How much should you spend on a vehicle?
The majority of Americans are spending far too much on their vehicle purchases. As a general rule, your total monthly vehicle expense should not exceed 10% of your gross income. The 10% number should include automotive insurance as well.
Every situation is obviously different however as to what you can reasonably afford for a vehicle as a percentage of income. In addition to rent or a mortgage, some folks have other outgoing payments such as student loans, alimony, and possibly child support. These expenses can consume a significant portion of your monthly budget. So the percentage of 10% of gross income should be used as guide and should not be taken as gospel. You should factor in all of your other mandatory expenses first before arriving at a number that would be affordable for you and your financial situation.
But let’s say you earn $60,000 a year and your monthly automotive insurance amount is roughly $100. Your monthly gross income would be an even $5,000, one-tenth of that would be $500. Given our example, your vehicle payment should not exceed $400 a month for principal and interest since the monthly auto insurance amount is $100.
To get the most for your money, you should pay close attention to the interest rate for your loan. Higher interest rates can have a significant impact on your monthly payment. The lowest interest rates are typically given to those with high credit scores, the higher rates to those with lower credit scores.
We recommend that you do the following when shopping for a new vehicle:
- Determine vehicle affordability for your situation as covered above
- Get or know your credit score before shopping for loans
- Use our calculator below to determine what amount you can reasonably borrow (3%-6%) is a reasonable range to use as an interest rate if you have good credit
- Get pre-approved for your auto loan and know what your payment will be ahead of time, we have links below to help you shop for auto loans
- Go shopping
- When you find a vehicle you want, call your insurance agent or get a quote from an insurance company before purchasing your vehicle – it’s always best to get an insurance quote on the vehicle you would like to purchase prior to purchase so that there are no surprises
Some credit unions and banks will issue an auto-draft check to you that can be completed by the dealer at the time of purchase. Having a check or financing in hand when shopping should significantly reduce your stress levels during the transaction. It is also one less thing you need to worry about, which allows you to focus your efforts on getting the best possible deal.