A Practical Guide on How Much to Spend on a Used Car

For many of us having our own car means having freedom. You have the ability to go where you want, whenever you like. Unfortunately, this freedom does come at a price. Even the cheapest cars can be expensive. While buying the cheapest car may seem like a good idea, if it is a junker that breaks down regularly, you’ll not only have to cover the initial purchase price, but also the repair bills. 

So, the question of how much to spend on a used car becomes an important issue. Whether you are interested in a fancy car to ride in style or a functional vehicle to run errands and get to and from work, you need to seriously consider what you should be spending on your new car. So, here we’ll explore the factors involved in how much to spend on a car. 

How Your Income Impacts How Much to Spend on a Used Car

While it is obvious that you need sufficient income to cover purchasing a car, there are several rules to ensure that you don’t financially overburden yourself. 

The first rule is to spend a maximum of 35% of your annual income on your used car. In simple terms, this means that if you earn $20,000 per year, you’ll have a budget of $7,000. While this is quite a modest budget, it should be enough to buy an older, reliable vehicle. However, if your annual income is $100,000, your budget would increase to $35,000. This opens up your options to a wider range of brand-new or used cars. 

However, there are some schools of thought that you should aim to spend a far lower percentage of your overall income on a used car. For example, a figure of 10 to 15% of income can be a far more achievable figure to allow you funds for your long-term financial future.

This does put greater restrictions on how much you can spend, but it will leave you with more disposable income to continue saving, invest for your future or fund your lifestyle. This is a more frugal approach, but it does mean that on the above incomes, you would only have $3,000 to spend if you earn $20k, which will translate to a high mileage, older used car. If you earn $100,000, your budget would be $15,000. 

This is harsh, but it does mean that you’ll have greater flexibility to cope financially if the cost of your bills increases or you need to cover a financial emergency. 

If neither of these approaches appeals to you, you could compromise with a figure of 20% of your income. This would increase the budget for the two income examples we’ve discussed to $4,000 and $20,000. 

Just bear in mind that how much you can afford is different from how much you should spend. While a loan officer may look at your credit report and income to say that you can afford “x” amount, this may mean stretching a loan term to spend more. So, while you may be able to buy a Tesla for $500 a month, you’ll be paying this loan for well over a decade!

Think about your income priorities and how much you are willing to commit to financing a car. If you tend to adopt a frugal approach, up to 15% of your income is a good guide. But if you are purchasing a newer and more expensive car, a good benchmark is to increase your budget to 20 to 25% of your annual salary. 

Consider Your Existing Debt

If you have outstanding debt from previous purchases, student loans, medical expenses or even a home purchase, it can significantly impact not only how much you can spend on a used car, but also whether you’ll be approved for an auto loan. The greater the level of your debt, the lower the chances that you’ll be approved for a car loan. 

This means that when you’re considering cars to purchase, you have to factor in the amount you need to service your current debt each month. Additionally, if you have higher amounts of existing debt, you may want to consider paying down some of your outstanding balances before you apply for a car loan. This will improve your approval chances and help you to get the car that you prefer. 

Financing Deals

If you pay cash for your new vehicle, this is not something you need to consider. But, most people will rely on car loans when looking at used cars. When you need to arrange financing for your car purchase, you are likely to find a vast array of financing deals and options. Typically, lenders will review your credit history and credit score to calculate your rate and terms. However, some will also consider the amount you have for a down payment and your income, along with other factors. 

While there are a number of lending options, one of the best is a dedicated auto loan. This type of loan is secured on the vehicle you’re purchasing, so it tends to offer better terms and rates compared to standard personal loans. But, you may be restricted in the type of vehicle and how much you can spend. 

It can be a good idea to get pre-approved for your financing before you start car shopping. This will give you a deeper understanding of how much you can afford to spend on a car and the amount you can expect to pay each month. You can then use this as a basis of comparison if car dealerships are offering financing offers for specific vehicles. 

It is important to note that there is a balance between affordability and overall cost. While you may want to keep your monthly repayments as low as possible, this is likely to involve taking the loan out over a longer term. This means that across the lifespan of your loan, you’ll incur far more in interest charges.

Unfortunately, many lenders and car dealerships are not wholly transparent about this. Although you may get loan quotes detailing the full cost of the loan, they are typically more interested in getting you to sign up for “an affordable” loan. So, think carefully about what you can afford and take the loan for the shortest term possible. 

Understanding Vehicle Expenses

Another important consideration when you’re working out how much to spend on a used car is the ongoing vehicle expenses. Typically, you can expect to pay more in repair costs if you buy a cheap, old beater, whereas a new or newer car may come with some warranty protection. 

Before you make a final purchase decision, there are a few car expenses that you’ll need to assess and factor into your calculations. These include:

Registration & Taxes: 

One of the first costs you’re going to encounter with your new vehicle is the registration and taxes. Depending on your home state, the taxes and fees associated with purchasing a vehicle can quickly add up, significantly impacting your car budget. 

You will also need to consider the costs of vehicle registration, vehicle tag, and title and any documentation fees, and other expenses. You won’t be able to use your vehicle on the road until it has been properly registered and licensed. So, it is important to have the funds for these expenses ready.

Insurance:

In addition to having your car registered, you will also need valid auto insurance to be able to legally drive it. The average cost of car insurance premiums in the US is approximately $144 per month. However, the specific amount will depend on a number of factors including the type of vehicle, your driving history, your location, your age and the level of coverage you choose. 

Of course, you can shop around to get the best car insurance deal, but make sure that you compare like for like coverage to see which is the best value. 

Maintenance and Repairs:

While the repair and maintenance costs are likely to be the last thing on your mind when you’re car shopping, it is something that needs to be considered when you’re buying a used car. 

The cost of maintenance will depend on factors such as the make and model of the vehicle, how often you use it, and its age. Fortunately, you can minimize the risk of costly breakdowns with a regular maintenance schedule of tire rotations, oil changes replacing brake pads, and other servicing. 

Fuel:

Another important vehicle expense is fuel. Fuel costs have seen significant price fluctuations in recent years, but it could have a massive impact on your monthly budget. The fuel efficiency of your specific vehicle will depend on its specifications and performance, but it will help you to determine the true cost.

You can check manufacturer websites and car review platforms to estimate the approximate fuel usage for specific makes and models. There is also a comparison tool on the Department of Energy website. 

For example, a 2015 Honda Civic 1.8L has an average fuel efficiency of 33 miles per gallon across highway and city driving. If your local gas station is charging $4.20 a gallon and you drive approximately 1,000 miles per month, your fuel costs are going to be:

1000/33×4.20. 

This works out to $127.28 each month. 

On the other hand, a 2015 Dodge Challenger 5.7L only has an average fuel efficiency of 19 miles per gallon. With the same costs and distance driving as the example above, your costs would be:

1000/19×4.20. 

This works out to $221.05 per month, which is significantly higher. 

So, if you are concerned about keeping to your car budget, it is important to research the average fuel efficiency of your possible models to see which offers better value for ongoing costs. 

How to Calculate the Budget for How Much to Spend

Now we’ve discussed all of the factors relating to how much to spend on a used car, it is time to put it all together to calculate your budget. A well-informed and realistic budget is crucial to make the purchasing process more manageable and avoid financial strain. There are a few steps to determine your budget.

• Calculate your monthly pay: You will need to work out your monthly income after the taxes and other deductions have been taken out. This will provide you with an understanding of how much money you have to work with on a regular basis.

• Work out your monthly expenses: Next, you need to consider what financial obligations you need to meet each month. This includes housing costs, groceries, utilities, and servicing any outstanding debt. Once you have this figure and deduct it from your monthly pay, you’ll be able to work out what you can afford without financial strain.

• Allocate an income percentage for transportation: As we discussed earlier in the article, setting a percentage of your income for transportation expenses is a good benchmark. Remember that this figure needs to not only include the purchase of your vehicle, but also maintenance, fuel costs, insurance, and other ownership expenses. 

• Assess your existing debt: You also need to take a look at your current debt, as it is likely to affect your ability to get financing. If you have lots of debt, you may need to think about paying down your accounts before you apply for your car loan. Remember, that the higher your debt, the higher the rate you can expect to pay if you’re approved. 

• Get pre-approved and comparison shop: Getting pre-approval for your loan will help you to establish your monthly budget according to how much you’re eligible to borrow. You can also use the pre-approval offer to compare other financing deals.

Summary

When you’re thinking about buying a new vehicle, knowing how much to spend on a used car can be a daunting topic. Determining how much you should spend involves a variety of factors including your financial circumstances, personal preferences and some practicalities. However, the most crucial thing is a well-balanced budget that allows you to stay within your financial limits. Fortunately, with some planning and careful consideration, you should be able to confidently buy a used car that will provide a superb driving experience without causing you undue financial strain.