Asking how much car can I afford is a logical question for the savvy consumer. The last thing anyone wants is to be responsible for a vehicle that goes beyond one’s budget. But affordability goes beyond just a car’s purchase price; there are many other expenses to consider, too. Add in that both new and used cars are selling for recond prices (thanks to pandemic-related tight supplies), and costs become even more of an issue. Read on as we answer the “How much car can I afford? question.
Buying a Car: What’s Involved
A car buyer shouldn’t think that costs are solely focused on purchasing or financing a vehicle. There’s much more involved, including maintaining, insuring, and operating the vehicle. Let’s go over a quick breakdown of these expenses.
Here’s an insightful example to start things off. In a 2020 article, Nerdwallet.com revealed that it costs $9,561 per year (or $797 per month) to drive the average car 15,000 miles annually. That’s close to the 14,200 miles the average American driver travels yearly. Keep reading to see how these numbers add up.
Here’s what’s involved before driving away from the dealership:
- Purchase price or monthly loan/lease payment
- Interest payments (if applicable)
- Destination charges
- Dealer fees
- Sales tax
- Delivery fees (if buying online)
Fueling a car is a significant and ongoing expense. And something to be reminded of at every fill-up. Consider how much you’ll pay for every stop at the pump. And electric car owners aren’t exempt either; charging costs money, whether at home or at a public charger. While EV costs can be more challenging to track, gas prices and vehicle economy ratings can be researched at fueleconomy.gov .
Taxes and Registration and Inspection Fees
Titling a vehicle in your name costs money. Most states charge a sales tax, and you’ll need to add registration and inspection fees. Some states, such as Arizona, are very cheap, where registration costs just $8, but others like Oregon charge as much as $636 for new cars and up to $306 for renewals. Florida isn’t far behind with its new-vehicle registration fee of $225.
Maintenance and Repairs
Maintenance expenses are harder to gauge because requirements can vary and some new cars include scheduled services for a few years. Basic maintenance includes oil and filter changes, tire rotations, and air filter changes. But work due to minor fender benders or other mishaps can add up. Repairs are likely modest for newer cars, but things can quickly add up for an older vehicle. According to AAA, the average annual maintenance and tires cost about $112.50 per month.
According to bankrate.com, the average annual cost for full-coverage insurance is $1,674, which comes to $139.50 per month. Many factors impact these costs, including the driver and their habits, the vehicle, and where the car is garaged. So, a 40-something-year-old with a premium vehicle and 23 years of accident-free driving will pay less for coverage than an 18-year-old with a new hot hatch powered by a potent engine.
Topmarq Tip: When is the Best Time to Buy a Car?
How Much Car Can I Afford? Calculator Estimate
Begin the process using one of the free “How Much Can I Afford” calculators available online. Many car-buying sites offer these tools to help shoppers zero in on vehicles best suited for their individual budgets.
The Carvana calculator , for example, asks you to enter the amount you can pay each month, your credit rating, the desired loan term, and the down payment amount. It’s a guesstimation tool, so you can be completely honest (it’s not a loan application) and adjust the different factors to see how the results change. The idea here is to get a basic idea for your monthly payment, which, as we’ve covered, is just part of the affordability equation.
For instance, using the Carvana calculator, let’s say you can pay $400 a month, have $2,000 towards a downpayment, and have an “Average” credit score of 630. Add in the desired loan length of 48 months, and Carvana reveals you can afford a car priced at $17,783.
Problems with Using “How Much Can I Afford” Calculators
Of course, these online calculators aren’t perfect. They are tied to the specific platform you’re browsing. Carvana’s tool, for example, uses its own in-house financing rates; you may find more favorable terms from another retailer or loan company.
How Much Car Can I Afford? Based on Salary
When using your salary for estimation, consider the 20/4/10 rule. It’s not fool-proof, and some believe it inaccurate, but this methodology remains tried and tested by many. Here’s what’s involved.
What is the 20/4/10 Rule?
The 20/4/10 rule refers to three calculations that can be used to determine car affordability for a four-year loan; these are formulas that consider your existing available funds and future income.
Part 1: 20
The “20” in the 20/4/10 rule refers to the percent of the purchase price you can provide as a downpayment. And it’s the same whether you are buying new or used.
The 20 percent figure is not an arbitrary number. Rather, contributing this amount towards a purchase will prevent you from being underwater as cars depreciate with age (in normal times). A sufficient downpayment plus regular monthly payments eliminate the risk of negative equity.
Part 2: 4
The next number is 4, which refers to the ideal loan length in years. While longer-term financing is available, up to 7 years, shorter loans reduce the likelihood of negative equity and cost less in the long run (due to fewer finance charges). Another advantage is that a paid-off four-year-old car will be less likely to need costly repairs and maintenance, so the money spent on the monthly payment can be set aside for future service work. The downside is that the monthly payment will be higher for a four-year loan versus longer financing terms.
Part 3: 10
The last number in the calculation is 10, meaning no more than 10 percent of your gross monthly income should be used for car expenses. So, if your monthly pre-tax salary is $6,000, don’t spend more than $600 monthly on the loan payment, operating expenses, and insurance.
Imperfections with the 20/4/10 Rule
There is debate over the accuracy of the 20/4/10 rule, particularly with the 10 percent part of the formula. Points of view differ if the 10 percent amount should be before or after tax and other payroll deductions. There’s no right or wrong here, but it may come down to looking at your other expenses. In other words, if you live paycheck to paycheck, then budgeting for a car based on 10 percent of your after-tax salary is the wise move.
Another criticism of the 10 percent formula is that it’s simply not enough to buy a better-than-decent car in today’s market. Using Carvana’s auto loan calculator, a $25,000 vehicle will cost someone with a 680 (“good”) credit score $476 a month using the 20/4/10 rule.
And $25,000 doesn’t get a buyer much more than functional transportation with a few bells and whistles. A newer luxury or high-spec vehicle is out of the question at this price. And the numbers and options get worse for a buyer with a lower credit score.
Conclusion: Check and Recheck the Numbers
It never hurts to check and recheck affordability calculations during the car shopping process and try to use different online tools to validate your findings. These efforts will help avoid being burdened with too much car-related debt and not understanding how much car ownership really costs.
Be meticulous in your research, and be conservative with your affordability calculations. In the worse case, you’ll have more money to spend on something else besides your car.