not limited to one agent or insurer, as an agent is. Brokers may be associated with certain insurance companies.
  • Online shopping is possible to purchase and shop for a policy – Online quote systems are rapidly expanding. Many large companies can provide a basic quote in as little as a few minutes. Drivers may need to call a local agent to make an online purchase. Online auto insurance shopping can help you save money and get discounts.

Is it Cheaper to Buy Insurance Online?

It is not always possible to get insurance online at a lower price than by going through an agent.

An agent can assist you with getting insurance quotes and negotiating the best price. Agents are specialists in the insurance industry and can help you find great deals. Agents can help you locate the best discounts and any other discounts.

Quotes can be obtained from multiple insurance companies. If you purchase directly, you may be able to get a lower rate.

Get Out of a Car Loan You Can't Afford

If you can’t afford your car loan, there are a number of possible ways to get out of it. The first is the best for your credit rating, so consider selling the car. There is a risk that you will lose the vehicle regardless if you can’t maintain your repayments, but by selling, you could pay off the loan and maybe even have some cash left over for a down payment on a cheaper vehicle.

If this is not a good option for you, for example, if the loan amount is higher than the value of the vehicle, you should try to negotiate with your lender. If your financial difficulties are temporary, your lender may agree a forbearance, where the payments are paused for a set period.

Your lender may also be amenable to modify the monthly repayment amounts, so they are more affordable. Lenders typically have their own policies about dealing with customer financial hardship, so even if you’ve had issues with a lender previously, don’t rule out speaking to your current lender.

The final option is to consider refinancing. If the market rates have gone down, you may be able to secure a lower rate, which will lower the monthly repayments. Alternatively, you may be able to take out a loan with a longer term. While you will pay more in the long term, you should be able to make the repayments more affordable.


While it may be tempting to pay cash for a car and haggle a better deal because of it, it is often a very bad idea. There is no accountability when you pay cash and it can also be dangerous to be carrying a large sum of money to make a deal.

Additionally, if you are buying from a dealership, the sales team will often not offer as competitive a deal. When you are using dealership finance, the dealership also makes money on it, so they can afford to negotiate on the vehicle price.

This type of calculator is a great tool that can help you determine how much you can potentially afford to spend on a car.

You’ll need to enter some basic financial information, such as the amount of down payment you have, a trade in value of your current car and what monthly payment you can afford to make. The calculator will then breakdown the sales value of cars you can afford and the type of loan interest you can expect to pay over your preferred term.

This will depend on your other financial commitments. If you already have credit card debt, student loans and other expenses, you will need to earn far more to afford a car compared to someone who lives with their parents and has no real debt.

You will need to think about your income and current expenses to determine if you have sufficient disposable income to afford a car. You will need to consider not just the purchase cost, but the maintenance and day to day expenses including gas and insurance.

If you’re unsure, you could consider using a car affordability calculator, which will help you determine if you earn enough to afford the car you have in mind.


The first thing to do is speak to your lender. If the financial setback is temporary, such as a late wage payment, the lender may agree to give you a grace period to catch up. The lender may also have policies to help customers in financial difficulties. This will allow you to assess your options and determine the best course of action.