How Much You Should Pay For a New Car

  • April 1, 2017
  • By: Greenpath Financial Wellness

Are you wondering how much you should pay for a new car? No article can tell you how much you can afford but there are a few things to keep in mind before you buy your next car.

Keep Total Transportation Expenses Below 25% of Your Take-Home Pay

A rule of thumb is that your total transportation expenses should not exceed 20%-25% of your monthly net income. For example, for someone making $2,500 per month (after taxes), that equates to about $625 per month for total transportation expenses. Broken down, that could look like:

  • Vehicle payment – $450
  • Gas – $100 ($25 per week)
  • Insurance – $80 per month ($960 annually)
  • Maintenance – quarterly oil changes at $30 each

When many people buy a car, they tend to only consider the monthly car payments.

Look at More Than The Sticker Price

Besides the sticker price, here are some other items to consider when making a car expense budget:

  • What are the insurance costs?
  • Do you have to make a down payment or can you trade in your old vehicle?
  • What about annual license plate fees?
  • How is the car rated on reliability? What is the chance that you’ll have to make repairs every year?
  • Does your new car have different gas mileage than your previous one? If so, will your fuel costs increase or decrease?

Add all of the monthly costs and then you will see your total transportation costs. And remember, just because the dealer may offer you a lower monthly payment doesn’t mean that it’s a better deal. Your payment may be lower because they offered you a loan with a longer term. These loans can have even higher interest rates so you’ll pay a lot more in the long run.