"I'm going to need 10X this for my car payment..." Do you know how much you can spend on a car? Figure out just how much car you can afford with this guide.
The average car payment is $482 for a new car (according to USA Today). The average car payment for a new car is $351.
Most car buyers sign up for a six-year loan (that’s 72 months!) at an average interest rate of 9.6%. The average price of cars financed with these egregious loans hovers around $26,000, but the total cost of the car loan is over $34,000.
How did I get that figure? I used this handy total loan cost calculator over at Bankrate.
This is a horrible investment for something that loses a quarter of its value the minute you drive off the lot. After four years, your precious new car will have lost about 70% of its value. So after making 72 payments, you’re left with a car that’s worth maybe six grand. Ouch.
If you haven’t figured it out already, I’m an advocate for buying used cars over brand new. I would much rather see someone buy a used car and pocket the extra cash. Imagine taking that $482 every month and putting it into an investment account. What could you do with an extra $482 per month if you weren’t putting it towards a car?
The average car payment is $482 for a new car (according to USA Today). The average car payment for a new car is $351.
Most car buyers sign up for a six-year loan (that’s 72 months!) at an average interest rate of 9.6%. The average price of cars financed with these egregious loans hovers around $26,000, but the total cost of the car loan is over $34,000.
How did I get that figure? I used this handy total loan cost calculator over at Bankrate.
This is a horrible investment for something that loses a quarter of its value the minute you drive off the lot. After four years, your precious new car will have lost about 70% of its value. So after making 72 payments, you’re left with a car that’s worth maybe six grand. Ouch.
If you haven’t figured it out already, I’m an advocate for buying used cars over brand new. I would much rather see someone buy a used car and pocket the extra cash. Imagine taking that $482 every month and putting it into an investment account. What could you do with an extra $482 per month if you weren’t putting it towards a car?
How To Estimate Your Car Budget
Most people screw up right at the beginning. Rather than figuring out a much-needed budget, they wing it, assuming they can cover the car payments. Actually sit down and go through your income and expenses. Look at your bank accounts, credit card statements, and your variable expenses (like groceries and clothes).Make sure there is enough wiggle room for emergencies, your savings, and other disposable income (your fun money!).
A common rule of thumb is that you shouldn’t spend more than 10% of your monthly household income on a single vehicle. This 10% figure includes all automotive expenses, such as gasoline, major repairs, routine maintenance, replacing common items, and insurance.
Also know that the total cost of a car is more than the stick price (although you shouldn’t be paying sticker anyway – negotiate!) because it includes sales tax, title, and registration fees.
Finally, don’t forget to consider future expenses. If you plan on financing the car for six years (please don’t do that) then you should be aware of your potential financial situation in the future. A lot of your expenses, such as rent and groceries, will probably increase over the years, which means that if your income doesn’t increase, you’ll feel the pinch. Plan for other large expenditures such as repairs, buying new furniture, having a baby, etc.
If you figure out that you can afford a $550 monthly payment, you could finance a $15,000 car for 36 months or a $32,000 car for 84 months. This means you could either get a Honda Civic or an Audi A3 with the same monthly payment. Hopefully you’ll be smart enough to choose the Civic.
Most people screw up right at the beginning. Rather than figuring out a much-needed budget, they wing it, assuming they can cover the car payments. Actually sit down and go through your income and expenses. Look at your bank accounts, credit card statements, and your variable expenses (like groceries and clothes).Make sure there is enough wiggle room for emergencies, your savings, and other disposable income (your fun money!).
A common rule of thumb is that you shouldn’t spend more than 10% of your monthly household income on a single vehicle. This 10% figure includes all automotive expenses, such as gasoline, major repairs, routine maintenance, replacing common items, and insurance.
Also know that the total cost of a car is more than the stick price (although you shouldn’t be paying sticker anyway – negotiate!) because it includes sales tax, title, and registration fees.
Finally, don’t forget to consider future expenses. If you plan on financing the car for six years (please don’t do that) then you should be aware of your potential financial situation in the future. A lot of your expenses, such as rent and groceries, will probably increase over the years, which means that if your income doesn’t increase, you’ll feel the pinch. Plan for other large expenditures such as repairs, buying new furniture, having a baby, etc.
If you figure out that you can afford a $550 monthly payment, you could finance a $15,000 car for 36 months or a $32,000 car for 84 months. This means you could either get a Honda Civic or an Audi A3 with the same monthly payment. Hopefully you’ll be smart enough to choose the Civic.
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How Much Does It Really Cost to Own a Car? The True Cost
Speaking of Audis and Hondas, expensive cars have much higher ownership costs because they cost more to insure, maintain and repair. Even if two vehicles have the same price, it doesn’t mean that they will cost the same amount over time. One of my favorite car-buying tools, if you’re buying a new car, is the 5-Year Cost to Own, which is the total amount of vehicle-related expenses you’ll likely have to cover during the first 5 years of owning a car. For example, the 2016 Chevrolet Spark LS has a 5-Year Cost to Own of $26,254, while the 2016 Toyota Yaris L has a 5-Year Cost to Own of $30,326.
The 6 Biggest Costs of Car Ownership
Gasoline.
Yes, gas prices are cheaper now, but I wouldn’t expect this to last forever. Remember when gas was $4 per gallon? There’s a big difference between a Toyota Prius (55 mpg) and a Lamborghini Aventador Roadster (12 mpg).
Finance charges.
If the car dealership doesn’t get their money with the purchase price, you better believe they’re going to get it with financing.
Depreciation.
For new cars, this represents more than 40% of the annual cost of ownership. While most people might not think so, depreciation is definitely a real cost. It’s like having thousands of dollars vanish into thin air.
Maintenance and tires.
If you want to stay on the road, you have to keep your car in good shape. For new cars, it won’t be as much, but if you buy a used car, this number could easily double. Or, if you want to buy a Ferrari F355, you’ll be spending $1,100 just on an oil change. A McLaren F1 requires an $8,000 oil charge.
Licensing, registration, and taxes.
This varies from state to state, so check with yours.
Insurance.
One of the biggest reasons I tell people to buy a used car is because a new car means higher insurance costs. The average auto insurance payment varies by state; here in Delaware, it’s $132 per month.
3 Quick Ways to Help Lower Your Insurance Costs
Shop around/get multiple quotes.
This is the best tip I can give you on lowering your insurance costs, but most people just get one quote and stop. Since prices vary from company to company, shopping around is a must. Get at least three price quotes, but I personally wouldn’t rest until I had five or more. However, be sure that price isn’t your only determining factor – ask for recommendations and check reviews/consumer complaints online. No amount of savings is worth dealing with an awful company when you need to use your insurance.
Check the record.
Choose a car with a great safety record and/or a low theft rate. Safer cars that don’t get stolen often have lower insurance costs.
Get a higher deductible.
A deductible is the part that you pay before your insurance kicks in. When you request a higher deductible, you significantly lower your costs. Increasing your deductible from $200 to $500 or $1,000 could save you up to 40%. Just make sure you have the money set aside to pay it!
Speaking of Audis and Hondas, expensive cars have much higher ownership costs because they cost more to insure, maintain and repair. Even if two vehicles have the same price, it doesn’t mean that they will cost the same amount over time. One of my favorite car-buying tools, if you’re buying a new car, is the 5-Year Cost to Own, which is the total amount of vehicle-related expenses you’ll likely have to cover during the first 5 years of owning a car. For example, the 2016 Chevrolet Spark LS has a 5-Year Cost to Own of $26,254, while the 2016 Toyota Yaris L has a 5-Year Cost to Own of $30,326.
The 6 Biggest Costs of Car Ownership
Gasoline.
Yes, gas prices are cheaper now, but I wouldn’t expect this to last forever. Remember when gas was $4 per gallon? There’s a big difference between a Toyota Prius (55 mpg) and a Lamborghini Aventador Roadster (12 mpg).
Finance charges.
If the car dealership doesn’t get their money with the purchase price, you better believe they’re going to get it with financing.
Depreciation.
For new cars, this represents more than 40% of the annual cost of ownership. While most people might not think so, depreciation is definitely a real cost. It’s like having thousands of dollars vanish into thin air.
Maintenance and tires.
If you want to stay on the road, you have to keep your car in good shape. For new cars, it won’t be as much, but if you buy a used car, this number could easily double. Or, if you want to buy a Ferrari F355, you’ll be spending $1,100 just on an oil change. A McLaren F1 requires an $8,000 oil charge.
Licensing, registration, and taxes.
This varies from state to state, so check with yours.
Insurance.
One of the biggest reasons I tell people to buy a used car is because a new car means higher insurance costs. The average auto insurance payment varies by state; here in Delaware, it’s $132 per month.
3 Quick Ways to Help Lower Your Insurance Costs
Shop around/get multiple quotes.
This is the best tip I can give you on lowering your insurance costs, but most people just get one quote and stop. Since prices vary from company to company, shopping around is a must. Get at least three price quotes, but I personally wouldn’t rest until I had five or more. However, be sure that price isn’t your only determining factor – ask for recommendations and check reviews/consumer complaints online. No amount of savings is worth dealing with an awful company when you need to use your insurance.
Check the record.
Choose a car with a great safety record and/or a low theft rate. Safer cars that don’t get stolen often have lower insurance costs.
Get a higher deductible.
A deductible is the part that you pay before your insurance kicks in. When you request a higher deductible, you significantly lower your costs. Increasing your deductible from $200 to $500 or $1,000 could save you up to 40%. Just make sure you have the money set aside to pay it!
How to Calculate Your Monthly Car Payments
An online calculator for calculating your monthly car payment is this auto loan calculator from cars.com.
Two of the biggest factors determining your monthly car payment are your down payment and any applicable trade-in value.
Down payment
I believe that you should put at least 20% or more down when buying a new car, but the evidence shows that I’m in the minority. An Edmunds analysis of 2015 auto purchases showed that the average down payment was about 10%, or half of my number.
I guess the down payment sweet spot doesn’t have to be tied to a specific percentage, as long as you’re getting a car you can reasonably afford and if the down payment doesn’t wreck your savings. A large down payment will allow you to choose a shorter finance term, saving you money in interest charges.
With that being said, just because you have the money doesn’t mean that’s what you have to put down. For example, if you have 50% saved up and can get a wonderfully low interest rate (around 7% or less, preferably much less) by only putting 20% down, keep the extra 30% in an emergency fund, invest it, or save it for the next vehicle.
Trade-ins
Your trade-in car can serve as your down payment, provided it has enough value. Granted, if you’re going to be paying high interest to finance the car, I would put as much cash towards it as reasonably possible. Plus, if you total your car in an accident with enough equity, you likely won’t owe anything, which means you won’t have to deal with additional stress. I never understood how people could buy a car with nothing-down, have the car depreciate 40% and then complain about how long it’s going to take before they’re no longer “upside down” on their loan.
Also, check out this great infographic on 14 Ways to Maximize the Value of Your Car Before Selling.
When trading in your old car and buying a new one, please remember that you are not obligated to buy a car from the first dealer you meet. If you both can’t agree on a fair price for your trade-in, just walk away. If you do your homework well in advance, you’ll know immediately if they’ve given you a fair offer. Find out what your car is worth by researching the Kelley Blue Book value.
An online calculator for calculating your monthly car payment is this auto loan calculator from cars.com.
Two of the biggest factors determining your monthly car payment are your down payment and any applicable trade-in value.
Down payment
I believe that you should put at least 20% or more down when buying a new car, but the evidence shows that I’m in the minority. An Edmunds analysis of 2015 auto purchases showed that the average down payment was about 10%, or half of my number.
I guess the down payment sweet spot doesn’t have to be tied to a specific percentage, as long as you’re getting a car you can reasonably afford and if the down payment doesn’t wreck your savings. A large down payment will allow you to choose a shorter finance term, saving you money in interest charges.
With that being said, just because you have the money doesn’t mean that’s what you have to put down. For example, if you have 50% saved up and can get a wonderfully low interest rate (around 7% or less, preferably much less) by only putting 20% down, keep the extra 30% in an emergency fund, invest it, or save it for the next vehicle.
Trade-ins
Your trade-in car can serve as your down payment, provided it has enough value. Granted, if you’re going to be paying high interest to finance the car, I would put as much cash towards it as reasonably possible. Plus, if you total your car in an accident with enough equity, you likely won’t owe anything, which means you won’t have to deal with additional stress. I never understood how people could buy a car with nothing-down, have the car depreciate 40% and then complain about how long it’s going to take before they’re no longer “upside down” on their loan.
Also, check out this great infographic on 14 Ways to Maximize the Value of Your Car Before Selling.
When trading in your old car and buying a new one, please remember that you are not obligated to buy a car from the first dealer you meet. If you both can’t agree on a fair price for your trade-in, just walk away. If you do your homework well in advance, you’ll know immediately if they’ve given you a fair offer. Find out what your car is worth by researching the Kelley Blue Book value.
