Creating Your New Car Budget: What Should You Pay?

Creating a new car budget can help you save cash on your next vehicle. A winning formula considers take-home pay and sets aside money for related expenses.

Matt Keegan | 

Feb 16, 2022 | 4 min read

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Shopping for a new vehicle places you in special company. Each year, approximately 17 million new cars, trucks, minivans, and utility vehicles sell to qualified buyers.

Establishing a new car budget is a great way to focus your search and ensure you can afford the vehicle you finally decide on. That affordability derives from a simple formula that's directly related to your take-home (net) pay. Here's what to consider when setting your new car budget.

What You Can Afford

If you explore the market, you will quickly realize that some cars are much more expensive than others. This is where having a new car budget can come in handy.

If you are financing your purchase, it's a good rule to keep your monthly payments to approximately 10% of your net income. That means if your net pay is $30,000 per year, then you could potentially spend $250 per month ($3,000 per year), provided all of your other expenses are in line. Your credit score plays a significant part in determining your creditworthiness and the interest rate you'll pay.

You may also want to set aside another 10% to cover related expenditures. These costs may include automotive insurance, fuel, oil changes, property taxes (where charged), registration, and upkeep. For the first several years of ownership, repair costs should be low, which can present a great opportunity to set aside cash for future fixes or purchase an extended warranty when the new vehicle coverage runs out.

Thus, the affordability formula represents 10% of your net pay for monthly car payments and another 10% for related expenses, or 20% in total.

How Much You Will Pay

As you shop around, examine the window stickers carefully. Every new vehicle sold in the U.S. comes with a Monroney sticker, which is a placard affixed to the side window. Specifically, that "sticker" details several points about the vehicle, including its base price, trim, packages, individual upgrades, delivery charge, and total cost before additional charges come in.

When you're shopping online, the Monroney is viewable along with photos and related documentation. Usually, the listed price isn't what you will pay for a vehicle. Instead, it's where you may begin your negotiation. Except for certain exotic and high-demand vehicles, the sticker price is typically flexible.

Financing Options and Discounts

Once you've settled on a car, it's time to consider how to pay for it. Through the dealership, manufacturers typically offer incentives on almost every purchase. Usually, you will have the choice of taking a low-interest rate loan or cashback rebate. Rarely are you able to claim both options.

Talk with your lender before negotiating the cost of a new vehicle. If you qualify for an auto loan and the rate is competitive, it's a good idea to obtain approval for the loan first. Then, when you negotiate for the vehicle, you might be able to obtain a lower price and save additional money by taking the rebate. You could put the rebate (or your trade-in money) toward a down payment.

By adding more money up front, you can lower your payments. Your lender can adjust the loan to reflect your final negotiated price.

Additional Costs to Consider

There are usually several costs added to your final price. The destination charge is a line item on the Monroney and is part of the total price, but other fees, including registration, documentation, and sales tax, are also added. Only the documentation fee is negotiable.

At this point, you may not want to purchase an extended warranty because the coverage doesn't begin until the new vehicle warranty ends, so you would be paying for a warranty you wouldn't use for several years. Further, if you add it to the cost of your loan, you'd pay interest on the not-yet-realized service. You can buy the warranty later to keep it separate from your loan. If this is the route you go, make sure the warranty is transferable to a new owner so that you can sell your car if you ever choose to.

The Length of Your Loan

A common auto loan length is 60 months, although 72-month loans are also popular. Certain lenders offer 84-month and 96-month loans, but the rates may be higher, and the loan might continue for several years after the new vehicle warranty ends. Basing what you can afford on a shorter-term loan can be a more sensible approach and might make it easier to obtain loan approval for your new car budget.

Matt Keegan

Matt Keegan is a lifelong car enthusiast, having “driven” his first real car at the tender age of five while sitting on his father’s lap. As soon as he acquired his license, he began exploring the open road and tinkering under the hood to fix the inevitable leaky radiator, broken belt, or mess with a stuck fan clutch. It is those experiences that convinced him to stick with writing and make good friends with mechanics. Matt regularly reviews new vehicles, advises friends and families on their next car purchase, and keeps his pulse on the automotive industry. His bucket list drive is navigating Alaska’s Dalton Highway and finishing that trip with a dip in the Arctic Ocean. In July, of course.