While I’m generally a pretty frugal person, cars are my weakness. I’ll scrimp and save on food and clothes, but splurge on vehicle upgrades and accessories. That flaw caused me a lot of trouble when I was in graduate school. Despite knowing better, I bought my dream car, a 15-year-old Mitsubishi 3000 GT with over 100,000 miles.
The purchase price was cheap, so I didn’t think it was a big deal. However, I failed to think about all of the other costs that come with car ownership like insurance, gas, and repairs. I quickly became “car poor,” and later was forced to sell it just to make ends meet.
It’s easy to make a mistake like I did. Car dealers are quick to stress that you can get a low monthly payment, but neglect to mention how long your loan will be. They certainly don’t tell you what you’ll pay in other fees.
“How much car can I afford,” you ask? Here’s what you should consider before buying.
How much cars typically cost
If you plan on purchasing a car, be prepared for sticker shock. In January, the average transaction price for a new car was $34,968, reported Kelley Blue Book.
Although buying a used vehicle can help you save thousands, they’re not exactly cheap either. An Edmunds report found that used cars cost an average $19,227.
According to the car information site, your car payment should not exceed 15 percent of your take-home pay. If your after-tax income is $2,500 a month, that means your car payment shouldn’t be over $375.
However, that recommendation doesn’t take into account other major monthly payments. If you’re a recent graduate, you might need to be even more conservative and take into consideration other factors.
If you live in a high-cost area with expensive housing or have a large student loan balance, you might only be able to afford 5 to 10 percent of your gross income on a car. That limit can make it more difficult to buy but also save you from headaches later on.
Other car expenses to consider
To figure out how much you can spend on a car, write down a list of all of your expenses, including rent, utilities, student loan payments, groceries, cell phone bills, and Netflix subscriptions. Subtract those expenses from your total take-home income, and that’s how much discretionary income you have that you can use to pay for a car.
However, that doesn’t mean you can spend that whole chunk on the vehicle itself. The cost of owning and maintaining a car can be in the thousands. To figure out what your annual cost is, consider these factors:
- License, registration, and fees: To get your car tag and title, you’ll spend about $500, according to AAA.
- Car insurance: In 2016, The Zebra reported average vehicle insurance costs of $1,323 a year, or $110.25 a month.
- Fuel: If you have a car that gets 30 mpg and drive 10,000 miles a year, and gas costs $2.35 a gallon, you’ll pay $783 annually for gas.
- Maintenance: Even if your new car is in good condition, it will need regular oil changes and air filter replacements. Depending on your vehicle, this can add about $20 a month to your charges — and that doesn’t take into account larger expenses, like replacing tires or fixing belts or brakes.
If you pay the average cost for all of the above, you’ll need $2,846 to maintain your car, or $237 a month, in addition to the thousands you’ll pay toward the car’s price.
How much car can I afford?
That $237 a month on insurance and maintenance cuts into how much you can spend to buy a car. If, based on the 15 percent rule of thumb, you had $375 in discretionary income, that means you’d have just $138 a month to put toward a car payment.
That’s why many people opt for an extended loan. Today, the average auto loan is a scary six-and-a-half years. Although the longer repayment period will lower your payments, you’ll pay far more in interest over time. And, because car values depreciate every year, you could end up owing more than the car is worth.
To make sure you don’t overextend yourself, try to keep your car loan as small as possible. If you have to go beyond a five-year loan term, the car is probably out of your budget. That means if you have $138 per month to put toward a car and have a $1,000 down payment, the most you can spend is $8,100.
To find out how much you can afford based on the monthly payment you have available and the loan term, use Edmunds’ affordability calculator.
Test drive your car payments
If you’ve worked out how much your new ride will cost you, and the numbers sound good on paper, test them out before heading to the car dealership. You might find that you missed recurring expenses, or that you like to have more wiggle room to go out to eat or meet friends for drinks.
To see if the payment will work for you, set a trial period of three to six months. On the first of each month, deposit your entire payment and maintenance costs into a separate bank account. If you can put that money away each month without needing it to pay bills, you’ll likely be able to afford your car. If you can’t, you might have to revisit your budget or look for a cheaper vehicle.
As an added incentive, using this strategy can also help you build a down payment for the car. If you put $375 into the bank for six months, you’d save $2,250 to put toward the purchase. Also, your targeted car might drop in price during that time, helping you score a better deal.
Buying a car you can afford
Answering the “How much car can I afford?” question can be tricky. It’s important to remember other car-related expenses so you don’t overextend yourself and end up with a vehicle you can’t afford (like me). Setting a strict budget and understanding all the other costs can ensure you’ll comfortably manage your payments.
If you know what car you want and how much you can pay, follow the tips in the complete guide to buying a car to get the best deal.
Interested in a personal loan?Here are the top personal loan lenders of 2020!
|Lender||APR Range||Loan Amount|
|5.99% – 18.82%1||$5,000 - $100,000|
|8.13% – 35.99%||$1,000 - $50,000|
|7.99% – 35.97%*||$1,000 - $35,000|
|99.00% – 199.00%2||$500 - $4,000|
|5.99% – 24.99%3||$5,000 - $35,000|
|7.99% – 29.99%4||$7,500 - $40,000|
|7.99% – 20.88%5||$5,000 - $50,000|
|9.99% – 35.99%6||$2,000 - $25,000|
|10.68% – 35.89%7||$1,000 - $40,000|
|9.95% – 35.99%8||$2,000 - $35,000|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Opploans.
Direct Deposit required for payroll.
Opploans currently operates in these states: . *Approval may take longer if additional verification documents are requested. Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day.
3 Includes AutoPay discount. Important Disclosures for Payoff.
4 Important Disclosures for FreedomPlus.
5 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
6 Important Disclosures for LendingPoint.
7 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage and history. The APR ranges from 10.68% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 9.56% and a 5.00% origination fee of $300 for an APR of 13.11%. In this example, you will receive $5,700 and will make 36 monthly payments of $192.37. The total amount repayable will be $6,925.32. Your APR will be determined based on your credit at time of application. The origination fee ranges from 2% to 6% (average is 4.86% as of 7/1/2019 – 9/30/2019). In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,001 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
8 Important Disclosures for Avant.
*If approved, the actual loan terms that a customer qualifies for may vary based on credit determination, state law, and other factors. Minimum loan amounts vary by state.
**Example: A $5,900 loan with an administration fee of 4.75% and an amount financed of $5,619.75, repayable in 36 monthly installments, with an APR of 29.95% would have monthly payments of $250.30.
Based on the responses from 11,574 customers in a survey of 210,584 newly funded customers, conducted from 1 Feb 2018 – 1 Aug 2019 95.05% of customers stated that they were either extremely satisfied or satisfied with Avant. 4/5 Customers would recommend us. Avant branded credit products are issued by WebBank, member FDIC.
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
Personal loans made through Upgrade feature APRs of 7.99%-35.97%. All personal loans have a 2.9% to 8% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by Upgrade’s lending partners. Information on Upgrade’s lending partners can be found at https://www.upgrade.com/lending-partners/.