Generally, experts recommend limiting your monthly car costs—including loan payments, gas, insurance and maintenance—to 15 percent of your income. So if you’re bringing home $3,000 a month, your maximum car costs should be $450. It’s also a good idea to make a 20 percent down payment when purchasing any new (to you) car.
Of course, as with all money matters, you can take general guidelines like these with a small grain of salt. Because what you should really spend on a car depends on your unique budget and needs.
First, consider whether it actually makes sense to own a car. If you live in a walkable area and don’t need wheels to get to work, you may be able to avoid it altogether—especially when you can rent or carshare for those occasions when you do need a lift.
If you really just want a car, it’s smart to take some extra time to save and build up your down payment to lower your monthly costs—or, better yet, buy it outright in cash—and to look for a used car. (New cars start losing their value the minute you drive them off the lot.)
Next, consider your budget. After accounting for your necessities, as well as your savings, how much do you have leftover each month to put toward car costs? That’s what you can actually afford (even if it’s less than 15 percent of your income).
Another tip: Research what loan terms you’re likely to qualify for. The strength of your credit score can drastically affect your interest rate and monthly payments. According to personal finance site ValuePenguin, the average rate for a 60-month auto loan is about 4 percent. But people with top credit scores of 720 to 850 can snag a loan at 3.6 percent, on average, while those with much lower scores between 500 and 589 could pay a whopping 15 percent.
Knowing your likely rate, as well as your budget, you can use online calculators, like the ones from Edmunds.com and Cars.com, to figure out what sticker price range you should be seeking. Just be sure to stick with that carefully considered budget once you start shopping.