The best car budget starts with what fits your monthly finances, not the most a lender will approve. This guide covers common rules of thumb, the costs that come with owning a car, and a simple way to set your price range before you start shopping.
Start with your monthly budget
Look at your take-home pay and your existing commitments: housing, other loan payments, savings goals and everyday expenses. Whatever is left is what you have to work with for all car costs, not just the loan payment.
Lenders also look at your debt-to-income ratio: your monthly debt payments divided by your gross monthly income. Each lender sets its own limits, so being approved for a loan doesn't necessarily mean the payment fits comfortably in your budget.
Common rules of thumb
These guidelines aren't rules, but they're useful starting points:
- Payment of 10% to 15% of gross monthly income. A frequently used range for the car payment alone. This is the guideline our affordability calculator uses.
- The 20/4/10 guideline. Put at least 20% down, finance for no more than four years, and keep total transportation costs, including insurance and fuel, under 10% of gross income. It's conservative, and harder to meet with today's car prices, but it shows what a cautious budget looks like.
Don't forget the cost of ownership
The loan payment is only part of what a car costs each month. Budget for:
- Insurance. This can vary widely by vehicle, location and driver, and lenders usually require full coverage. Get quotes for the models you're considering. See How Are Car Insurance Rates Calculated?
- Fuel or charging, based on how much you drive.
- Maintenance and repairs, such as tires, brakes and routine service.
- Taxes, title and registration, which vary by state.
- Parking and tolls, if they apply to you.
- Depreciation. Most cars lose value over time, which affects what you'll get when you sell or trade in.
A worked example
Suppose your household's gross income is $75,000 a year, or $6,250 a month:
- 10% to 15% of gross income gives a car payment range of about $625 to $940 a month.
- With a 60-month loan at 7.5% APR, those payments could support borrowing roughly $31,000 to $47,000.
- Adding a $5,000 down payment puts the vehicle price range at roughly $36,000 to $52,000, before taxes and fees.
That's the upper end of what the guideline allows, not a target. Insurance, fuel and maintenance still have to fit in your budget, and existing debts may lower what's comfortable. Many people choose to stay toward the bottom of the range, or below it.
Steps to set your budget
- Decide on a comfortable monthly amount for the payment plus insurance and running costs.
- Get preapproved to learn the APR you qualify for. See How Auto Loans Work.
- Work backward to a price range using your monthly amount, APR, loan term and down payment.
- Get insurance quotes for the specific models you're considering before you buy.
- Stick to your number at the dealership, and compare offers by total cost, not just the monthly payment.
To estimate a price range from your own numbers, try our Car Affordability Calculator.
Frequently asked questions
Should I base my budget on the monthly payment or the total price?
Both matter. Start with a monthly amount you're comfortable with, then convert it to a total price range. When comparing offers, look at total cost, since a lower payment can come from a longer, more expensive loan.
How much should I put down on a car?
There's no single right amount. A larger down payment lowers your loan amount, payment and interest, and reduces the risk of owing more than the car is worth. The 20/4/10 guideline suggests 20%, but many buyers put down less.
Does my credit affect how much car I can afford?
Yes. Your credit influences the APR you're offered, which changes how much a given monthly payment can buy. Getting preapproved shows you the rate you qualify for.
