How Much Should I Spend on a Car?
To calculate how much you should spend on a car, think about the cost of the car, any financing options that might be available, and how much you will have to pay for insurance, tabs, fees, taxes, servicing, and gas.
How Much Does It Cost to Buy a Car?
The average cost of a new car in America is over $45,000 (costing consumers upward of $10,000 a year), and the average cost of a used car is $21,000. Of course, it is possible to buy a new car for much less than $40,000, and a good used car can be purchased for just a couple thousand dollars.
When deciding how much you should spend on a car, consider your travel and transportation needs, your budget, and your other financial goals and priorities. As you are planning to buy your car, there are a few things to keep in mind.
Calculate your take-home income, which is how much you make after taxes. Financial experts suggest that you should spend up to 15% of your income on transportation, which covers everything from your car payment to insurance to gas. If your take-home pay is $4,000 per month, your transportation budget should be no more than $600.
The 15% amount can vary based on your income and other expenses. If you live in a high-rent area or one with a high cost of living, your transportation budget might be conceivably smaller.
You should also factor in any existing debt you have, like your credit card balances, your student debt, or any medical expenses. The more debt you have, the less take-home pay you will have for your transportation budget. You may have to put off buying a car until you have eliminated one of your debts (or, at the least, reduced it so that it can be more easily paid off eventually).
Financing and Credit Costs
You might have the option of financing your car purchase with a loan. Many people take this option, so they do not have to pay a lump sum to take immediate ownership of the car. However, this can be a tricky process.
Your application for a loan has to be reviewed by lenders who will also look at your credit score. If your loan is approved, they will set the interest rate, which is determined by your credit score. This determines the monthly payments you make on the car as well as the total repayment costs. A lower rate (helped by a good credit score) means you will have to spend less money over the loan’s lifetime.
Bad credit, on the other hand, will likely mean a higher interest rate, so you will have to pay more over the life of the loan. For example, in 2020, the average interest rate on a car loan was 4.3%, but people who had poor or subprime credit would have to pay as much as 21% interest.
Fees and Taxes
As with most purchases, buying a car comes with fees and taxes. Taxes apply in most states. If the vehicle is purchased in a state with sales tax, you will pay that on the purchase price minus any allowances you get for a trade-in and any applicable discounts. Only Oregon, New Hampshire, Montana, Delaware, and Alaska do not charge any sales tax on vehicle transactions.
Regardless of what state you live in, you are legally required to register your vehicle. The fee for this can be up to $50.
Similarly, you will have to buy a license plate, and keep your tabs current. Some states will have you pay a documentation (dealer) fee. These fees are in addition to the other costs mentioned above.
And many new car dealers charge a destination charge, which is an additional fee to cover the cost of shipping the vehicle from the manufacturer to the dealer.
Let’s say you bought a $30,000 car in the state of Florida. This means you would also have to pay:
- Sales tax of $1,800 (6% sales tax)
- Initial registration fee of $225
- New title fee of $77.25
- License plate fee of $28
- Dealer fee of $399
These additional fees and taxes will run you $2,529.25, meaning that your total car purchase is $32,529.25. You must make sure your budget can account for the extra thousands of dollars in taxes and fees.
Insurance, Maintenance, and Gas
Every state requires drivers to carry liability insurance when they drive, but many drivers choose to purchase additional collision and comprehensive coverage. The average car insurance policy in America costs $1,683, which is about $140.25 per month. This figure is based on the type of car you have, your age, your driving history, where you live, what coverage you want to buy, and how much driving you expect to do. Newer cars tend to cost more to insure.
You should also take maintenance and service fees into the equation. Older cars will likely require more regular servicing. The more you drive, the more you will have to get your car serviced, and the more it will cost. For most drivers, maintenance costs 9 cents for every mile, so if you drive 12,000 miles every year, your yearly maintenance costs come out to $1,080.
Your transportation budget will have to include paying for gas. The average driver in America spends $3,000 every year on gas, which is $250 every month. But if you have to commute a long way to work or if you drive to faraway places for day trips, your gas expenditure will obviously be higher.
A car with a smaller motor (one that burns less fuel) will save you money on gas. Alternatively, a hybrid vehicle (or a fully electric vehicle) will be more expensive out of the gate, but it might save you money at the pump.
How Much Should You Spend on a Car?
To give you an idea how much you should spend on a car, this is what a transportation budget might look like, under normal conditions:
If you have take-home pay of $4,000 a month, and you budget 15% of it for transportation, you would pay $600 a month on car-related expenses. Take away the cost of car insurance and maintenance, you will have about $370 a month for your car payments. If you have good credit and normal debt, you might be able to get a 60-month loan with an interest rate of 5%. The most you could afford with those terms is $19,500, which means your monthly payment is $368 a month.
The Average New Car Costs $45,000: What the Heck Is Going On? (October 2021). CNET.
Owning a New Vehicle Costs Nearly $10,000 a Year, Says AAA. (August 2021). USA Today.
How to Save for a Car on Any Budget. (June 2021). Current.
5 Tips For Buying a Car the Smart Way. (October 2019). NPR.
Here's The Average Auto Loan Interest Rate by Credit Score, Loan Term, and Lender. (September 2021). Business Insider.
Fees, Taxes, and the Five-Finger Flip: What to Watch Out for When Buying a New Car. (July 2020). MotorTrend.
Average Cost of Car Insurance in the U.S. for 2021. (October 2021). U.S. News & World Report.
Here’s How Much the Average Person Spends on Gas in Every State. (February 2019). Business Insider.
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