August 18th 2025.
Car shopping can be a daunting task, and it becomes even more challenging when trying to determine how much to spend. With varying opinions among financial experts, it's no wonder that many people are left wondering, "How much car can I afford?" Some recommend that all car-related expenses, such as gas, insurance, and maintenance, should not exceed 20% of your monthly pre-tax income. Others suggest that the cost of the car should be less than half of your annual take-home pay. And some frugal finance gurus advise spending no more than 10%-15% of your yearly income on a vehicle purchase. With terms like pre-tax, take-home, and annual income being thrown around, it's no surprise that people are struggling to find a clear answer.
The truth is, there is no perfect formula for determining how much you can afford to spend on a car. Every person's financial situation is different, and what may work for one may not work for another. However, a general rule of thumb is that your new car payment should not exceed 15% of your monthly take-home pay, which is the amount you receive after taxes and insurance. If you're looking to lease or buy a used car, then your payment should not exceed 10%. This is because the monthly payment is not the only cost you'll have to consider. You also need to factor in the cost of fuel, insurance, and maintenance, especially for used cars, which many people tend to overlook. Altogether, these expenses should not exceed 20% of your monthly take-home pay in an ideal scenario.
While the 10%-15% rule for car payments may not be suitable for everyone, it's a good starting point for finding a target price that won't leave you struggling to pay your bills each month. However, to get a more accurate and personalized estimate, there are a few steps you can take.
Firstly, take a few minutes to calculate your monthly expenses, including rent or mortgage, bills, groceries, childcare, savings, and entertainment. Subtract this amount from your monthly take-home pay, and you'll have a better idea of how much money you have left over and how much you can afford to spend on a car. Using this budget, you can then search for cars within your price range, with the help of an affordability calculator. Keep in mind that the prices displayed may vary depending on the vehicle's trim level, options, sales tax, and registration fees.
It's essential to remember that your automotive budget isn't just about the monthly payment. You also need to consider the cost of fuel, insurance, and, if buying a used car, maintenance. These expenses can add up to around 7% of your monthly take-home pay. So, it's crucial to factor them in when determining your budget.
To get a more accurate estimate of fuel and insurance costs, you can track your current car's mileage and fuel economy and compare it to the estimated ratings for the new car you're considering. You can also contact your insurance company or use an online quote tool to get an idea of how much you'll be spending on insurance for the specific vehicle you're interested in. If the total cost of fuel and insurance is 7% or less of your monthly paycheck, then you're in good shape.
In addition to following a general rule of thumb, it's also essential to consider your own buying patterns and habits. For example, if you tend to keep your car for a few years and pay off the loan on time, then buying a new car may be a good option for you. On the other hand, if you enjoy upgrading to the latest technology and performance every few years, then leasing may be a better fit. And if you're a blend of frugal and realistic, then buying a lightly used or certified pre-owned car with cash or an early pay-off may be the best choice.
To make this budgeting process more tangible, let's look at an average new-car buyer's scenario. According to the U.S. Bureau of Labor Statistics, the median weekly earnings for a full-time worker in 2025 were $1,196, which translates to an annual income of $62,192. After accounting for an estimated 22% in income taxes, this comes out to a monthly income of about $4,042.
Following the 15% rule, John, a potential car buyer, could afford a monthly car payment of up to $606. However, according to Edmunds data, the average amount financed for a new car in the second quarter of 2025 was $42,388. Suppose John bought a new Kia Telluride for that amount, made a 13% down payment, and opted for a 72-month loan term with an interest rate of 7.2%. In that case, his monthly payment would be $727, already exceeding his budget. And this doesn't even include sales tax, fuel, and insurance costs.
If we estimate that John drives around 13,500 miles a year, then his monthly fuel cost would be around $180, and the average American pays $170 a month for auto insurance. This adds up to a total of $1,077 in monthly automotive expenses, which is nearly 27% of his monthly take-home pay. While some people may be comfortable spending a quarter of their take-home pay on car ownership, this would put a significant strain on John's finances. And for those who make less money or have poor credit or other debt to consider, buying a new car may not be a feasible option. In these cases, leasing, opting for a less expensive car, or buying a used car may be a better choice.
In conclusion, determining how much to spend on a car is not an easy task, but it's essential to consider all expenses and make a budget that works for your specific financial situation. By following a general rule of thumb and considering your own buying habits and patterns, you can find a vehicle that fits within your budget and meets your needs.
Car shopping can be a daunting task, and to make matters worse, determining how much to spend on a car is not an easy feat, even among financial experts. Some experts believe that your total automotive expenses, including gas, insurance, car payments, and maintenance, should not exceed 20% of your monthly pre-tax income. Others suggest that a car that costs less than half of your annual take-home pay is a reasonable choice. And for those who are more frugal, they recommend spending no more than 10%-15% of your yearly income on a vehicle purchase. It's enough to make anyone wonder, "How much car can I afford?"
Since everyone's financial situation is different, there is no one-size-fits-all formula for determining how much car you can afford. However, as a general rule, your new car payment should not exceed 15% of your monthly take-home pay, which is the amount you earn after taxes and insurance. If you are leasing or buying a used car, the recommended payment should be no more than 10% of your monthly take-home pay. This is because the monthly payment is not the only expense that comes with owning a car. You also need to consider the costs of fuel, insurance, and maintenance, especially for used cars, which many people tend to overlook. Altogether, your total budget should not exceed 20% of your monthly take-home pay, ideally.
While the 10%-15% rule for car payments may not work for everyone, it is a good starting point for setting a target price that won't leave you struggling to pay your bills every month. But how do you determine your specific budget? Edmunds has some helpful tips to help you come up with a customized number.
First, take a few minutes to calculate your monthly expenses. Start with your monthly take-home pay, then deduct your rent or mortgage, bills, groceries, child expenses, savings, and entertainment expenses. This will give you an idea of how much money you have left for a car. Once you have an idea of your budget, you can start looking for a car that fits within that price range, maybe even with some extra savings. Edmunds offers an affordability calculator that lists vehicles within your predetermined budget. Keep in mind that the prices on the calculator may vary depending on factors like trim level, options, sales tax, and registration fees.
If your budget doesn't leave you with many options, don't worry, you're not alone. New cars are becoming more expensive, and it's putting a strain on many consumers. Nonetheless, this amount now represents your budget for a car, which, as mentioned earlier, includes more than just the monthly payment. Now, you need to estimate the costs of fuel and insurance.
Before you go out to buy or lease a car, it's important to know how much you'll be spending on fuel. A good way to estimate this is by tracking your mileage and fuel economy in your current car and comparing it to the estimated miles per gallon ratings of the car you're interested in. This will give you an educated guess at your fuel expenses in a new car. You also need to factor in the cost of insurance, which may be higher for a newer vehicle, especially if you have a history of accidents. Although it may take some effort, these estimates are crucial in helping you choose the right car for your budget. Some cars may be more expensive to fuel up, while others may have higher insurance costs.
For accurate fuel economy figures and annual fuel cost estimates for both new and used cars, you can visit the Environmental Protection Agency's Fueleconomy.gov website. This will allow you to compare your current car's fuel economy to potential new cars within your budget. As for insurance quotes, you can contact your insurance agent or company for an estimate on the car you're interested in. Alternatively, you can get an online quote from an auto insurance website. If your estimated fuel and insurance costs add up to 7% or less of your monthly income, then you're in good shape.
In addition to following a formula, it's important to understand your own buying habits and preferences when it comes to spending money. For instance, if you are someone who buys a car, pays off the loan on time, and keeps the car for a few years, then buying a new car may be a good option for you. This is because you have a track record of staying within your means, paying off the loan, and having a period of time without a car payment. On the other hand, if you tend to get bored with a car after a few years or enjoy having the latest technology and performance, then leasing may be a better fit for you. Leasing allows you to avoid the initial depreciation hit that new cars face and often results in a lower monthly payment, which means you can get a nicer car for less money. However, it's important to keep in mind that you will never truly own the vehicle, and all the money spent on the lease will be gone forever. Lastly, if you're someone who is both frugal and practical with their spending, then a lightly used or certified pre-owned car may be the best choice. This allows you to avoid the steep depreciation of a new car while still having a relatively new car that won't require major repairs for some time.
To make all of this budgeting less abstract, let's plug in some real-world numbers. According to the U.S. Bureau of Labor Statistics, the median weekly earnings of a full-time worker in the second quarter of 2025 were $1,196, which translates to an annual income of $62,192. After paying an estimated 22% in income taxes, John, a car buyer, is left with a monthly income of about $4,042. Following the 15% rule, John's monthly car payment should not exceed $606.
In the second quarter of 2025, the average amount financed for a new vehicle was $42,388, according to Edmunds data. Let's say John purchased a new Kia Telluride for that amount. Assuming he has good credit and the deal mirrors the industry average, including an interest rate of 7.2%, John made a down payment of 13%, which comes out to about $6,433. This means his monthly payment will be $727, as he opted for the most common loan term of 72 months. However, this is already over budget and does not factor in sales tax, fuel, and insurance costs.
If John drives around 13,500 miles a year, his fuel cost would be around $180 a month, while the average American pays $170 a month for auto insurance. This brings John's total monthly automotive expenses to $1,077, which is nearly 27% of his monthly income. While some people may be comfortable spending a quarter of their take-home pay on car ownership, this would put a lot of stress on John's financial situation. And for those who make less than John or have poor credit or other debts to pay off, buying a new car would be a real challenge. In such cases, leasing, finding a less expensive car, or considering a used car may be a better option.
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