How Much Should You Really Spend On A New Car Based On Your Income?

It’s time to buy a new car. You’ve been wanting one for several years and now you have a little money saved up for a down payment. But how much should you be spending on your new ride? Today we are going to go over several tips that can help you decide how much to spend. 

The 50% Golden Rule 

When calculating how much you should spend on a new car, you should use the 50% rule. This rule is easy to understand. It simply means that you should not have more than 50% of your total net income tied up in things that go down in value. Some of these items include cars, boats, and motorcycles. For example, if you make $100,000 a year you should not spend over $50,000 on your new car.

The Frugal Rule of 20%

For those who are very frugal, you may want to use the 20% rule instead of the 50% rule. Meaning you will spend less than 20% of your total net income on that new ride. For example, if you make $80,000 a year you can only afford to spend $16,000 on a new car. That may not seem like much, but you can get a reasonable car for around that price.

Keep Monthly Payments Around 1%

Another rule that is good to follow is the 1% rule. It’s important that you try to keep your monthly car payment down to around 1% of your total income. For example, if you make $50,000 a year your monthly payment should be around $500. This will help to keep you on budget and not spend too much on your new car.

At Least 20% Down

Before you head off to the car dealership you should be able to make a down payment of at least 20%. Putting that much down will help lower your overall monthly payment and the amount of interest you will pay. If you don’t have a large lump sum saved up for a down payment, be sure to have a few hundred dollars available when you visit the car dealership.  Many dealerships require either the first payment or at least a few hundred dollars. You might consider borrowing from a reputable online lender such as They can lend you a small sum that you can easily pay back.

Never Finance for Over 4 Years

When talking to the dealer about financing, it might be tempting to go for a 7-year loan. However, doing so will add a ton of interest to your purchase, boosting the overall price of the car. Instead, try to negotiate a good deal on a 4-year car loan or less. Your payments may be slightly higher, but the car will be yours much sooner and for a more reasonable price.

Keep more money in your pockets by following these simple tips. Remember that financing a car for more than 4 years is never a wise move. Now hop in the driver’s seat and feel confident knowing you’re paying an amount you can afford.

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