How Much Should You Spend on a Car? The Complete Guide
Are you thinking of purchasing a car?
Good move. Long gone are the days when buying a car was considered a luxury. Today, a car is a basic need. Without one, you’ll find great challenges commuting to work or school and when running personal errands.
A car is also a purveyor of freedom. You can go wherever you wish at any time. Think of the endless road trips you’ll have!
But then, how much should you spend on a car? There’s a car to suit almost every budget, so it can be difficult to know how much to splurge.
In this article, we’re diving into the various factors that determine how much money you can or should spend on buying a car. Read on!
Are You Buying a New or Used Car?
When you’re in the market for a car, one of the most important things you’ll have to decide is whether to buy a new car or one that’s been used.
The good news is this is a fairly simple decision to make. New cars cost way more than used cars. In 2020, the average price of a new car is $37,000, up 2 percent from 2019. On the other hand, the average price of a used car is about $21,000.
As you can see, we’re talking about a $16K difference.
If you’re on a tight budget, it’s obvious that you cannot afford a spanking-new car. Or even if you do, you’ll most likely strain your finances.
Of course, we all want to buy new cars. This way, you don’t have to worry about a car’s mechanical history, and you get the latest automotive technology. New cars are typically safer to drive than used cars.
However, used cars have substantial advantages over new cars. For instance, a pre-owned car doesn’t depreciate as aggressively as a new car. New cars can shed off as much as 30 percent of their value in the first 3 years, while it will take a used car about 10 years to shed that value.
Whichever way you go, you should focus on getting the best deal.
Whether you’re buying a new or used car, you still want a car that suits your needs.
If you’ve a big family, for instance, you need a car that can seat everyone comfortably. A seven-seater will be a good fit.
If you’re a bachelor who lives in the city, you probably need a car for commuting and running errands. A small sedan will do.
If you live in the countryside and go camping in the mountains often, you need a car that can handle that terrain, and probably haul a camper. As such, you will be looking at SUVs and pickup trucks.
These needs call for cars that belong to different classes. This also means their cost varies. If you need a truck, for example, expect to spend a lot more money than if you were buying a small sedan.
Assess your needs carefully and determine whether you have the money to buy a car that meets those needs.
Are You Buying in Cash, Leasing, or Taking Out a Loan?
There are three ways to get a car:
- Buy in cash
- Take an auto loan.
Each method has its pros and cons, but the method you choose will have a direct impact on how much you can spend on the car. Let’s look at each method.
Buying in cash means going to a dealership, choosing your car, and wiring them whatever amount the car’s going for. No strings attached. You leave the dealership with a car that’s 100 percent yours.
But since new cars are expensive, you might end up settling for a cheaper model or brand if you’re on a budget. If money isn’t one of your problems, you can obviously afford any car you want.
Here’s the big question, though. Would you rather go for an inferior car just because you want to buy it in cash? What if we told you theirs is a way to afford the superior car that you wouldn’t otherwise afford to pay for in cash?
That’s where an auto loan comes in.
With a car loan, you can afford to purchase most new cars in the $40K-$50K range. If you’ve got excellent credit and your income is high, it’s possible to get a loan for a $100K car.
However, taking out a loan has consequences. You must repay the loan, usually in 4-5 years, along with the interest. If you default on the loan somewhere along the way, the car could be repossessed.
Then, theirs is leasing. When you lease a car, you don’t own it. You’ll have the freedom to use it for a specific period of time, during which you’ll be making monthly payments. Once the lease is up, you can extend it or return the car to the dealership.
Since leasing doesn’t involve owning a car, you shouldn’t consider it. Choose between buying in cash and taking out an auto loan.
Another way to determine how much you should spend on a car is to apply formulas that have been established by money management experts.
For instance, experts say you should not spend more than 15 percent of your net salary on car payments. This is to say, if you’re netting $5000 a month, you shouldn’t spend more than $650 on monthly car payments.
Let’s crunch some more numbers.
Working with $650, give yourself 4 years to fully repay a loan. This means you can afford a card worth $31,200.
There are several rules you can follow, and each will give you a slightly different figure. You’re free to choose the one that suits your finances.
How Much Should You Spend on a Car? It Depends
So, how much should you spend on a car? There’s no fixed figure. A lot depends on the state of your personal finances, as well as your car needs. If you need a performance car, be prepared to spend top dollar.
With this information, you’re now in a better position to determine how much you can spend on buying a car.
Keep reading our blog for more money and automotive tips.