Don't forget, though, that your car payments are just one of the costs of car ownership. You also need to account for car insurance, registration fees, and maintenance.
A good rule of thumb in personal finance is that your overall transportation costs shouldn’t exceed 20% of your monthly take-home pay.
How much does the average car cost?
The average new car price was just above $48,000 in mid-2023, according to Kelley Blue Book. Meanwhile, the average used car price was just under $27,000, according to Consumer Reports.
Not surprisingly, high vehicle prices and financing costs have caused monthly car payments to surge. Edmunds reports that the average monthly car payment on a new vehicle was $733 in the second quarter of 2023. If you don't want your car payment to exceed 15% of your take-home pay, you'd need to earn nearly $4,900 after taxes to afford a $733 car payment.
Customizing your car budget
Although 10% to 15% of your take-home pay works well as a general guideline for buying a car, you also need to take into account your current spending habits.
Ideally, after factoring in your car payment, you should still be able to:
- Pay for all the necessities
- Put 10% to 20% of your income into a savings account
- Have disposable income remaining for non-essential expenses
Look over your budget to see how much you're spending and saving each month. This will give you the most accurate idea of how much you can spend on a car.
For example, if you've been saving 30% or more of your income, then you have the flexibility to spend more on a car. On the other hand, if you aren't able to save much money, then putting 10% to 15% of your income toward a car payment may be far too much.
If you're wondering how much the monthly payment on a personal loan might be, use the calculator below. Enter the amount you'd like to borrow, then set either the monthly payment or loan term to what you're looking for. Experimenting with different numbers can help you find a loan term that works for you.