What Should My Car Payment Be

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Buying New Versus Used Vehicles

Buying new has its advantages, such as the fact that it has never been previously owned. It has that new car smell and everything about it is brand new. The engine is clean and the interior has no stains, burns or defects. However, the individual who purchases new pays a much higher price than if they had purchased the same make and model used.

Though purchasing a used car means that there may be imperfections left behind from the previous owner, the cost of ownership is typically lower. The advantages of purchasing used include:

There are several advantages for purchasing used instead of new. However, purchasing used does have a few disadvantages, too. For example, the vehicle typically will no longer be under any type of warranty & third party warranty services can be quite expensive. It may also have significant wear and tear on the engine and other vital drive train parts, especially if it has been used as a fleet vehicle or owned by an individual who traveled a great deal, such as a sales professional. When purchasing used, if you want to avoid expensive repair fees it is typically best to purchase something that is only two or three years old with low mileage. On average, cars clock about 12,000 miles per year. If a three year old vehicle which has over 100,000 miles on the engine is probably not a good bet.

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Factor In Your Vehicle Expenses

Youll need gas to get from A to B, and youre also going need auto insurance to protect it. Youll also need to set aside some money for oil changes, tune-ups and other regular maintenance work.

According to a AAA report on the cost of owning a vehicle in 2017, the average new vehicle will cost you nearly $8,500 annually for the car payment, insurance, maintenance costs and gas. Thats about $706 per month.

Heres a breakdown of those car ownership expenses:

License, registration and taxes: $753 annually, which comes to roughly $63 per month

Maintenance and repair: $1,200 annually, or $100 per month

Fuel: $1,500 annually, or $125 per month

Full-coverage insurance: $1,194 annually, or $100 per month

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Tips For Getting The Best Deal Possible On A Car

Ive been buying cars for clients for years. On average, I negotiate and save $3,100 on each car I buy. Dealerships have outright expressed their disdain for me, and their nasty texts and emails help me to sleep at night like warm tea.

You can read all of my secrets, as well as the best A-to-Z process for buying your first car, in my car buying guide.

In the meantime, here are some of my favorite and most effective tips Ive put together over the years.

Your Payment Isn’t Your Only Car Expense

Dont forget that on top of your car payment there are extra auto-related expenses. This includes insurance, gas, repairs and maintenance, parking and even tolls.

Many financial experts recommend keeping total car costs below 15% to 20% of your take-home pay. So while your car payment is 10% of your take-home pay, you should plan on spending another 5% on car expenses.

For example, if your monthly paycheck is $3,000, your car payment would be about $300 and youd plan on spending another $150 on automotive expenses.

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Why Such Small Down Payments

The explanation for the prevalence of small down payments is simple: It’s all people can afford.

“The main reason why people aren’t putting enough down is because the cost of the vehicle has substantially increased, but people’s income has remained relatively flat,” says Jack Gillis, executive director of public affairs for the Consumer Federation of America.

The average down payment of 11.7% has actually gone up since 2007 when it was at 9%. Meanwhile, the cost of a new car has increased by 33% in that time, according to Edmunds. In other words, if you wanted to put 20% down on an average new-vehicle purchase today, you’d have to come up with approximately $7,255.

Balance Your Budget Your Life And Your Car Payment

NerdWallet recommends using the 50-30-20 rule, dividing your take-home pay into three general spending categories:

• 50% for needs such as housing, food and transportation which, in this case, is your monthly car payment and related auto expenses .

• 30% for wants, such as entertainment, travel and other nonessential items.

• 20% for savings, paying off credit cards and meeting long-range financial goals.

The monthly payment for your auto loan definitely falls into the needs category. For many people, a car is a lifeline, connecting them to essential tasks such as holding down a job or transporting the kids to school.

However, there’s some flexibility in the balanced budget approach. If you want a more expensive car, you could consider part of your monthly payment as spending in the “wants” category, so long as you keep the budget balanced overall.

So, while 10% of your take-home pay for your car payment may sound restrictive, if you economize in other budget areas, then you could choose to spend more on your car.

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The Two Times Leasing Might Make Sense

All that being said, there are two cases in which leasing might make sense.

• You only need a car for three years. To be clear, this method isnt necessarily cheaper than buying used but it is a bit more convenient. If you dont want the hassle of having to sell a used car, leasing might be the way to go.
• You gotta have that new car smell.If you cant bear the idea of driving a used car, but also cant afford to finance a brand new one, leasing might be an option. But we still recommend that you convince yourself that a used car is the better move.

Dont Pay A Penny For Dealer Extras

Before you sign, dealerships will try to add recommended extras onto the invoice price. These typically include a $1,000 ceramic coat, $1,000 for a GPS anti-theft device, and $100 for nitrogen in the tires.

You can apply a ceramic coat yourself for $50, put an Apple AirTag under the seat for $29, and get free nitrogen at Costco .

Oh, and ask to waive the documentation fee. Its not a fake fee, but dealers charge too much and many will reduce or remove it upon request.

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What Car Payment Can You Afford

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Before you hit the dealership you should take a moment to decide what monthly car payment you can afford.

To cut to the chase, its smart to spend less than 10% of your monthly take-home pay on your car payment, so you can keep your total car costs below 15% to 20% of your income.

That might leave you feeling you can afford only a beat-up Yugo. But theres an interesting caveat to this rule of thumb. Its called the balanced budget approach. Heres how it works.

Car Affordability Calculator: How Much Car Can I Afford

Chris Butsch|

Modified date: Aug. 14, 2022

The realization that its time to buy a car probably comes with an equal mix of excitement and trepidation.

On the one hand, you have a nice, new car to look forward to heated seats, Apple Carplay, and more.

But on the other hand, youre doing mental stretches getting ready for all the questions youll have to answer before getting the keys:

• How do you determine your budget?
• Should you lease or finance the car?
• If you can afford to pay cash, should you?
• What loan terms should you go for?
• And finally, how can you get the best possible deal on the car?

Whats Ahead:

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How Much Money Should You Spend On A Car Based On Your Salary

The rule of thumb among many car-buying experts dictates that your car payment should total no more than 15% of your monthly net income, sometimes called your take-home pay . Your net income is the money you take home after federal, state and local income taxes have been deducted from your paycheck.

Note that this 15% is meant to cover just your car loan payment, and not ongoing car-related expenses like fuel, maintenance and insurance.

The idea behind the so-called 15% rule is that if you limit your monthly car loan payment sometimes called a car note to 15% or less of your net income, youll have enough money left over each month to cover the rest of lifes expenses, including the occasional financial curveball.

Should I Pay Off My Car Loan Early: Advantages And Disadvantages

If youre looking to improve your financial standing and lower your debt, you might want to consider paying off your car loan before the obligatory pay-off date. While doing so can certainly bring some benefits more money in your pocket and the freedom of owning your car outright there are a couple of important downsides to consider as well.

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The Pros And Cons Of Paying Off Your Car Loan Early

When you take out a car loan, you agree to pay for the cost of the vehicle as well as interest. Your annual percentage rate is the percentage of interest you pay each month. When you pay more than the minimum, that extra money goes towards the principal, lowering how much you owe in interest. Thats just one of the pros of early pay-off, but theres more to know.

Pro: Paying the loan off early could save you cash in the long run.

Making an extra payment here and there, rather than making a single lump-sum payment speeds up the repayment process without draining your savings. Just make sure your overage payments go toward the principal of your car loan rather than the interest. These are called principal-only payments.

Con: Some loans include precomputed interest, so early payoff may not save you money in the long-run.

It is important to note that some car loans include precomputed interest, or interest that is calculated upfront. In these cases, you may not be able to save money on interest if you pay off your loan early.

Make sure you determine the amount of interest pay-off will save you in the long run. To find out if your interest was calculated up-front, look at your statement. If your interest is precomputed, it will be lumped together with the principal rather than a separate fee. You should speak to your lender if you arent sure.

Pro: More money in your pocket each month.

Pro: Improved debt-to-income ratio.

Con: You may have to pay a prepayment fee.

How Much Car Can I Afford

Fitting a car into your household budget is no easy task, and financial experts do not agree on how to determine its affordability. One school of thought holds that all your automotive expenses gas, insurance, car payments should not exceed 20% of your pretax monthly income. Other experts say that a vehicle that costs roughly half of your annual take-home pay will be affordable. Then some frugal personal-finance gurus say you should spend no more than 10%-15% of your annual income on a vehicle purchase. Pretax, post-tax, annual income these terms are enough to make a person ask: “How much car can I afford?”

There’s no perfect formula for how much you can afford, but our short answer is that your new-car payment should be no more than 15% of your monthly take-home pay. If you’re leasing or buying used, it should be no more than 10%. The reason for finding a vehicle that falls below 10%-15% is that the payment isn’t the totality of what you will be spending. You’ll need to factor in the costs of fuel and insurance, and many people overlook that. We put those costs at another 7% of your take-home pay. So, all in, you’re looking at a total budget that is ideally, no more than 20% of your monthly take-home pay.

While the 10%-15% rule may not work for everyone, it’s a good starting point for finding a target price that won’t leave you scrambling to pay your bills every month. Here’s how you can get a more customized number for yourself.

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Buying A Car With Cash Instead

Although most car purchases are made with auto loans in the U.S., there are benefits to buying a car outright with cash.

There are a lot of benefits to paying with cash for a car purchase, but that doesn’t mean everyone should do it. Situations exist where financing with an auto loan can make more sense to a car buyer, even if they have enough saved funds to purchase the car in a single payment. For example, if a very low interest rate auto loan is offered on a car purchase and there exist other opportunities to make greater investments with the funds, it might be more worthwhile to invest the money instead to receive a higher return. Also, a car buyer striving to achieve a higher credit score can choose the financing option, and never miss a single monthly payment on their new car in order to build their scores, which aid other areas of personal finance. It is up to each individual to determine which the right decision is.

How Much Is The Car Payment Really Costing Me

Its just $350 a month.

Everyone has a car payment.

Sound familiar?

See, on the surface, $350 or even $500 a month seems innocent. But then, your dog needs surgery. Or your almost-teenager needs braces. Ordang ityou just need more room in your monthly budget for life.

Wheres your margin? Oh yeah, its going to the bank for five more years.

On a practical level, your monthly car payment is costing you, well, money. And lots of it.

But even if you could squeeze out that monthly payment without too much stress, think about the extra youre paying in interest. Thousands of dollars. And oh yeaha new car with a loan will jack up your auto insurance.

Instead, that money could be beefing up your savings account. Or you could even have enough to buy a reliable used car in straight-up cash. Then you could get the right auto insurance at the right price and keep your costs down.

Let’s say you bought a used car with cash, and instead of wasting $500 a month on a car payment, you invested that money in a Roth IRA instead. After a 40-year period, that investment will be worth $4.3 million dollars.

So, back to our original questionhow much is a car payment really costing you? More than 4 million dollars over the course of your life. Thats how much.

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Minimize The Impact Of Depreciation

A solid down payment will achieve three things: reduce your monthly payment, get you better interest rates and offset the initial hit in depreciation.

On average, a new vehicle depreciates by 30.5% in its first year, 7.7% in the second and 6.8% in the third year, according to Edmunds data. This depreciation is an average among all brands, but as a general rule, luxury vehicles will depreciate faster, while vehicles with higher resale value will be closer to 20%. Either way, if you only put down a small amount of money, you’ll have negative equity in the car, meaning you’ll owe more on it than it’s worth.

What Is The Average Car Payment 2020

Experian reports that, as of the second quarter of 2020, new vehicle owners paid an average of $568 a month on their vehicles, while used car owners paid $397. Since these figures represent monthly car payment averages, they do not necessarily represent what any single vehicle owner is actually paying.

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Set Yourself Up For A Lower Monthly Car Payment

As you may have deduced so far, a good way to get the best deal on your average monthly car payment is by tweaking one or some combination of the above factors before making your purchase. All of the following suggestions may not be available to all buyers, but one or some combination of factors may prove beneficial to you.

Avoid A Costly Car Payment Mistake

Once youve determined the monthly car payment you can afford, consider what goes on under the hood when the lender calculates your payment. Factors include:

• The loan amount.

• The annual percentage rate, or APR, which includes the interest rate.

• The length of the loan.

You could waste a lot of money by focusing only on the monthly payment and ignoring your total financing costs. For example, take a look at how two vastly different loans can result in the same car payment.

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