Buying a car is a major financial decision, and determining how much you should spend is a critical first step. The right budget depends on your income, financial goals, and the overall cost of car ownership.

Setting a budget: Income-based guidelines

The 10-15% rule

Financial experts often recommend spending no more than 10-15% of your monthly take-home pay on total transportation costs, including your car payment, insurance, fuel, and maintenance. If your monthly take-home is $4,000, your transportation budget should be $400-$600.

The 20/4/10 rule

Another popular approach is the 20/4/10 rule:

• Make a 20% down payment on the car

• Finance for no more than four years to avoid excessive interest costs

• Limit total transportation costs to 10% of your gross monthly income

Annual income cap

Some experts suggest capping the total purchase price of a car at a percentage of your annual income:

• 35% of annual pre-tax income: This guideline works well for buyers looking to finance their purchase

• 50% of annual gross income: This is suitable if you're paying cash or making a significant down payment

Factors to consider when budgeting

Your financial situation

Assess your income, existing debt, and monthly expenses to understand what you can comfortably afford without overstretching your budget.

Depreciation

Cars, particularly new ones, lose their value. Avoid overspending on a vehicle that will depreciate significantly within the first few years.

Future financial goals

Consider how a car purchase will affect your ability to save for priorities like a home, education, or retirement.

New car price ranges to consider

If you're leaning toward buying new, here are the typical price ranges based on current market trends:

• Under $25,000: Entry-level options, including subcompact and compact sedans

• $25,000 - $35,000: Compact SUVs, crossovers, and some mid-size sedans

• $35,000 - $50,000: Mid-size SUVs, full-size sedans, and entry-level luxury vehicles

• $50,000 - $75,000: Luxury sedans, compact luxury SUVs, and some full-size SUVs

Used car price ranges to consider

For those looking to buy used, here are some common price ranges and examples for vehicles:

• Under $10,000: Reliable older models

• $10,000 - $15,000: More recent models with good features

• $15,000 - $25,000: The sweet spot for used cars, a balance of quality, features, and affordability

Balancing your wants with your finances

Ultimately, deciding “how much should I spend on a car?” depends on your financial circumstances and priorities. Whether you choose a new or used vehicle, focus on finding a car that meets your needs without compromising your long-term financial health.

By sticking to a well-thought-out budget and considering the total cost of ownership, you can make a smart purchase. If you’re ready to get pre-qualified, you can start the process online. Credit Acceptance works with other 15,000 dealers coast-to-coast.