How Much Should I Spend on a Car?

car budget

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Let’s discuss how much you should spend on a car and how to  establish a budget for your new vehicle. In fact, let’s talk in a comprehensive and long term way for how to budget for a car. How much can you afford to spend on a car?

I talk to each of my clients about how to budget for a car if they’re unsure about what kind of vehicle they should be looking at.

Setting the car budget is extremely important before you start shopping. Not knowing what vehicles fit inside your budget can cause you to purchase a vehicle much more expensive.

The caveat to this is that it’s also possible that a vehicle with a higher price and higher payment could have a lower total cost of ownership.

These are the considerations for when you are setting a car budget. Here are 10 topics you need to understand for how to budget for a car and how to make an informed buying decision.


How much to spend on a car

Financing Terms

Financing terms are a huge part of the total deal and dramatically affect the total cost of ownership. Whether a vehicle can fit inside your car budget could very well be dependent upon financing rates and terms. 

An increase of 2% on a loan of $20,000 costs you over $1200 more on a 72 month loan. That equates to around $17 per month on a 72 month loan. 

The following things can affect the interest rate of your loan.

Dealership charges more than the amount you get approved for.

That’s right! The interest rate you pay could be more than what you are approved for through the bank. The dealership profits the difference. That is why it is a good idea to shop the financing terms of the vehicle you want. 

If you don’t know what rates you are approved for, the dealership can charge you whatever they want and you may not even know you paid too much.

Miles on the vehicle

The more miles a vehicle has the higher the interest rate. Also keep in mind that banks will typically reduce the amount of time that they will allow you to pay off a vehicle. In short, typically the higher the miles, the higher the interest rate and the shorter the loan term, equates to a higher payment.

Year of the vehicle

New vehicles have lower interest rates than used vehicles typically. Just like miles, the age of the vehicle can also lower the amount of time a bank is willing to finance the vehicle. Again, older vehicles typically have higher interest rates and shorter terms which equates to higher payments.

Certified Pre-Owned Cars

A certified preowned vehicle will sometimes come with promotional interest rates. These vehicles have to go through a certification process before being offered for sale and they are newer pre-owned vehicles. 

The manufacturer finance companies offer promotional interest rates typically lower than what you can get through the bank to give you an incentive to buy them. 

These vehicles also come with an extended warranty. You may be able to get a certified vehicle that comes with a warranty for the same payment as a vehicle without a warranty that costs less. 

Your total cost of ownership may be less on a certified vehicle even if it costs a few thousand more than a regular pre-owned vehicle.

Term of the car loan

This is pretty simple but not understanding the term of a loan can totally screw up your set car budget. The shorter the loan term the better the interest rate. I have seen people agree to pay $20 dollars less per month only to pay the loan for an extra year. That is terrible. Make sure you know the term of the loan and ask if you can reduce the loan term to get a better rate and how that affects your payment. 

Never shop for a vehicle solely based on payment. That’s how dealerships maximize profit. A monthly payment should not be a leading factor for determining how much to spend on a car. If it is, perhaps a lease would suit you better.

The financing terms of the vehicle are just as important as the sale price of the vehicle. A good idea is to get a pre-approval from your bank and shop the interest rate at multiple dealerships. Never let someone tell you the interest rate is fixed and can’t be negotiated. Always negotiate the interest rate.

Cost of Insurance

The cost of insurance should always be considered before you agree to buy any vehicle. Here is why. I have heard many clients say things like, “I like that vehicle but it is $2000 more and I can’t afford it.” What they do not realize is that the vehicle they want costs $30 dollars less per month to insure. 

What normally will happen is that people look for a vehicle and make a deal  and then call to add insurance. But you should always check insurance rates on the vehicles you are considering before making a deal so that you can get the most bang for your buck.

I see this happen all the time with new drivers especially. I have clients who are parents that want a small compact vehicle for their teenager. However, they would really feel better with their child driving a small SUV because of the safety. SUVs typically cost more in price and payment. 

But the cost of a lower insurance rate can offset the total cost of ownership. Those small compact cars can have the highest cost of insurance while the small SUV has some of the best rates. You could make a deal on a car inside your budget then call your agent and the insurance on it could throw you right out of your set car budget.  

Huge bummer after the fact. Just call your agent before you buy! Good insurance agents will create lasting relationships; I shoot my agent a text or Facebook message and he’ll let me know what it costs to insure a new vehicle on the fly before I shop or buy.

This post contains affiliate links. If you receive a quote from Toggle, YCBA receives a commission which helps us keep the lights on. You won’t pay a penny more using one of our affiliate links.

Of course, you should also keep your insurance honest. You can get a quote on Toggle to quickly to compare.  And they won’t ding your credit; it’s an easy way to make sure you are getting the best rates on car insurance.

Costs of service to the vehicle

I like to have a car budget for not just purchasing but for the entire year. How much do I want to spend on transportation costs for an entire year. Some things are unexpected but let’s consider some maintenance costs.

How much do new tires cost? How much does an oil change cost? Does the vehicle have known issues that go wrong? Does the vehicle come with a warranty? 

These are all the things you should consider before buying a vehicle and determining how much you can spend on a new car. A lot of car owners and buyers don’t know that certain types of vehicles or brands can be more expensive to maintain. You should know about the car brand you are buying.

Gas Mileage

When gas prices skyrocketed years ago everyone considered it a factor when purchasing a vehicle. Gas prices went back down and people think about it less. It is a really easy equation if you want to consider the cost of gas.

Figure out how many miles you will drive in a year and divide that number by the average fuel economy of the vehicle. That gives you how many gallons of gas you will buy in a year. Take that number and multiply by the cost of gas per gallon, then divide that number by 12.

Let me show you how that looks.

Here’s the scenario. You drive 10,000 miles a year in a car with 20 mi per gallon and gas costs about $2 dollars per gallon.

10,000 miles per year / 20 mpg = 500 gallons of gas per year

500 gallons of gas x $2 dollars per gallon = $1,000 in fuel

$1000 in fuel / 12 months= $83.33 per month in fuel

To compare, if you got a vehicle that got 30 mpg you would save $27.78 per month. Factor in the cost of fuel to get your total cost of ownership. If doing these calculations and reviewing these scenarios overwhelms you, just message me I’m happy to work the numbers through for you and answer your questions.

Vehicle resale value

The resale value of the vehicle is a huge factor for determining what vehicle you should buy. Think about if you only planned on owning a vehicle for five years and you were considering two vehicles. 

Vehicle A: You really want it but it costs $20,000. In five years it could be traded or sold for $10,000

Vehicle B: It costs $15,000 to buy today. In five years it could be traded or sold for $3500

Vehicle A actually has a total cost of ownership $1500 less than vehicle B. 

Estimating the resale value of vehicles is a little tricky but you can make a good estimated guess. You really should consider how long you plan to own a vehicle and what is the estimated value of that vehicle when you will get rid of it.

You see if you only focus on the price of the vehicle or the payment you may end up buying a vehicle that you really didn’t want when the vehicle you do want actually has a lower cost of ownership. 

A dealership salesperson is reluctant to tell you this information because it just makes your decision harder to make. Because I am a consumer advocate I want you to have complete knowledge before you buy. 

Setting a car budget is not just about setting a number. You need to have knowledge around these areas too. Ultimately, total cost of ownership is what needs to take precedence.

Next: Play by Your Rules

Coming up with the car budget should be a high priority item in your car search and buying process.  

When you have come up with your budget, move on to learn how to play by your own rules when buying a car.

Why Trust Your Car Buying Advocate?

Watch this short video to find out why working with Your Car Buying Advocate makes all the sense in the world.

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