Smith 
Buying a car from a dealership can be a real headache. Just trying to figure out the true cost of a car can be confusing. You start with the sticker price, then look at the manufacturer’s suggested retail price (MSRP), and if you’re good at negotiating, you might even get close to the dealer’s lowest price. Unfortunately, getting from that initial sticker price to the final deal can be a mystery. If you’re not careful, you might end up paying more than the car is worth or more than you can afford.
Car dealerships are also skilled at making you think their cars are worth a lot more than they really are. For instance, by late 2023, the average new car loan had already skyrocketed to over $48,000, with monthly payments averaging more than $700 over 68 months. When you consider that the median household income was only $59,039 in 2017, those car prices are pretty crazy. If you know what kind of car you want, use our Car Affordability Calculator to see what you should be paying. We’ll even show you how this impacts your future retirement!
To make sure you don’t spend too much on a car, follow these four steps to figure out a monthly payment you can manage. Don’t leave it to the salesperson to decide how much you can borrow—they might suggest you can afford anything on the lot based on your credit and income. Ultimately, only you know what fits into your budget.
Step #1: Figure Out Your Monthly Income
If you don’t already use a budget, you might not have a clear idea of your monthly earnings. Gather your pay stubs and calculate your average monthly income. If you have a steady income, this will be easy. If your income varies, estimate it based on several months of pay.
Step #2: Subtract Your Expenses
Next, list out all your monthly expenses. Include fixed expenses like rent, insurance, and utilities, as well as variable ones like food and gas. Don’t forget to factor in some savings each month. Once you’ve tallied your expenses and savings goals, see how your income stacks up. Whatever’s left is what you could potentially spend on a car—but it doesn’t mean you should spend all of it.
Step #3: Estimate Costs for Gas and Insurance
Think about how gas and insurance costs might change with a new car. Add these estimates to your budget from steps 1 and 2. Here’s an example: If you net $4,000 a month, and your expenses total $3,510, that leaves you with $490 for a car payment. While that’s the maximum you could spend, it’s smart to stay below this amount.
Step #4: Use a Car Payment Calculator
Play around with a car loan calculator to get a better understanding of potential payments. Input the price range you’re shopping within and the interest rate you’re hoping for to see what kind of monthly payment you might face.
If you’re considering a used Toyota Corolla hybrid for $21,000, but hope to lower it to $20,000, use the calculator to experiment with different scenarios. For instance, borrowing $20,000 at 5% APR over 60 months would mean monthly payments of $377.42. Or, if you put down $3,000 and borrow $17,000 for four years, you’d pay $391.50 a month.
Five Important Tips When Buying a Car
- Don’t Forget Other Costs: Beyond the car’s price, factor in expenses like license plates, insurance, and taxes. Newer cars often come with higher costs in these areas.
- Leave Room in Your Budget: Make sure there’s buffer space in your budget for unexpected expenses. Life is unpredictable, and you’ll be better off with some financial cushion.
- Shop Around for Insurance: Insurance rates can vary greatly, so compare policies to make sure you’re getting the best deal.
- Consider Buying Used: New cars depreciate quickly. Used cars avoid that initial drop in value and could save you money.
- Stick to Your Budget: Set limits and stick to them. Don’t let a salesperson convince you to spend more than you planned.
The Bottom Line
Affording a new car requires careful planning. Set a budget, choose a car within your means, and save for the down payment. Factor in all associated costs like insurance, taxes, and maintenance. By shopping around for the best deals and being mindful of your budget, you can find the perfect car without overspending.
FAQs
To figure out your car budget, start by reviewing your income and expenses. Then, determine how much you can reasonably afford for a car payment each month, considering other costs like gas and insurance. Ideally, your total debt payments should be no more than 36% of your gross monthly income. A credit score of 700 or higher is generally considered good for car loans, though you can still get a car loan with a lower score—just expect higher interest rates.
