How much should you spend on a car?
Here's a quick and easy way to figure out how much you can afford to spend on a new car or truck.
Start by applying the 20/4/10 rule.
It says you should put down at least 20% on a vehicle, finance it for no more than four years and not let your total monthly vehicle expense (including principal, interest and insurance) exceed 10% of your gross income.
So grab your pay stubs and determine your household's monthly gross income — that's how much you and your spouse make before any taxes or expenses are deducted.
Then find your most recent auto insurance bills, and figure out how much you're spending per month on premiums.
Take 10% of your gross monthly income, and subtract the monthly insurance premiums.
That is the monthly car payment you can afford to make.
Let's say, for example, you earn the national median income of $50,502 and spend $70 a month for auto insurance, which is the average nationwide cost for one vehicle, according to the National Association of Insurance Commissioners.
Your monthly gross income would be $4,208, one-tenth of that would be $420 and the monthly car payment you could afford would be $350.
Now go to our auto loan calculator.
Click the circle at the top that says you want to calculate the "Total purchase price."
Enter the monthly payment you can afford, and choose to finance the balance over 48 months, as the 20/4/10 rule suggests.
Put in how much you have for a down payment or trade-in, and use 4.05% for the interest rate. That's the current average cost of 4-year, new-car loans, according to our weekly surveys of major lenders.
Put zero in the fields for taxable and nontaxable fees, and enter the sales tax rate for where you live and license your cars and trucks. Remember that the sales tax rate on vehicles may be different than it is for everyday expenses such as food and clothes.
Hit the "Calculate" button and the "Total purchase price" will appear in the gray box. That's how much you can afford to spend.
Using our example, with a $350 monthly payment, $3,000 down payment and sales tax rate of 7%, this typical family could afford to spend $17,277 (see the red arrow below).
Are there situations where you could responsibly spend more?
Let's say the new car or truck you're buying offers a $1,500 rebate that you used to boost your down payment.
If you have decent credit, you might qualify for discount financing from the automaker or a regular loan that costs less than the 4.05% average.
The more you put down, and the lower the interest rate, the more you'll be able to afford to spend.
How much can median-income famillies in the nation's 25 largest cities afford to spend on a new car or truck? Check the results of our 2013 Car Affordability Study.