Buying a car is a big deal. Not only is it commonly the first major purchase someone makes, but it can be an expensive one. And you might know a lot of people with opinions about what kind of car you should buy. Before you start the car-buying process, it's important to review your finances and determine how much you can actually spend on a car. These tips could help you find a right-priced ride—and help prevent your bank account from hitting E.
How much car can I afford?
A good road rule: Consider keeping your total monthly costs to 15% or less of your after-tax monthly income. That should include monthly payments, gas, maintenance, insurance, and parking and tolls. If you’re looking for an electric vehicle (EV), factor in the cost of electricity and charging equipment. Also account for sales tax if it’s charged in your area, dealer charges, and registration and title fees, which could add up to more than $1,000.
How to buy a car
1. Set a monthly budgetIf you’re following the 15% guideline, multiply your monthly take-home pay by 0.15 to determine how much car you can afford each month. Then subtract an estimate of how much you’d pay for gas, maintenance, insurance, and other “extras.” What remains is what can go toward monthly car payments.
For example, if your monthly take-home pay is $5,000, the 15% guideline means you could spend up to $750 on car-related expenses. If you spend the 2023 monthly national average on gas and full-coverage car insurance, about $1791 and $2232 respectively, and budget $50 for maintenance (the American Automobile Association’s suggested minimum)3, you’re left with $298 for a monthly car payment.
The numbers might change if you pay for parking and tolls or go for an EV or hybrid vehicle with lower gas costs (or a luxury car with higher maintenance and insurance fees), but the basic equation remains the same.
2. Find models in your budget
Now that you have your magic number, start researching cars that meet your needs and your finances. You might consider the mileage per gallon of gas it gets, safety features that are important to you, and size—whether you want it small enough to fit into tight parking spaces or large enough for multiple car seats and room for your camping gear.
As you weigh your options, keep in mind the hidden costs that typically come with buying a car. These include sales and excise tax, registration and title charges, and dealer fees that can add up.
3. Figure out your financing
Not sure whether to buy or lease? If you don’t plan to keep your car for more than 3 years, drive fewer than 12,000 miles per year, and take good care of it, leasing might make more sense than buying. Doesn’t sound like you? Buying might be a better bet.
Even if you have enough cash to cover a car, if you can get a lower interest rate on a loan than the rate you could potentially earn in interest on your cash, it could make sense to finance your purchase. If you’re not buying a car outright in cash, shop around to get preapproved for a loan. Your local bank or credit union might be able to give you an appealing interest rate and loan term, and there are online banks that provide auto loans too.
It takes more legwork, but it’s smart to get quotes from a few different lenders so that you can compare rates and potentially score the best deal. It’s also worth checking the financing options where you’re buying the vehicle to see how it matches up with your other options.
Pay close attention to the loan’s length, not only the monthly payment. Generally, the longer the life of the loan, the more you’ll pay in interest in total. That might be OK with you to get lower monthly payments. But be aware that might lead to a higher overall price.
For instance, borrowing $25,000 to buy a new car at a 7% APR for 60 months (5 years) would cost about $4,702 in interest with a monthly payment of about $495. The same loan terms over 72 months (6 years) would get you a lower monthly payment, about $426, but you’d pay $5,688 in interest over time.4 That’s an extra $986 for the same car.
Another watch-out: loan terms that would make you owe more than the car is worth. If you’re buying a new car, you might need a hefty down payment or trade-in to avoid that. Keep in mind too that new car values depreciate quickly in the first couple of years. So if your car gets totaled or stolen, the amount your car insurance provider reimburses you might be less than what you still owe your lender. And you could be on the hook for your loan’s full balance—unless you have gap insurance, which covers the difference between the car’s value and what’s left to pay on your loan.
4. Negotiate and pay for your car
The process of buying a car can be stressful. To make things more confusing, today there are many different ways you can make this big purchase, including at dealerships and on mobile apps. However you buy your new vehicle, these tips could smooth out the journey.
- Research car prices and options ahead of time
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Make sure you know the extras you want on the car—and how much they’re worth. You can’t tell whether you’re getting a good deal unless you know some basic info about the car, including the invoice price (what the dealer paid for the car) and the manufacturer’s suggested retail price (MSRP), aka the sticker price.
- Get ready to negotiate
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It’s normal to feel uncomfortable with people who are pros at negotiating. One way to bolster your confidence and chances of success: Go into the dealership with a fair price in mind that's based on research and within your budget, and don’t let yourself spend more than that. But you might have to bend a little: If the cost of the exact car you want isn’t coming down, reveal one bargaining chip at a time to see how that affects the price. Being flexible about the model year, color, and combination of options could get you a deal. So could timing a dealership visit to when a salesperson is more eager to hit numbers—such as the end of a month, quarter, or year. When you’re at the dealership, be cool, confident, and prepared to walk away.
- Consider all your choices for your old ride
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If you already own a car, you could consider selling it to a private buyer, which may potentially land you a better price than trading it in at a dealership. If you decide to trade in your old wheels at a dealership, know its worth. And don’t mention that you’ve got a trade-in until you’ve settled on the new car’s selling price. The salesperson might give you a great-sounding new-car price with plans to give you poor value on your trade-in, which effectively raises the new car’s cost.
- Visit multiple dealerships or look online to make sure you’re getting the best deal possible
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You can do a lot of car shopping online so you’re a more educated customer before you step into a dealership, if you go that route.
- Break out the right bargaining chips
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A dealer might be willing to give you a lower overall price if you finance your car through them. They know they’ll make more money off you through your loan, so there might be more wiggle room on the car’s cost. On the other hand, if you don’t plan to finance through the dealer, keep that to yourself until after you’ve agreed on the car’s selling price.
Looking to start saving money for buying a car? We can help. Create a plan below that could help get you on the road.