Optimal Budget for a New Car
It's amazing how few take the time to actually figure out what they can comfortably afford.
Most of the time, car buyers have their heart set on a certain model, they get to the dealership and once they add all the options and extras, they realize the price has crept up much higher than they expected.
Add car insurance, taxes, and other dealer fees on top of this, and you can easily see how someone can get in over their heads. This leads to situations where one has to finance more car than they can comfortably handle, and ultimately end up struggling to make car payments.
The Optimal Budget
If you don't want to worry about buying more car than you can afford, here are the optimal budget guidelines that most experts recommend:
- Monthly car payment should be no more than 15% of your gross pay or 20% of your take-home pay.
- Down payment should be at least 20% of purchase price
- Maximum term of a car loan should be 48 months
For example, if your gross monthly income is $5,000, then your maximum monthly car payment should be no more than $750.
On a 48 month loan at 6% interest, this will allow you to finance around $32,000. Add to this a 20% down payment of $6,500, and your total maximum budget for a new car will be $38,500.
If you have a stable job and have no problems paying bills on time, then this optimal budget will ensure that you'll be able to make your car payments without much problem.
My Recommendation for Car ShoppersTrueCar No-Haggle, Edmunds Price Promise and Ryde Shopper are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
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About: Gregg Fidan
Gregg Fidan + is the founder of RealCarTips. After being ripped off on his first car purchase, he devoted several years to figuring out the best ways to avoid scams and negotiate the best car deals. He has written hundreds of articles on the subject of car buying and taught thousands of car shoppers how to get the best deals.