How Much Should I Spend on a Used Car? | Dick Hannah

How Much Should I Spend on a Used Car?

How much should you spend on a used car? This question of how much to spend on a car has been asked dozens of times, by nearly every driver, since the invention of the automobile. The answer is equal parts subjective, logical, and economical. There is no one correct answer to this question, but a little knowledge of used car options and expenses can take you far.

This article will provide several guideposts to help you make the right choice for buying your next car. The most important question to start with is: What kind of car do you want? Depending on your answer you will have different advantages, costs, quality, and inventory choices to contend with upon purchase.

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.

Used vs New – How Much Should I Spend?

Deciding which car you should purchase is an important decision that should never be rushed. This is in many ways a decision that is personal to the car buyer and their budget. You spend a lot of time in your vehicle, and you should make an informed decision that fits your lifestyle best.

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, and harder to finance or lease. This can also make your insurance payments cost more. It is important to consider all the costs when considering if you should go with a new or used car.

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How to Calculate Your Used Car Budget

When it comes to purchasing a car, one of the most important factors to consider is affordability. Finding a vehicle that fits within your financial means can make all the difference in ensuring a stress-free ownership experience. In this guide, we’ll explore various aspects to consider when determining which car to buy, such as income, debt, financing options, taxes, fees, insurance premiums, maintenance, and fuel costs. By carefully considering these elements, you can confidently make a well-informed decision and find a car that meets your needs without breaking the bank.


What is the quickest way to calculate how much to spend on a car? Start by calculating your monthly take-home pay. That is your key to understanding how much you are able to spend on a new or a used car. As income increases or you grow your savings over time that can greatly impact the kind of car you can afford.

Ideally, you’ll want to stick to spending around 10-15% of your monthly take-home income on transportation costs. As an example, if your take-home is $5000 a month, then your total transportation budget is $500 to $750. This budget isn’t just your car payment, it is your TOTAL cost for the month, which includes everything from monthly payments 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.

Existing Debt

Do you have outstanding debt from medical expenses, previous purchases, or student loans? This can significantly affect your car-buying process depending on your answer. Your existing debt is taken into consideration by banks when deciding whether to grant a loan. The greater your debt, the lower your chances of being approved for a car loan. When selecting a car to purchase, factor in the amount you currently pay towards debt each month. If you’re concerned about your debt affecting your ability to get a car loan, consider paying off some of your outstanding balances before applying. This can improve your chances of being approved for a loan and help you get the car you want.


When you are looking to get financed for an auto loan, bank lenders will review your credit score and credit history. Banks will also consider other factors such as income and the amount for a down payment. It is important to be ready with proof of identity and residence as the lender may ask for it before processing a loan. This may not be needed though if you work with a bank or credit union that you already use regularly. According to Experian’s 2022 State of the Automotive Finance Market Quarterly Report, Credit Unions are taking a leading position in the market and offer the lowest rates for both new and used loans. Getting a loan pre-approved from your personal bank is usually ideal as they already have a deeper understanding of your financial picture and may be able to give you a better rate. You can also work with a car dealer to get approved for a loan. When this happens, the dealer will usually contact several banks and get quotes for comparison. 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 Getting pre-approved is the best way to help determine your monthly budget in advance.

Taxes and Fees

When calculating how much to spend on a used car, it’s important to take into account taxes and fees in addition to the cost of the vehicle itself. These additional expenses can add up quickly and significantly impact your budget, so make sure to research and understand what fees are associated with purchasing a used car. At Dick Hannah Dealerships, if you are an Oregon Resident, we will pay your Washington State tax for you.

Some other fees that should be factored into the final price of a used car:

  • Vehicle Registration
  • Vehicle Tag and Title
  • Any documentation fees

Do your research on these fees and make sure to calculate them into your budget. Additionally, you’ll want to consider ongoing costs like car insurance premiums, maintenance fees, and fuel expenses when deciding how much you can afford to spend on a used car.

Car Insurance Premiums

On average, car insurance premiums in the United States are around $124 per month. However, this amount can vary depending on several factors such as whether you purchased a new or used car, your age, location, driving history, and the coverage options you choose. It’s important to consider these factors when shopping for car insurance to ensure that you get the best coverage at an affordable price. Take this opportunity to shop around and look for the best insurance to match your budget and needs.

Maintenance Fees

Repair costs are the last thing on your mind usually when purchasing a vehicle, but they are definitely something to take into account when purchasing a used car. Car maintenance costs can vary depending on the make and model of your vehicle, its age, and how often you use it. On average, Americans spend about $1,200 per year on car maintenance and repairs. This includes routine services such as oil changes, tire rotations, and brake pad replacements, as well as unexpected repairs like engine or transmission issues. It’s important to factor in these costs when budgeting for your car expenses to ensure that you can keep your vehicle running smoothly and avoid costly breakdowns.

Fuel Costs

Another thing to consider when purchasing a used car is the cost of gas. The fuel efficiency of your vehicle also plays a significant role in determining the true cost. This can also be tricky to predict given the variable nature of gas prices always changing. You can still do some basic math to help you calculate an estimation of monthly expenses based on your vehicle gas mileage, how much you drive per year, and the cost of gas right now.

As an example, let’s say you want to buy a used 2012 Toyota Camry that has a 17.0-gal tank with a combined 28 MPG fuel efficiency across both town and highways. Your local gas station charges $4.30 a gallon and you drive roughly 20,000 miles per year. How much would we pay for gas a month?

First, let’s calculate how many gallons of gas you would need for 20,000 miles per year.

20,000 miles/year ÷ 28 miles/gallon = 714.29 gallons/year

Now let’s calculate the cost of gas per year.

714.29 gallons/year × $4.30/gallon = $3,071.44/year

Finally, let’s calculate the cost of gas per month.

$3,071.44/year ÷ 12 months = $255.95/month

You would pay approximately $255.95 per month for gas.

A very useful tool to calculate this for your vehicle is, 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. While not a fixed cost, using tools and a little bit of math can help you come up with an estimate of how much you spend on fuel every month.

Deciding on your Budget

Establishing a budget is a crucial step in determining how much you should spend on a car. By setting a well-informed and realistic budget, you can avoid financial strain and make the car-buying process more manageable. We can do this by combining all the previous points made above. Here’s how to decide on your budget:

  1. Determine your monthly take-home pay: Calculate your monthly income after taxes and other deductions. This will give you a clear understanding of the amount you can allocate towards transportation costs.
  2. Allocate a percentage of your income to transportation: Ideally, aim to spend around 10-15% of your monthly take-home income on transportation expenses. This includes not only your car payment, but also insurance, maintenance, and fuel costs.
  3. Consider your other monthly expenses: Factor in your other financial obligations, such as housing costs, utilities, groceries, and any outstanding debt payments. Make sure you have a well-balanced budget that accommodates all your monthly expenses without causing financial strain.
  4. Factor in taxes, fees, and insurance premiums: When deciding on a car budget, don’t forget to include the additional costs of taxes, fees, and insurance premiums. Research these expenses and incorporate them into your budget to avoid surprises down the line.
  5. Account for maintenance and fuel costs: Estimate your car’s expected maintenance fees and fuel expenses based on its make, model, age, and fuel efficiency. Include these ongoing costs in your budget to ensure you can comfortably cover them.
  6. Evaluate your existing debt: Take a close look at your current debt situation, as this can affect your ability to secure a car loan. If you have high levels of debt, consider paying off some of it before applying for a loan to improve your chances of being approved.
  7. Get pre-approved for financing: Obtaining pre-approval for an auto loan can help you establish a clearer budget based on the amount you’re eligible to borrow. Stick to your original budget even if the bank pre-approves you for more, as exceeding your budget could lead to financial difficulties later.

By following these steps, you can create a comprehensive and realistic car budget tailored to your financial situation. This will help ensure you make a responsible decision when purchasing a vehicle, allowing you to enjoy your new car without the stress of financial strain.

In conclusion, determining how much to spend on a used car involves a combination of personal preferences, financial circumstances, and practical decisions. Always keep in mind the importance of maintaining a well-balanced budget and staying within your financial limits. With careful planning and consideration, you can confidently purchase a used car that provides a great driving experience without causing undue financial stress. Happy car hunting!

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