How Much Should I Spend on a Car?

Calculator Use

Use this calculator to find out how much car can you afford to buy.

This calculator will calculate the total price of the car you might consider purchasing based on how much you can afford for a monthly payment. And, factoring in down payment and trade-in, calculates the loan amount and loan schedule you will need to make up any difference. This calculator should give you a rough idea of your car price range.  Once you are ready, you’ll need to get professional loan advice on your actual affordability.  Other factors include your credit rating and fees that you pay up front or roll into the loan.

Car Payments
The monthly amount you want or can afford to pay for a car loan
Car Sales Tax
How much tax will you be charged on this car price. Sales taxes by state
Down Payment
The amount of cash on hand you will be able to put toward this purchase and not borrow in the loan
Trade In Value
What will the dealer give you as cash value for any trade in vehicle you will be using in this transaction
Loan Term
How long will you take to pay back the loan in years or months?  What is the loan term?
Interest Rate
The annual stated rate of your loan.
Car Price You can Afford
This is likely the asking price of the car you can consider.
Car Loan Needed
Considering all of the factors you entered, this should be the actual loan amount you will need to apply for.

For a simple auto loan calculation use this car loan calculator. You can also create a table of payments if you want to investigate various loan options.

Birchwood Credit’s Car Loan Calculator and how it works

If you’d like a better estimate of your car payments, you can try our online Car Loan Calculator. This tool will help you estimate your bi-weekly or weekly payments based on vehicle cost, loan duration and your credit score.

When it comes to car loans, three important numbers are taken into consideration:

  • The principal, or the total cost of the vehicle including taxes, loan administration fees and add-ons/special features.
  • The loan term, or the length of time payments will be made on your loan. Terms typically range from 36 to 72 months.
  • The interest rate, which is the percentage the lender charges you to borrow money.

These three numbers are represented in our Car Loan Calculator to give you estimated payments so you can budget for the car you want (and can afford).


1. Income 

Calculate your take-home income. This is how much you earn after taxes. In general, experts recommend spending 10%–15% of your income on transportation, including car payment, insurance, and fuel. For example, if your take-home pay is $4,000 per month, then you should spend $400 to $600 on transportation. 

To be sure, that range is simply for guidance. Depending on your income and expenses, you may have to budget less. For example, if you live in an area with high housing costs, then you’ll have less to spend on a car. 

Desired Monthly Payment

With serious consideration given to the length of the loan or lease, of course, the desired monthly payment is pretty much the total ballgame. It is the figure the dealership will target. It is the number that will be a fixed point in your financial world for the life of the loan or lease.

Things to consider beyond the monthly check you’ll stroke (or have automatically deducted) that are very much part of your auto-owning experience are the costs for insurance, gasoline, maintenance, fees, tolls and parking.

Generally, financial advisors advise against total vehicle costs topping 20% of take-home pay. Payments themselves, whether principle and interest or lease installments — but not insurance — should account for half that, or 10%.

Now, about insurance. Your premium will constitute a substantial portion of your car-owning costs. As with all consumer products, you should shop around. Begin by knowing your state’s minimum requirements, as well as those of the financing or leasing agency.

Review your driving record. Are there problems that can be cleaned up? What’s your current coverage? Does it require adjusting?

To cut to the chase, check out’s “How Much Car Insurance Do You Need.

For estimates, submit “shop car insurance quotes” to your favorite search engine. Esurance, Edmunds, Money Supermarket and NetQuote are among the top providers.

3. Financing

You may choose to finance your purchase with a loan. According to Experian data from 2020, more than 85% of new cars and 36% of used cars are bought with car loans. 

When you apply for a loan, lenders review your application and your credit score. Once your loan is approved, the interest rate will be set. That rate, based on your credit score, helps determine your repayment amount. 

Your interest rate affects both your monthly payments and total repayment costs—a lower rate means you will spend less over the life of the loan.

As of Nov. 2021, for a 48 month consumer loan from commercial banks, the average interest rate on a car loan was 4.58%, but borrowers with poor or deep subprime credit could pay as much as 13%.

Should you pay cash or finance a car?

If you can afford to pay cash, should you? 

Here’s why financing is almost always better than paying cash

On paper, paying cash makes much more sense. You don’t have to worry about a monthly payment, you don’t pay a dime of interest, it’s one-and-done. 

However, there’s an opportunity cost to paying cash

If you write Carmax a check for $15,000, that’s now $15,000 that you can’t invest and multiply. 

To illustrate, let’s say you choose to finance instead of paying cash. You put 20% or $3,000 down, and set up autopay for your $300 monthly payment. 

That leaves you with $12,000 today to play with. 

  • You could put it in an S&P 500 index fund where it could become $30,000 in five years.
  • You could put it in your retirement account, where it could become $113,000 in 30 years.

As a general rule of thumb, it’s usually worth financing at a 2% interest rate or lower and stashing the cash in other places where it can grow much faster. As a cherry on top, financing with a low interest rate is better for your credit score

For ideas on where to invest your extra car cash, check out 7 easy ways to start investing with little money

Term of the Loan

It ought to go without saying that the shorter the length of your vehicle loan, the better. Yes, all other variables being equal, the longer you take to pay, the lower the monthly payments will be.

But other important factors to consider are the amount you’ll pay in interest on longer-term loans, how long you’ll be paying off your vehicle after its warranty runs out, and, because of depreciation, how long your loan balance will be higher than the value of the car.

Buying vs. Leasing: Generally, it costs more to buy a car than to lease one, but the upside is at the end of the purchase arrangement, you own something. At the least, if you’ve followed prudent advice on down payments and length of the loan, you will have equity in your vehicle if you get the new-car itch.

Leasing involves lower out-of-pocket monthly costs because you aren’t buying anything; you’re simply absorbing the vehicle’s depreciation during the term of the lease, plus interest (or rent) charges, taxes and fees.

Buying involves a down payment. Assorted upfront leasing costs can include the first month’s payment, a refundable security deposit, an acquisition fee, a down payment (for lower payments), taxes, registration, and other fees.

details other differences, but they all orbit a central theme: One way the vehicle is yours; the other way it still belongs to the dealership.

Buy, and the vehicle is yours, to have, hold, drive, customize and, ultimately, dispose of as you see fit.

Lease, and you have to return it essentially as you received it, plus allowable mileage. Think of it as getting a car from Hertz or National, just for a really, really long weekend.

How much money should you spend on a car based on your salary?

The rule of thumb among many car-buying experts dictates that your car payment should total no more than 15% of your monthly net income, sometimes called your take-home pay (some might stretch this to 20%, but 15% is more conservative and therefore likely to make budgeting even easier). Your net income is the money you take home after federal, state and local income taxes have been deducted from your paycheck.

Note that this 15% is meant to cover just your car loan payment, and not ongoing car-related expenses like fuel, maintenance and insurance.

The idea behind the so-called 15% rule is that if you limit your monthly car loan payment — sometimes called a car note — to 15% or less of your net income, you’ll have enough money left over each month to cover the rest of life’s expenses, including the occasional financial curveball.

How much should you spend on a car?

If you are a driver, then you have probably asked yourself the question “what car can I afford?” more than a hundred times. Unfortunately, the answer to this question is not easy.

First of all, you have to take into account that the people’s financial situation differ significantly. A well-off banker from Wall Street can buy a brand new luxurious limousine. A school teacher from Wisconsin will be probably looking for an affordable used car. An unemployed hairdresser who lives in a small town in Nevada will probably need to calculate her car affordability very carefully. So how to calculate car affordability for different people?

We believe that we can set a rule of a thumb which says that average earner should spend between 20 and 60 percent of his annual income on a car.

This range is quite broad as it is intended to fit all situations. Where you fit on this range depends on your personal financial situation and… how keen you are on automobiles and vehicular activities. From a strictly financial perspective, the less you spend on a car, the better. However, if cars are your passion and every night your dream about driving, then, of course, you can buy a more expensive vehicle. In this situation, in your personal finance you will treat this expense more like a hobby, or realization of your dream, than the necessary costs of the vehicle that allows you to commute to work. Another way to drive the car of your choice without a lot of fuss is to lease it.

Summing up, a good approximation that fits most of the people is to spend no more than 40% of the annual income on a car. For example, if your annual salary is $40,000, then according to our rule it means that you can buy a car for $16,000. This is not a fortune, but it should be enough to buy a car that’s not too old, while also being comfortable and reliable. If you don’t have this money in cash, you could safely take a car loan that doesn’t exceed this amount. To make all necessary calculations, remember to use our car affordability calculator!

5 tips for getting the best deal possible on a car

I’ve been buying cars for clients (and myself) for years. On average, I negotiate and save $3,100 on each car I buy. Dealerships have outright expressed their disdain for me, and their nasty texts and emails help me to sleep at night like warm tea. 

You can read all of my secrets, as well as the best A-to-Z process for buying your first car, in my car buying guide.

In the meantime, here are some of my favorite and most effective tips I’ve put together over the years. 

Shop around for car insurance

My first two car insurance quotes for my 2001 Mazda Miata were $200 and $1,000 for six months. Same car, same goober driving it — 400% price difference. 

Every insurance provider sees each driver and car pairing differently, so it absolutely pays to shop around for at least five quotes. Check out our list of the best car insurance companies for young adults to compare multiple insurers so that you don’t end up overpaying.

Buy used – seriously 

A used car that’s passed a pre-purchase inspection is nearly as good as a brand new car. 

In some cases, it’s even better. Generally speaking, a Toyota with 50,000 miles on it will outlast a VW, Fiat, or an Alfa Romeo with 0 miles on it. It all comes down to initial build quality, which some manufacturers emphasize more than others. 

Used cars are also significantly cheaper (when there’s not a chip shortage). As a general rule of thumb, cars lose at least 15% of their value each year — so if you’re considering a Mazda3, look back just a few model years for a steep discount. 

Don’t pay a penny for dealer extras

Before you sign, dealerships will try to add “recommended extras” onto the invoice price. These typically include a $1,000 ceramic coat, $1,000 for a GPS anti-theft device, and $100 for nitrogen in the tires. 

You can apply a ceramic coat yourself for $50, put an Apple AirTag under the seat for $29, and get free nitrogen at Costco (oxygen is also fine). 

Oh, and ask to waive the “documentation fee.” It’s not a fake fee, but dealers charge too much and many will reduce or remove it upon request. 

In fact, don’t go to a dealership at all 

For decades, car dealerships have employed seedy manipulation tactics like including hidden costs, undervaluing your trade-in, and telling outright lies just to get you in the door. 

And now, with lower inventory and increasing pressure from Carmax and Carvana, they’re getting bolder and more desperate. 

You can still negotiate a good deal with dealerships, but you’ll need to enter the lion’s den ready to fight. For everyone else, Carmax is a much better choice.  

Read more: Ex-car salesman tells all: how to beat the auto dealerships at their own game

Reliability is the best luxury

Finally, I’d urge you to make reliability one of your top considerations when buying a car. In addition to browsing the Consumer Reports reliability surveys, run any car that you’re considering through The Edmunds Inc. True Cost to Own® tool

Tinkering around with TCO® will reveal that while a fancy 4-Series BMW may cost less than a Mazda3 to buy, it costs over $20,000 more to own and maintain over five years. 

The bottom line

The process of purchasing a new car is an exciting endeavor but being realistic with your budget will ensure that you won’t have to pinch pennies once you bring your new ride home. Before settling on a car, consider all of the potential costs, including insurance, maintenance and fuel. When calculating all of the expenses, aim to find a car that costs no more than 20 percent of your take home pay. The goal is to find a car that meets your expectations and allows you enough breathing room financially to accommodate any unforeseen costs or reduced income.

Learn more


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Next steps: Identify cars within your budget

Establishing an auto budget is an important first step in the car-buying process. Once you’ve landed on a number you’re comfortable with, you can move on to identifying makes and models within your price range before heading to the dealership.

Check out our guides to buying a new car or used car for tips on finding a car and financing that fits your needs.

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