A new car is a major purchase, so before you go for a test drive, hit the brakes and strategize. Wondering how much you should spend on a car? Let’s hit the road.

A new car is a major purchase, so before you go for a test drive, hit the brakes and strategize. Wondering how much you should spend on a car? Let’s hit the road.
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.
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:
Once you’re ready to buy a car, you have two options: You can lease or you can buy.
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:
Cons:
When you purchase a car, you’re acquiring a valuable asset and building equity.
Pros:
Cons:
Now, it’s time for your other big decision: Do you buy a new car or a used one?
With a new vehicle, you’re getting the latest in design, safety, and technology. You also start with no wear or damage.
Financing may be less expensive because interest rates and annual percentage rates (APRs) are typically lower on new cars.
However, new vehicles are often pricey, and it will depreciate the moment you drive off the lot.
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.
A good option is certified pre-owned vehicles, which are low mileage used cars that dealers put through a rigorous multi-point inspection.
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.
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.
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.
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.
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.
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.
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.