How Much Should You Spend On A Car Based On Your Income

June 2021teen girl getting keys to new car

Buying a car, whether it’s new or used, is a significant investment. You don’t want to overextend your finances by buying a car outside your budget, but you don’t want to settle for a subpar vehicle just because the price is right. To help you find a car that aligns well with your budget and fulfills your driving needs, use your income as a guide.

Put finances first
Although buying a car can be a complicated, overwhelming purchase, it’s also exciting. That excitement can cause you to get swept away by models that boast the latest tech, the most stunning design or the greatest power. Instead of determining the car you want first, U.S. News & World Report writer John M. Vincent advises figuring out what amount of money you can put into a monthly car payment while still paying the rest of your bills. Then, he says to factor in that acceptable monthly payment to a loan that has a “reasonable” end.

“The longer the loan you take, the more you will pay in total for the vehicle, and the more financial risk you’ll expose yourself to,” he writes. So it’s best if you get a loan for the minimum amount of time your budget will allow.

Crunch the numbers
To get a clear picture of what you can afford, you’ll need to examine your monthly budget. If you haven’t been diligent about tracking your expenses, now is the time to look closely at where your money goes. According to NerdWallet writer Philip Reed, your take-home pay should be dispersed into three categories: needs (50%) – this includes transportation, wants (30%) and savings (20%).

“It’s smart to spend less than 10 percent of your monthly take-home pay on your car payment,” according to Reed. For example, if your monthly paycheck is $3,000, your car payment would be about $300.

Factor in the complete cost
Remember, your loan payment isn’t the end of your car expenses. Be sure to factor in costs associated with keeping your car running, Vincent advises. Car insurance, fuel costs, regular maintenance and more expensive repairs are all part of car ownership.

“So while your car payment is 10 percent of your take-home pay, you should plan on spending another 5 percent on car expenses,” according to Reed. This means that with the $300 monthly car payment example from earlier, you should plan on spending another $150 on automotive expenses.

Keep budget confidential
Once you determine the amount you can responsibly afford, it’s best to keep it confidential. When negotiating with a car salesperson or an independent seller, Consumer Reports experts caution that you don’t want to give them any information they can use against you. You don’t want to be “sold” into a longer loan or a car that’s more expensive than you need.

A car is a necessary expense, but it doesn’t need to break your bank. Be mindful of the total costs associated with a new car and be respectful of your financial limitations so you can coast through car ownership.

Lastly, don’t forget we’re always here to help. Our Personal Bankers are a great resource to not only help you apply for a car loan from the bank, but they can also discuss your loan options so that you find one that fits your needs and your budget.