How Much Car Can I Afford Based on My Salary?

It’s no secret that owning a car is expensive, especially due to the rising levels of inflation in the automotive industry

Between the initial purchase price, insurance, gas, and maintenance costs, it can be tough to figure out just how much car you can afford. 

But with a little bit of math and some knowledge about your personal finances, you can work out a budget that fits your needs. 

In this article, I’ll show you how to do just that. 

Let’s dive in. 

How Much Car Can I Afford Based On My Salary?

There’s no single correct answer to how much car you can afford based on your salary. However, as a general rule of thumb, your new car’s monthly payment must not exceed 20% of your monthly take-home pay if you’re planning on leasing, or 30% of your annual income if you’re going to purchase it with cash.

Person using a calculator near cash money on wooden table

For example, if your salary is $40,000 -$50,000 a year and you plan to buy a car rather than lease it, then your total car budget should not exceed $15,000. This would be 30% of your yearly income. 

If you decide to lease instead, the maximum amount you should be paying on a monthly basis should not exceed 20% of your take-home pay or roughly $833 in this case.

However, it’s important to note that these figures are just guidelines and do not take into account other debt payments you may have as well as monthly expenses like rent/mortgage, utilities, food costs, insurance, and more. 

So before making a purchase, be sure to factor all of these into your zero-based budget and adjust the amount you spend on a car accordingly.

Finally, don’t forget to keep in mind the costs associated with owning and maintaining a vehicle. This includes things like:

  • Registration fees
  • Taxes
  • Fuel costs
  • Oil changes
  • Repairs
  • Insurance

Top Tip: To make it easier to account for routine car maintenance and running costs when financing a car, look for an option that has a 5% lower (15% instead of the usual 20% of your monthly income) monthly lease. The extra 5% can then be placed into a savings account for you and used to cover regular maintenance in the future.

Determining Your Car Affordability 

Calculating car payment costs beforehand can save you hundreds of dollars in the long run. So, why not work smart and minimize your expenses?

Here are a few handy ways to determine how much car you can afford based on your salary.

Your Monthly Income and Preferences  

Your monthly take-home pay significantly determines how much car you can afford. However, this doesn’t mean that you have to stick to the 20% rule. You should also consider your personal preferences as well. 

Some people prefer luxury cars and are willing to pay a higher monthly payment, while others may prefer an economy car with a lower monthly cost. 

There’s no right or wrong way to approach it—it all comes down to your personal preferences and budget.

Finger punching numbers on a calculator

So, think about it. Are you:

  • A frugal person who only needs a car to get from point A to B (spending limit 15%)
  • Someone who enjoys comfort and prefers a good heating and sound system in their car (Spending limit 20%)
  • Enthusiastic about cars and prefer luxury (Spending limit 35%)

Use a Car Affordability Calculator 

Punching your salary into a car affordability calculator is perhaps the easiest way to help you determine how much you can spend on your vehicle. 

These tools help you accurately calculate what you can afford to buy with an auto car loan based on the following criteria:

  • Interest rate
  • Preferred monthly car payment
  • Loan term
  • Credit tier

Just remember that different car affordability calculators may use different sets of data to determine how much monthly car payments you can afford. 

Therefore, the estimates you get in return might vary depending on the tool you use. However, it’s still a good way to get a rough idea of what price bracket car you can afford to purchase.

Leasing Vs. Buying

Leasing a car is tempting for obvious reasons. You get a brand-new vehicle without having to pay full price. 

However, it requires you to make regular monthly payments and often involves hefty fees if you break the terms of your lease contract. Not to mention you must also have a good credit score to qualify for leasing in the first place!

On the other hand, buying a car will let you own the vehicle after paying it off. You’ll also be in full control of its maintenance, be able to customize it as you wish, and have no restrictions when it comes to trading in or selling the vehicle at a later date.

But, not everyone has that kind of cash lying around to buy a car on cash. Plus, leasing might actually be better for you if:

  • You only plan to keep your car for a few years and sell it afterward as you’ll only be paying for a portion of the car’s depreciation while it is in your possession
  • You do not like the idea of driving a used car and cannot afford to purchase one brand new

At the end of the day, both options present their own unique pros and cons, so be sure to weigh your choices carefully before making a decision. 

Salesman talking to a customer about the features of a new car

Think About Monthly Car Payments

Before you finalize a car, it’s always a good idea to calculate the expenses associated with your car. This may include maintenance charges, insurance costs, and more.

Fuel Costs

Gas prices can vary depending on which state you live in and how isolated your location is. Therefore, it’s important to have an estimate of how much you’ll be spending on gas each month in your location. 

For example, if you live in a state where gas is cheaper like Texas, you can get away with a higher-capacity engine car, even if it’s not that fuel efficient, and increase your monthly car payment budget accordingly. 

However, if you live in an area with higher gas prices like California, it’s probably better to go for a hybrid or electric vehicle that will save you money in the long run and make your monthly payments much easier to manage.

Car Insurance 

Automotive insurance is yet another expense associated with owning a car. Every state law requires drivers to maintain a particular coverage amount.

The precise amount varies by state. For instance, the average insurance rate in Washington is around $1500, while in California, it is up to $2,190.

You can always check your state to get an estimate of what you’ll spend on insurance. Generally speaking, insurance companies base the overall costs considering a few factors:

  • Credit history
  • Policyholder’s age
  • Driving history
  • Vehicle Model

However, not all states have the same factors when calculating insurance rates. For instance, a few states restrict insurance companies from considering credit history when calculating rates. Some of these include:

  • Washington
  • Vermont
  • Alabama
  • Florida
  • Delaware
  • New Mexico
  • Oklahoma
  • Illinois
  • Texas

So, if you live in any of the states mentioned above and have a low credit score, it won’t affect your insurance rate. Also, not all insurance companies put the same weight on each factor.


Every vehicle requires maintenance to keep it up and running. Generally, dealerships or manufacturers offer free oil changes and a few maintenance services for a specific period if you go for a new car.

However, once the specified time passes, you’ll be responsible for paying for the upkeep.

Imported and luxury cars generally have high maintenance and repair costs due to being a niche option with numerous parts which are prone to break down at some point. 

On the flip side, locally manufactured, mainstream vehicles tend to be cheaper to maintain due to greater parts availability and being simpler overall.  

Woman with daughter checking the car wheel of a white car in a showroom

Decide On a Car Loan Term 

You have various options when it comes to car loans. Lenders typically offer loan terms between 24-84 months. While it’s tempting to go for a longer duration loan since it involves less monthly payment, it also means you’ll likely pay a high-interest rate.

Getting excited about a new car is natural, but the thrill wears off soon when you get stuck making monthly payments for years.

Most experts recommend avoiding a loan term longer than 48 months for a used car. If, however, you’re purchasing a new one, it’s okay to go for a 60-month plan.

The sooner you pay off the loan, the lower the interest rate. Plus, you’ll also be paying off your debt quicker.

Determine Down Payment 

Down payment refers to the cash you can give when purchasing the vehicle. Many credit agencies like Equifax recommend saving until you have 15-20% of the total vehicle price to pay as a down payment for your new car.

If you have the money, submitting a bigger down payment is always a good option as it will naturally lower the amount you’ll have to pay each month.

You can also reduce the loan payment if you have a car trade-in option. This lets you trade in your current vehicle to the car dealership at the time of purchase to reduce the amount you have to spend on your new car.

Compare Your Car Options 

After you have an estimate of the car price or monthly payment plan you can afford, it’s time to visit your nearest dealerships in person and see what they offer.

Talk to sales representatives to get an idea of how much you can negotiate on the price of the cars you like. Make sure to compare the overall value of different car models before making a final decision.

Finally, read through the papers and documentation for the vehicle carefully to ensure that you don’t end up with any surprises down the line.

Top Tip: To make sure you’re getting a fair deal on your car, consider using online vehicle valuation tools like Kelley Blue Book or Edmunds to research different cars before signing on the dotted line.

Tips to Get a Better Car Deal 

Here are a few effective tips to get a better car deal and maximize savings.

Go For a Used Vehicle 

There seems to be a huge misconception amongst first time car owners that you can only get a good car deal if you buy it brand new. 

However, that’s usually not the case. Used cars are often significantly cheaper than new ones and they still provide high-quality performance at a fraction of the price. This is because used cars lose about 33.3% of their value every 5 years due to depreciation.

Sure, a used car may have some minor dents, scratches, or other problems but the price reduction will be significant. Additionally, some dealers provide warranties for used cars as well.

So, if you want to get a car at the lowest possible price and still with a lot of value, go for a used vehicle, but preferably one that isn’t too old – the newer the better!

Top Tip: To check out how much your new car will be worth in a few years’ time, try using depreciation calculators like this one. Additionally, if you want to make sure your car retains the most amount of value for the next few years, consider buying a car from this list of the top 10 cars that retain the most value.

Explore Car Insurance Options

Car insurance is an important factor to consider before getting a car. Insurance rates vary among different cars, so it’s best to compare them and see which one gives the most savings.

Ideally, make sure you get around 5 quotes to determine your ideal option.

Finally, it’s also important to consider the add-on coverage available in your car insurance policy such as roadside assistance, rental reimbursement, and gap coverage.

Avoid Car Dealerships 

Dealerships are notorious for including hidden costs, devaluing your trade-in vehicle, and other tactics to draw more money out of you. This is why buying a car at a dealership is not always the best way to get a good deal. 

Woman standing beside a black car and holding her new car keys

Instead, consider buying through private sellers online on used car sites. Many websites like CarGurus and Cars&Bids provide detailed information about cars which makes it easier to find the car that fits your budget and needs. 

Additionally, you can often negotiate directly with the seller for a better deal!

Related Questions

What Car Can I Afford If I Make 80K a Year?

The 2019 Chevrolet Cruze, 2019 Ford Fiesta, 2019 Nissan Frontier, and 2019 Honda Civic are some of the best cars you can afford if you make 80K a year.

How Much Should I Spend On My Car If I Make $60,000?

If you make $60,000 annually, your monthly take-home salary would be around $5000, excluding taxes and other expenses. So, considering the 20% rule, you must spend no more than $1000 on your monthly car payments.

How Much Car Can I Get for $500 per Month?

The precise answer depends on how much you initially pay in the form of a down payment and the loan length. 

Say you didn’t put any money down and took out a 62-month loan with a 6% APR. At this point, your $500 monthly payment will get you a vehicle that sells between $25,000 to $31,000.

Alternatively, you can get a more costly car for the same money if you go the leasing route. However, you won’t own the car after the 3-year lease term ends.

Key Takeaways

Very few things beat the freedom of having your own car. It offers independence and lets you take pleasure trips when desired. Plus, they can be really helpful in case of emergencies.

However, the surging car prices make people question, “How much car can I afford based on my salary?”

Since everyone has different monthly salaries, here are a few key things that can help you figure out how much car you can afford based on your income:

  • Calculate leasing affordability using the 20% rule (you shouldn’t sign up for a car payment option that requires more than 20% of your monthly salary)
  • If you’re buying with cash, make sure the car isn’t worth more than 30% of your annual income
  • Use car affordability calculators like this one to double check if its the right price for you

Also, do your research on various models, buy used, try buying directly through sellers, and get quotations from several car insurance companies to get the most bang for your buck vehicle.

And remember to set the bar a bit lower than you initially anticipate. Keep your maximum price below what you think you can afford because sales tax and fees can quickly add up to hundreds or thousands of dollars.

Best of luck in the showrooms! 

Jason is a contributor at PFGeeks and has been figuring out ways to make money since the age of 12 when he organised a Connect 4 tournament in his school class. From the age of 15, he set up and ran a successful mobile Disco company that focused on everything from local parties to (eventually) corporate events for brands like Google and Hilton. Fast forward to 2020 and Jason went from part time writing to going all in on the content industry - it was a pandemic pivot that so far is reaping him rewards. For many years he was also a Radio producer and researcher, and it's this "leave no stone uncovered" methodology that Jason now brings to all his writing - believing that deep analysis is key to a strong article. When he's not brushing up on the latest Finance news or feeding his entrepreneurial side, Jason loves to solo travel, geek out on SEO trends and get some exercise in with long walks.

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