July 22, 2021
How Much Should I Spend on a Used Car? It’s an age-old question that people have been asking themselves since the combustion engine came into being. “How much car can I afford?” It’s a great question and one that you should spend quite a bit of time on before you buy. Afford can lead to higher than you anticipated car payments, or insurance payments, or service bills, etc. Instead of affording a new car, ask yourself, “how much should I spend on a car.”
How much you should spend on a car is all about your annual income and monthly budget. Financial experts say to not spend more than 35% of your annual income on the car itself and the costs that come with your purchase. Below you’ll find a breakdown of what to consider when buying a new or used car and how much you should spend.
First things first, decide if you want to buy a used car or a new car. There are pluses and minuses to both so figuring out which is right for you and your budget is key. Used cars are usually a cheaper route than new cars, but used cars might be more expensive in the long run. Mechanical issues can arise if you’re not careful about which used car you buy and can add up quickly. You can check out our blog on what to look for when buying a used car to better prepare yourself for that used car purchase.
Buying a new car is the route most people want to take just because they want something new and shiny. Don’t get us wrong, we love that new car smell too, but new cars are usually more expensive, harder to finance or lease. and make your insurance payments higher. It is important to consider all the costs when considering if you should go with a new or used car.
Your budget isn’t just the car or monthly car payment. Your budget includes the car payment, fuel costs, service costs, car insurance, etc. All of these should be factored into how much you spend when you buy a used car.
Ideally, you’ll want to stick to spending around 10-15% of your monthly take-home income on transportation costs. If your take-home is $5000 a month, then your total transportation budget is $500 to $750. But $500 to $750 isn’t just your car payment, it is your TOTAL cost for the month, which includes everything from monthly payment to insurance.
You also have to factor in the cost of your other monthly bills. If you live in an area that has high housing costs then you might have to adjust your car budget to account for the higher rent or mortgage costs.
If you have any existing debt like medical bills, personal loans, student loans, or credit card balances then you must account for those in your budget, as well. Debt will factor into the likely hood of being approved for a loan by the bank. The more debt you have the higher the chances the bank may hesitate on approving the auto loan.
When you apply for an auto loan, lenders take a look at your application and your credit score. Banks then use that info to approve or deny the loan. If approved they will use that to determine your interest rate. Your interest rate ties into your monthly payment. A lower rate means you will spend less over the life of the loan.
The best option is to get pre-approved for a loan by your preferred bank. That will give you a solid picture of how much car you should be able to buy. You should always stick with your original budget even if the bank pre-approves you for more. It is nice to have some wiggle room but if you decide to go above budget then you could find yourself in trouble later on.
In 2020 the average interest rate on a car loan is about 4% for people with good (700+) credit scores and people with poor credit could end up with an interest rate as high as 21%. Getting pre-approved is the best way to help determine your monthly budget in advance.
Shopping for a used car online be aware of the taxes and fees that could be lurking behind that reasonable price in the listing. Oftentimes, you need to add in sales tax, registration, tag and title, and documentation fees to the final price. These are the types of things people regularly miss when putting together a budget for their car. They can add up quickly and blindside you if you’re not careful.
On average drivers in the U.S. pay about $124 a month for car insurance. This can change based on if you bought a new or used car, your age, your location, your driving history, and coverage options.
When you are shopping for a car, you don’t usually think about the costs of maintenance straight out the gate. Thinking about service costs usually only happens when you actually need to service your car. Buying a used car could be even more expensive because of the wear and tear it has already been through. But on average, you should expect to pay about $1,080 a year or about $90 per month maintaining your car.
Determining the cost of gas and adding that into your monthly budget can be kind of difficult. This is especially true with gas prices seeming to fluctuate so much these days. Again, we can go off the average, and you should expect to pay about $2,094 on gas per year. But if you are planning on using your ride for road trips then definitely expect to pay more than that. If you want to reduce the cost of fuel it might be time to go with a smaller motor that burns less fuel or even a hybrid.
A very useful tool is fueleconomy.gov, which allows you to easily and quickly search cars you’re interested in and determine their annual fuel costs as well as their average miles per gallon.
The $500 to $750 monthly budget is now a lot smaller when you factor in all the other monthly costs. The main thing to take away from this article is to plan out your spending. How much should you spend is the more responsible question than how much can I afford.
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