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Cars can get expensive. When you can pay for a car in installments, the difference between a used 2002 Honda and a brand new Benz might not seem like that big of a deal — especially if you stretch out the loan term long enough. But buying within your price range can help you stay financially healthy. Keep reading to learn how much should you spend on a car and where to look when shopping for affordable cars.
How much should you spend on a new car?
How much you should spend on a new car largely comes down to your finances and your personal tastes, but some experts suggest that you should aim to spend approximately one third of your income on debt repayment, including car loans. Assuming you have no other debt and make $3,500 a month, this means that you could spend up to $1,155 on car loan repayments.
Of course, most people will have debts such as credit card payments and mortgage payments that will take away from this amount, so in reality you’d probably be spending closer to 10-15% of your income on a car.
In fact, many experts suggest using the 20/4/10 rule, in which you’re advised to make a 20% down payment on your car, pay back your loan in 4 years or less and spend no more than 10% of your income on all car-related expenses.
If you’re a car enthusiast or use your car a lot, you might push the limits and spend 15% to 30% of your income as long as you can afford to cover all of your other expenses.
When deciding how much should you spend on a car, it can be helpful to stay within the 10% to 15% guideline because it:
Keeps you from borrowing more than you need. The more you borrow, the more you pay in interest
Leaves room for the cost of owning a car. Between insurance, gas, maintenance and repairs, the ongoing costs of owning a car add up quickly.
Car value depreciates rapidly. Think of your car as a useful tool, not as an investment. You don’t want to pay for something that’s not worth what you’ve invested in it.
Car loan monthly payment calculator
Calculate you car loan monthly payment to help you decide how much should you spend on a car.
By deciding ahead of time that you won’t spend more than 15% of your yearly income on a car, you’ll have a clear price in mind when starting your search.
Annual income
How much you should spend on a car (15%)
$20,000
$3,000
$40,000
$6,000
$60,000
$9,000
$80,000
$12,000
$100,000
$15,000
$150,000
$22,500
$200,000
$30,000
Buying a car under $5,000:
There are thousands of used cars being sold for less than $5,000. Check eBay, Kijji, autoTrader.ca, the local classifieds, used car dealerships and online auctions.
Know what to look for in a used car. By following a checklist and knowing what to be aware of, you could avoid purchasing a lemon.
Consider financing rather than leasing if it helps you get a more reliable or efficient vehicle, or if you’re caught short and urgently need a new car to get to work. Used car loans let you borrow as little as $1,000 with fixed interest rates usually starting at 5-6% interest.
You may not want comprehensive car insurance for a car under $5,000, even if you’re the kind of person who gives your car a name and emotionally bonds with it. Consider sticking to third party property damage only. This is one of the cheapest types of car insurance, but it still offers minimal protection.
Buying a car under $15,000:
You can find recent-model used cars for under $15,000 online or at dealerships.
Car loans are available for higher amounts, and you’ll be able to find a cheaper rate if you can use your car as collateral as you would with a secured car loan.
Vehicle auctions are popular among car dealers. This is where a lot of them go to pick up a bargain for resale at a higher price. Learn about car auction etiquette and more in our guide to car auctions here. Buying from an auction can help you beat dealers to the punch, and even get government vehicles at a fraction of their value. Check sites like remarket.ca to find an auction near you.
You could save money by opting for a more recent or popular model, even if it costs a little bit more. Spare parts are easier to find, so it can keep repair, maintenance and car insurance costs down.
Comprehensive car insurance may not deliver value for money in this price range. Consider third party property damage insurance for important but inexpensive coverage, or third party fire and theft insurance, which covers legal liability as well as theft and fire damage, while still being relatively affordable.
Buying a car for $15,000 or more:
Used vehicles can be a good choice for every budget, including those in higher price ranges. Look around and you might find current-model cars in almost pristine condition for half of what they cost new.
If you’re planning on financing your vehicle, it’s could lower your rates to use your car as security when taking out a higher loan amount. Used cars can still be used as security, but you might find that new car loans have a cheaper rate.
Vehicles in this price range and above can be loaded with additional features and electronics. If you want to save money, look for the features that deliver value and safety, rather than the luxuries, cosmetic features or unneeded conveniences.
If you want to get a lot of use out of your car and plan on treating it like your own child, comprehensive car insurance can deliver a high level of protection.
Bottom line
Remember that everyone’s financial situation is different. Compare every option critically before deciding on a loan. You can compare all your car loan options here or check out some of the articles below for more information:
Are you an Uber driver, or planning to become one? Check out Uber car loans to see if they can compete with the options above.
Have you seen a dealer offering a 0% car loan? Here’s what you should know to decide whether it’s right for you.
Your budget should dictate how much you can spend on your cars, whether you’re buying one or two. Use the guideline of 10% to 30% of your budget for the total cost of all cars. If you have two cars, your budget shouldn’t increase. Rather, the cars you buy should be cheaper. This will prevent you from spending too much on a vehicle and hurting your finances.
You should expect to put down between 10% to 20% of the car’s value at signing. This can include cash money and the trade-in value of your previous vehicle.
Some repair shops may offer financing to cover repairs, but that’s rare. In general though, once you buy a car, you’re on the hook for its repairs. If your don’t have your insurance deductible as part of your emergency fund, then you might want to turn to a loan. Fortunately, you are able to use a personal loan to cover any repairs that may come with owning a car.
Elizabeth Barry is lead editor for Finder's global financial niches which includes banking, crypto and investments. She has written about finance for 10 years and is regularly featured in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review.
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