Buying a car is one of the biggest purchases many people will make in their lifetime. With the average price of a new vehicle nearing $40,000 in 2022, deciding when you can comfortably afford a car is an important financial consideration.
How Much Car Can You Afford?
As a general rule, it’s recommended that your total monthly auto expenses – including your car payment, insurance, gas and maintenance – remain under 15-20% of your take-home pay. This percentage will vary based on your overall budget and expenses. It’s important not to overextend your finances when buying a car.
Here are some quick tips on how much car you can afford based on your salary:
- Making $30,000 a year: Look for used vehicles in the $10,000 range and keep your total monthly auto expenses under $375.
- Making $50,000 a year: Aim for used cars priced $15,000-$20,000 and keep monthly expenses below $625.
- Making $75,000 a year: You can likely afford a $25,000 vehicle while keeping auto expenses under $940 per month.
- Making $100,000 a year: Consider both new and used cars priced up to $35,000, with monthly costs remaining under $1,250.
- Making $150,000+ a year: With this salary, you can likely afford a luxury vehicle while staying within a 15-20% budget.
These quick estimates demonstrate how your income level can dictate what you can comfortably spend on a vehicle. Always be sure to factor in costs beyond just the car payment, and stick to a spending limit that fits your overall financial situation.
Getting Pre-Approved for a Car Loan
Unless you plan to pay for a car completely in cash, you’ll need to finance your vehicle purchase through an auto loan. Getting pre-approved for a loan before visiting dealerships can give you a better idea of what you can realistically afford.
To get pre-approved:
- Check your credit score and report for any issues that may affect your interest rate.
- Research current auto loan interest rates at banks, credit unions and online lenders.
- Collect details on your income, expenses, assets and debts to submit for pre-approval.
- Apply for pre-approval with one or multiple lenders and compare loan terms offered.
Having a pre-approved loan shows car sellers you’re a serious buyer, and it can give you stronger negotiating power. Make sure the loan amount and terms match what you can comfortably afford based on the auto budget percentages above.
Factors that Influence Affordability
In addition to your salary, there are other important factors that will impact how much vehicle you can afford:
- Down payment amount – The more you can put down upfront, the lower your loan amount and monthly payments will be.
- Interest rate – Shop around for the best rate, as a lower rate will save you money over the loan term.
- Loan term – A longer term (5-6 years) means lower payments but greater interest costs over time.
- Insurance costs – Get quotes on insurance for the make, model and year car you’re considering.
- Running costs – Estimate gas, maintenance and repair expenses based on the car’s mileage and reliability.
- Overall budget – Make sure buying a car doesn’t strain your budget in other areas like housing, food and savings.
Crunching the numbers in advance and getting pre-approved for financing will point you towards a car price and payment you can live with comfortably.
New vs Used Car Based on Salary
For most shoppers, buying a used car is the more affordable option. However, your income level can determine whether you might be able to look at purchasing new.
| Salary Range | Recommended Car Option |
|---|---|
| Under $30,000 | Used |
| $30,000 – $50,000 | Used |
| $50,000 – $75,000 | Used or Certified Pre-Owned (CPO) |
| $75,000 – $125,000 | New or CPO |
| Over $125,000 | New |
This table provides general salary guidelines for whether you may want to look at new or used vehicles. However, you’ll still need to carefully weigh what monthly payment fits your individual budget.
Benefits of Buying Used
For most income levels, buying a used vehicle offers big advantages:
- Lower upfront cost – Used cars are thousands less than new.
- Better value – They depreciate less over time than brand new models.
- Wider selection – You can likely find a used car with your must-have features.
- Lower insurance – Used cars cost less to insure than new ones.
Going used means you can get more car for your money while keeping payments manageable. Be sure to have any used car inspected prior to purchasing.
When You Might Consider New
Here are some instances where it may be worth looking at new cars if you’re earning $75,000 or more:
- You plan to keep the car long-term (7-10 years) to get your money’s worth.
- You want the latest tech and safety features that may not be on used cars.
- You can qualify for 0% financing from the dealer on a new car.
- You want peace of mind from a full factory warranty.
New cars depreciate quickly, so be prepared to keep the car for several years. Leasing a new vehicle is another option, which comes with lower monthly payments but no equity in the car.
Steps for Determining the Right Car Price
Once you understand affordability guidelines for your income level, follow these steps to zone in on the right used or new car price for your budget:
- Set your auto budget – Determine a monthly amount that fits within 15-20% of your salary and other expenses.
- Get pre-approved financing – Shop lenders to find the best interest rate and loan terms.
- Research pricing – Use online pricing guides to see typical prices paid for the make and model you want based on year, mileage and options.
- Check insurance costs – Get quotes from insurers to make sure they fit your budget.
- Include other costs – Factor in sales tax, registration fees, gas, maintenance and repairs.
- Determine price range – Using all the above information, set your target price range to stay within your set monthly budget.
Give yourself a clear budget limit before falling in love with any car. Being disciplined about what you can afford will prevent buyer’s remorse down the road.
Lowering Your Payment to Fit Your Budget
If the monthly payments on your target vehicle exceed your budget, there are steps you can take to lower the payment:
- Make a larger down payment to reduce the loan principal.
- Extend your loan term, but watch out for higher interest costs.
- Negotiate the vehicle price – aim for at least 10% below sticker price.
- Choose a less expensive car with fewer options and features.
- Consider a newer used car over a new car.
- Opt for a model with better fuel economy to save on gas.
Running the numbers through an auto loan calculator can help you see how adjustments like these will impact your bottom line. Don’t let the salesperson pressure you above your predetermined budget.
Special Considerations for Young Buyers
As a young car buyer, you may face higher insurance rates and loan costs. Here are some tips:
- Shop around for the best car insurance rates. Ask about discounts for young drivers.
- If financing, work on building your credit score to improve your interest rate.
- Consider having a parent co-sign your loan to potentially lower your interest rate.
- Buy an older used car – they often have lower insurance premiums.
- Take a driver’s education course for possible insurance discounts.
With less driving experience, be extra diligent about picking an affordable, reliable used car with lower operating costs.
Questions to Ask Yourself
Before committing to any car purchase, ask yourself these key questions:
- Does this car fit my overall budget, or will it strain my finances?
- Can I maintain this car and afford the insurance, gas and repairs?
- Is this vehicle a want or a need? Should I consider something more practical?
- Am I buying based on monthly payment or total price? What’s the real cost after interest?
- Am I overextending myself to keep up with trends or peer pressure?
- Have I explored all options for lowering my payment to fit my budget?
Being completely honest with yourself will prevent making an emotional decision you later regret. Your car should fit your lifestyle, not dictate it.
Final Takeaways
Here are key points to remember when deciding what you can afford to spend on a car based on your income:
- Aim to keep auto expenses under 15-20% of your take-home salary.
- Get pre-approved financing to see what monthly payments you can manage.
- For most incomes, a used car offers the best value and lowest payment.
- Don’t forget to factor in insurance, fuel, maintenance and repair costs.
- Adjust your down payment, loan term or car price to find a payment in your budget.
- Ask yourself if the car fits your needs and won’t strain your finances.
Determining affordability requires doing your homework on pricing and evaluating your entire financial situation. Stay disciplined about your budget and you’ll end up with no regrets about the car you select.
