How much should you spend on a car?

Toy car on money

Most Americans are spending far more than they can afford on cars and trucks.

Just because the monthly payments are manageable doesn't mean it's smart to let a $30,000 or $40,000 auto loan gobble up a huge chunk of your paycheck every month.

This is one of life's biggest expenses, and it's a purchase where you have total control over how much you spend.

The car companies know this.

It's why they devote billions of dollars a year to advertising that tries to make this a purely emotional choice. You're urged to choose a ride that tells the world how successful you've been. Or how hip you are.

The automakers want to grab as much of your money as you'll let them take.

Week after week. Month after month. Year after year. They want you to keep paying them.

Yet you can get a great car for much less and use the savings to invest in yourself.

Here's where the money for your retirement or kids' college can come from.

The 20/4/10 rule

It all starts with what we call the 20/4/10 rule, which says you should:

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 $53,000 and spend $80 a month for insurance — right around national median household income and average premium for a single car.

Your monthly gross income would be $4,416, one-tenth of that would be $441 and the monthly car payment you could afford would be $365.

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.

Use 4.35% for the interest rate, which is right at the average cost of a 4-year new-car loan.

Or search Bankrate's database of the best car loans in your area, and use that rate instead.

What you'll pay

Most buyers with reasonable credit will pay less than average for financing.

Under Down payment, on our auto calculator, enter how much cash you'll be devoting to the purchase and the trade-in value of your existing car or truck.

Under Taxes and fees, enter the sales tax rate for where you live and license your vehicles. 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 at the top of the calculator. That's how much you can afford to spend.

Using our example, with a $365 monthly payment, $3,000 down payment, a sales tax rate of 7% and no other fees, this family could afford to spend $17,870.

Are there situations where you could responsibly spend more?

Absolutely.

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 4.14% average.

The more you put down, and the lower the interest rate, the more you'll be able to afford to spend.

But be careful.

Longer loans are one of the auto industry's favorite tricks to lower monthly payments and help customers buy more expensive cars than they can really afford.

The 48-month loans we recommend are bad enough, siphoning thousands of dollars in interest from your savings to pay for something that's losing value every day you own it.

Longer loans are just bigger wealth killers. If you need to finance a vehicle for six years, it's a sign you can't afford it.

  • Enzo Baldwin

    Lol @ Seanmar. Lots of American cars are made in Mexico or Canada and plenty of Imports are made right here in good ole states like Tennessee.

    Edit: This article was pretty informative, but if you're a young person, there's no way in hell you're only spending 80 a month on insurance.

  • TruthTrollUSA

    Agreed, which is why I'll always be an Accord driver.

    • Mikael

      Accord? You mean, Honda? The Japanese company?

      • TruthTrollUSA

        I encourage you to research where the Accord is manufactured and how many American jobs are tied to its production. Many "American" cars (ehem, looking at you Chevy and Ford sedans) are actually imported from Mexico.

        • ANDREW JACKSON

          Accords are actually manufactured in Ontario, Canada

          • TruthTrollUSA

            That may be for the Canadian market. Accords sold in the US are manufactured in Ohio.

  • Mikael

    I burst into laughter at the thought of spending more than 10k on a car! LET ALONE 30-40k Bahahah, good one.

    Here I was looking for advice on weather or not to buy a car outright for 3k-6k or if it'd be worth it to take a 6 month loan of 2k go up to 8k, and which factors to take into consideration to make that choice!

    • Floyd

      Why not spend more? What are you going to do with all of your money? Life is short, enjoy it.

      • Mikael

        You know, down payment on a house, savings, investments. Life is short, but that doesn't mean it's smart to spend my hard earned money now and have none for later when hard work isn't possible, not even going to consider spending TOMORROWS hard earned money today. Ant and the Grasshopper and all that.

      • Cody Williams

        A very solid reason is that money has other uses. Not spending it on a depreciating asset lets you use it on something more useful, like a better down payment on a house or investing it for retirement. People hear things like "retirement" and assume its far enough off that it doesn't matter, but you could retire far earlier than otherwise (like decades earlier) if you save more of your money. Life IS short, and being able to spend extra decades enjoying life instead of being required to work is a very valuable thing.

        • RJ

          I retired young in great part by never having a car payment after my first one. A 36 month loan I paid off in 19.
          Just wish I would have took up disc golf sooner. I developed a belly that I am not working on removing with the help of disc golf.

      • Milleau Limey

        Depends on if you're a car person (I am) or not (my wife). If not get the cheapest reliable car that'll get you from A->B (reliability is important for the B->A part).
        If you love cars then consider it a hobby, the extra expense is that you might otherwise plow into golf, a boat, kayaking etc etc, on top of the functionary part and budget accordingly.

    • Milleau Limey

      If the interest rate is close to (or below) inflation, always spend someone else's money, and keep yours earning.

    • Name

      If it appreciates, buy it. If it depreciates, lease it. Buying a $3K-$5K? You'll be putting even more money into keeping it running.

  • jason

    I dont see any reason why it has to be no more than 4 years. You can get 0% interest for 6 years on some new cars. If its 0% interest there is not reason to even put any money down. Even if you do pay interest better off investing the money in something that earns a higher return than the interest that you are paying.

  • Woof!

    Woof!

  • oli

    wow, I am more at 40/5/3. Not my choice though

  • RJ

    Good info. But 441-80 is $361 according to my math.
    I would probably adjust the rule to 20/3.5/12. I think 3.5 years is plenty for anyone.
    But, 12% is fair including insurance for the monthly total.
    And perhaps a very big wealth killer is buying from a dealer. Often, you can buy a similar car from a private party for $1000-2000 less.
    Just have a mechanic look at any car prior to buying. For paint & body work as well as mechanical condition.
    Finally, pay your insurance in full every 6 months, most insurance company financing or fees for paying monthly is a ripoff. But divide it by 6 for the above calculations.