When it comes to cars, we all have a dream ride (Audi Q5, anyone?)—but you can’t grab the keys just yet. Before you go buy a new car, truck, or SUV, you need to ask yourself, “How much should I spend on a car?” You want something you’ll enjoy—and that you can afford. We’re here to help you prepare.

What to consider when figuring out your car budget

Before you visit a dealership’s lot or browse online car retailers, ‌create a car budget. After a house or condo, a car is the second largest purchase most people will ever make. Lenders and automotive manufacturers offer tools to help, including Ford’s printable version and Toyota’s online payment estimator. 

In today’s market, new cars are expensive, and used car prices are also at record levels. According to Kelly Blue Book, a go-to source for auto pricing, in February 2022, the average new vehicle cost $46,085, while the average used car price in January 2022 was $27,633. The auto market is extremely volatile, and numbers change regularly. If these figures make you want to buy a bike instead, don’t stress. There are affordable options out there, but you’ll need to shop around.  

Some factors that influence how much car you can afford include:

• Make and model of the vehicle.
• New or used vehicle.
• Buy or lease.
• Down payment amount.
• Loan amount.
• Loan terms.
• Your credit score and borrowing history.
• If you have a car to trade in.

Lease or buy? How do you decide?

Once you’re ready to buy a car, you have two options: You can lease or you can buy.  

Lease

When you lease a vehicle, you’re essentially renting it from a dealer for a set period of time, usually two or three years. When the lease ends, you turn the vehicle back into the dealer. 

Pros: 

• You get a brand-new car with all the latest design and technology features. 
• After your lease period is up, you can trade it in for a new one.
• You don’t have to worry about reselling or trade-in value.
• As the car gets older and the manufacturer warranty runs out, you’re not responsible for costly maintenance.  

Cons: 

• You get limited annual mileage allowance, typically 12,000 to 15,000 miles per year.
• If you go over the mileage limit, you’ll have to pay a surcharge. 
• You could get charged for wear and tear.
• Since you don’t own the vehicle, you’re not building equity.
• The leasing process can be complicated.
• Insurance prices can be higher. 

Buy

When you purchase a car, you’re acquiring a valuable asset and building equity. 

Pros: 

• You get to customize your vehicle to your preferences and needs.
• When you pay off your loans, you own the vehicle. 
• You don’t have to worry about mileage limits.
• You can sell or trade it whenever you like.
• No dealer charges for wear and tear.
• When you go to buy another vehicle, you can trade in your current car and use the value to reduce your next purchase.

Cons: 

• As the car ages, you’re responsible for the maintenance and service.
• After you hit a time or mileage limit, the manufacturer warranty expires.
• When updated models hit the market, you won’t be able to switch easily into a newer vehicle.
• Over time, the car will depreciate‌.

New or used?

Now, it’s time for your other big decision: Do you buy a new car or a used one? 

New vehicles

With a new vehicle, you’re getting the latest in design, safety, and technology. You also start with no wear or damage.

However, new vehicles are often pricey, and it will ‌depreciate the moment you drive off the lot.

Used vehicles

Also called pre-owned, used cars have already been on the road. That means you inherit another driver’s wear and tear, accident history, and anywhere from a few thousand to upwards of 200,0000 miles. Used car prices and quality vary.

They may even include a warranty. Used car financing usually costs more because of the car’s declining value, depreciation, and potential for maintenance issues. 

Steps to calculate how much you can spend on a car

Now that you know your options, it’s time to bring it home. You’ll need to set your budget and pick a make and model. What’s an expensive car? That depends on your tastes and your finances. 

1. Calculate your vehicle allowance

Financial experts recommend spending between 10%-15% of your take-home pay on the purchase price, or your car to income ratio. If you make $150,000 per year and your take-home pay is roughly $8,500 per month (depending where you live and your tax liabilities), you could spend between $850 to $1,275 on your car payments. Use this paycheck calculator to calculate your budget.

2. Factor in the extras

When you calculate your monthly allowance, it might sound sizable. But before you go off and buy a Tesla, there’s more to consider because you’ll have other car-related expenses. AAA recommends car buyers make a list of ‌costs, including gas, tolls, parking fees, auto insurance, tires, and ‌repairs. Want vanity plates? That will cost you too.  

With gas prices at record levels, fueling up can put a serious dent in your wallet. These days, I spend between $80 and $100 to fill up my SUV! The U.S. Department of Energy can help you calculate annual fuel costs. 

Also, don’t forget about taxes, registration, and title. When you purchase your vehicle, you’ll have to pay related taxes at the time of purchase. Rates vary by city, county, and state, so check with your local motor vehicle departments for information. In Denver, Colorado, where I live, there’s an 8.81% sales tax on motor vehicle sales. In some areas, title and registration fees can be pricey. Some states charge flat registration fees, others are based on value or weight. The National Conference of State Legislatures tracks each state’s requirements. You’ll have to renew your car annually. Forget, and you may get a ticket and fine. 

Include these factors into your budget, and it may reduce the amount you can spend on a vehicle by a few hundred dollars a month. 

3. Get your finances in order

People often ask, “How much should I save to finance a car?” and the answer is, as much as you can. If you have cash to put toward a down payment, it will reduce your loan amount. That means lower monthly payments and lower interest charges. It could be a smart move to find some cash to direct to your down payment. 

4. Shop for your loan

When it’s time for financing, do your homework to find the best loan. Dealers offer financing and incentives, including occasionally offering 0% financing for a period of time. You can also check your bank or credit union or work with a third-party lender. 

Ready, set, shop

Buying a car can be a little overwhelming, but if you get your finances organized and make some important decisions before you go shopping, you’ll be in the driver’s seat. Now hit the road.