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How Much Should I Spend on a Car?


Figuring out how much to spend on a car can be difficult because everyone has a different opinion. Ultimately, the answer depends on a few factors.

We're going to take you on a quick tour of the five most common spending rules out there. But first, we have to figure out a different number.

How Much Car Can I Afford?

Before you decide how much to spend on a car, you need to figure out how much you can even afford. This includes setting a budget and using online tools to help you estimate your monthly payments.

Set a Car Buying Budget

When setting your budget for a new or used car, think outside the sticker price and factor in all other costs, including insurance, regular maintenance, one-off repairs, gas, and financing. There are even hidden fees to consider (we'll get to this later).

Also be prepared for a dealer to ask if you want any optional features such as an extended warranty or credit insurance, as these will all have extra costs.

Use a Loan Calculator

Not sure how to calculate what you can afford? Try running different prices, terms, and interest rates through an auto loan calculator. This will give you a better idea of your monthly estimated costs.

Estimate your monthly auto loan payments.

How Much Should I Spend on a Car?

Many buyers follow different rules when figuring out how much to spend. We're going to walk you through five of the most common ones and explain how they work.

20/4/10 Rule

This rule may help accelerate your loan payoff time due to the larger down payment, which makes for a smaller loan amount. Plus, a shorter loan term means you pay less in interest throughout the life of your loan.

How it works: The 20/4/10 rule involves making a 20% down payment, financing the vehicle for four years or less, and ensuring your total monthly vehicle costs are less than 10% of your gross monthly income.

15% Rule

With this rule, you're aiming to keep your monthly car payment under 15% of your gross monthly income. It's ideal for the careful, savings-minded spender.

How it works: To apply this, calculate 15% of your gross monthly income (let's call this "a"). Then, add up all your debts (let's call this "b"). Next, subtract b from a. What's left can go toward your monthly car payment.

20% Rule

This rule may be the middle-ground fit for borrowers who aren't too financially conservative or aggressive.

How it works: Calculate 20% of your gross monthly income (let's call this "x"). Add up your existing and expected debts (let's call this "y"). Subtract y from x. The difference can be used for your monthly car payment.

36% Rule

This rule is geared to help assess how much debt a household can reasonably take on, based on income, existing debts, and discretionary spending. It can also help lenders evaluate your financial health when applying for credit.

How it works: When abiding by this rule, all of your monthly debt combined, including your car payment, should not exceed 36% of your monthly gross income.

Half-Your-Annual-Salary Rule

This rule doesn't factor in financing or down-payment expenses, or other existing debts, so partnering it with another rule might better serve some borrowers.

How it works: Just like it sounds, this rule allows you to spend up to half your annual salary on a car purchase.

Whether you follow one of these spending rules or create one that complies with your financial situation, having a rule will better prepare you to stand your ground on loan conditions and stay within your budget when negotiating your deal.

Hidden Costs of Buying a Car

When buying a car, there are hidden costs to consider. Learning about these costs now can help you possibly counter them down the road.

Fees and Costs That Could Potentially Be Waived

  • Dealership Fee: This covers the dealer's costs to get your car ready to leave the lot. If your car has to be delivered from the manufacturer, there can be a fee for that, too (also known as a destination fee).
  • Financing Fees: The act of taking out a loan sometimes requires a fee. This charge is based on the interest rate of the loan.
  • Advertising Costs: Manufacturers sometimes charge dealers an advertising fee. Some dealers might add their own advertising fee to the one from the manufacturer.

Fees and Costs that Likely Cannot Be Waived

These non-negotiable fees are often bundled into what's known as the out-the-door price.

  • Documentation Fee: This fee is required by law in some states. It's a charge administered for prepping paperwork, including the sales contract. See where your state stands.
  • Vehicle Title and Registration Fees: These fees cover assigning the car title and registering your car at your local department of motor vehicles (DMV) and also differ by state.
  • State and Local Sales Tax: Some states enforce a sales tax when you buy a new car (the amount varies by state). If you buy a car out of state, you'll most likely pay the sales tax issued by the state you live in, since that's where you'll also register it. Local sales tax charges vary by city and county.

Bottom line, keep the conversation on the out-the-door price before committing to a deal.

Go by Your Golden Rules

Determining how much you should spend on a car is your first move in the car-buying game.

And you'll be better set to ace it playing by your rules:

  • Do your prep work by setting and sticking to your budget
  • Find a spending strategy that works for you
  • Keep the out-the-door price in focus

See the Financing Options Available to You

Take a look at our auto loan rates, terms, and more.

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