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If you’re in the market for a new car, the last thing you want to do is step onto a car lot without knowing exactly how much you should spend on a car. After all, car salesmen are known for convincing people to spend more than they can afford for the sake of a ‘great’ deal.
But how much should you spend on a car? According to JD Power and Associates, the average car currently costs around $30,772. While that might be more than you can afford, you’ll be happy to know that there are still great cars with sticker prices that start as low as $15,000. You might even be happier to know that there are quality used cars out there for even cheaper.
When it comes to deciding just how much you should spend, it’s important to remember to stay within your means – especially if you’re planning on auto financing. The last thing you need is a car payment that is going to put a squeeze on your budget for many months to come. Here are some tips for deciding how much you should spend on a car:
Use the 20/4/10 Rule to Determine How Much You Should Spend on a Car
According to many financial experts, the 20/4/10 rule will help you make a financially responsible choice when buying a car. The maxim suggests that you should make at least a 20% down payment, take out a loan for no more than four years, and not pay more than 10% of your gross income towards auto expenses like your car payment, gas, maintenance, and insurance.
To give you an idea of how much that works out to, if you make $60,000 per year then you should only spend $500 per month or $6,000 per year on your auto expenses. If you are paying $100 per month on insurance, and another $100 on things like parking, gas and maintenance – then your car payment should be no more than $300 per month.
How Your Loan Affects What You Can Afford
While $300 might seem like a lot to spend on a car payment, what you can get with that payment depends significantly on the costs involved in financing your car. Someone with excellent credit who can qualify for a low interest rate will be able to spend more for an expensive car than someone who has poor credit since the costs of financing will add significant expenses to their payments. Also, if you stick to the 4 year rule, then your car payments will be more expensive than if you had opted for an 8 year auto loan.
Other financing expenses like whether there is are origination fees or prepayment fees charged on your auto loan could also impact how much you can spend.
Factor in Maintenance and Repairs and the Cost to Own Your Car
While you might think that you’re getting a great deal on the car you have your eyes on since it costs less then a comparable vehicle by a competitor, if you’re not careful you might end up buying a car that will cost a lot in things like gas, maintenance, and repairs. Those added expenses could make your auto payment more difficult to afford and that might be financially risky if you don’t have an emergency fund to pay for unexpected expenses.
According to Consumer Reports, some cars often look like a good deal when you look at just their sticker prices, but the expense of owning them adds up. They’ve looked at the expenses of owning cars by make and some are much more expensive than others. For example, if you buy an Acura, you’ll spend an average of $230 annually on maintenance and repairs but you’ll spend only $50 if you buy a Toyota.
Another great resource to help you understand the additional costs involved in buying your car is AAA’s annual study that looks at driving costs and compares the average costs of ownership on different types of cars from the relatively cheap cost of driving a small sedan that rings in at $6,579 per year to the more expensive cost of driving a large sedan that comes in at over $10,492. This will help you figure out how much to spend on the right kind of vehicle for your needs and budget.
The Bottom Line
Buying a car is a huge financial investment, and you should know how much to spend on a car. If you stick to the 20-4-10 rule, factor in the costs of your financing and the expenses related to driving your vehicle, then you’ll be able to make a smart choice that won’t wreak havoc on your budget or leave you regretting your decision.
Author: Andrew Rombach