How Much Can You Spend to Finance a Car? Here’s How to Tell

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A car is a big purchase, especially these days. Read on for a look at what to consider when you’re deciding how much car to buy. 

Thanks to supply chain issues and inflation, just about everything is more expensive lately. Cars are no exception — data from Edmunds revealed that a record 17.1% of consumers took on a monthly car payment of $1,000 or more in Q2 2023. For perspective, that’s up from 16.8% of consumers in the previous quarter, and 4.3% from just four years earlier in Q2 2019.

Despite higher prices, if you need a way to get around, you may not have many options besides financing a car, especially if you don’t have the cash saved to buy one outright. Ideally, you can make do with a vehicle that costs you less than $1,000 per month, though. Let’s take a look at the factors you need to keep in mind if it’s time to buy a car.

Consider all the costs of owning a car

When you finance a car, you’re agreeing to take on not just the expense of your payments, but a whole boatload of other costs, too. You’ll need to pay for auto insurance, which is a legal requirement in just about every state — and highly recommended, even if it isn’t required where you live.

You’ll have to keep your car up to date on maintenance. You’ll also have to pay for gas or electric charging. In short, owning a car isn’t cheap, and it’s important to reckon with all your potential costs before committing to a loan payment and ensure you have room in your budget for them.

How much of your income should you spend on a car?

Opinions vary when it comes to this question. The car experts at Edmunds recommend committing no more than 15% of your take-home pay to payments on a new car, and no more than 10% of take-home pay to payments on a used car. This might seem very low, but as we discussed above, your payments are not the sum total of your expenses to own the vehicle. By keeping payments to a lower set percentage of your budget, it’ll be easier to cover a big repair bill or shell out your auto insurance deductible if you need to file a claim.

Let’s say you bring home $48,000 per year, after taxes. If you’re hoping to buy a new car and stick to that 15% suggestion, that leaves you with $7,200 per year to spend on a car payment — or $600 per month. If you opt for a used car for 10% of your income, that takes you down to $4,800, or $400 a month. With real dollar amounts based on your own budget, you’ll be able to come up with your own number to aim for.

Down payments and loan terms

Ideally, you’re intending to make a down payment on a car purchase. If it looks as if your monthly costs will be too high to afford a particular car, can you make a larger down payment to bring down the monthly payments? If not, it might be wiser to find a less expensive car to buy — which may be a difficult prospect in today’s market.

You might be considering asking for a longer payment term to compensate for a higher price, but this is a bad idea, too. The longer your auto loan, the more likely it is that you’ll end up underwater on it — or owing more than the car is worth. This could be a real problem if you get into an accident, your car is declared a total loss, and your insurer pays out only what the car is worth, rather than what you owe. You’d have to come up with the difference to repay your lender.

How can you make buying a car more affordable?

Ultimately, it’s best to avoid stretching to afford a car purchase because the ownership costs on one are likely to be one of the biggest parts of your budget (for many people, car expenses might be second only to their housing costs). Aim to keep your costs as low as possible by:

Buying a used car that is in good condition. Buying a cheap used car that needs tons of repairs won’t save you money.Shop around for the best personal loan. Don’t assume the dealership financing is your cheapest option.Keep the car for as long as possible. Not having a car payment can be a huge help for your finances.

Before you start looking for a car to buy, take a long hard look at your income and expenses to give yourself a number to aim for. If you keep a car payment to just 10% to 15% of your take-home pay, you’re less likely to end up in a world of financial hurt.

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