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Just How Big Should Your Monthly Car Payment Be?

A smiling parent driving a car with their two kids in the backseat.

Image source: Getty Images

Buying a car is an expensive proposition, which is why many Americans borrow for one. Research from Edmunds showed that the average monthly car payment for a new vehicle was $717 in the fourth quarter of 2022, while the average monthly payment for a used vehicle was $563.

The big question is, are these payments reasonable or are people taking out auto loans that are too large? Before borrowing for a car, it’s important to have an answer to this question and know how large your monthly car payment actually should be.

The ideal size of your monthly car payment

In an ideal world, you would not have a monthly car payment. That’s because cars are depreciating assets, so they go down in value over time. If you’re paying interest on a vehicle because you borrowed for it, you are spending extra money each month on a vehicle that is worth a little less than you paid for it each day.

For most people, though, paying for a car entirely out of savings just isn’t feasible. A car isn’t optional for those who need one to get to work or school or to fulfill family obligations, and if you need a car and don’t have tens of thousands of dollars sitting around, then you’re going to have to borrow for it.

If you have to borrow, you should aim to keep the costs of your car payment to no more than 10% of your income, although some experts say you can go up to 15%. Capping the costs at 10% can help you ensure your vehicle loan doesn’t compromise your other financial goals.

You can also determine exactly how much you can afford to spend by making a detailed budget and looking at your other expenses, including the amount you need to save for retirement, big purchases, and other future objectives. If you have a budget that allocates every dollar, you can see how big your car payment can be without causing you to develop a shortfall and not be able to do other things you want.

For most people, though, following this 10% rule is an easier approach, and it can serve as a guide to help you ensure you don’t devastate your personal finances with your vehicle payment.

How can you keep your car payment to 10% of your income or less?

Although you should keep your car payment to below 10% of income, not everyone is doing that. In fact, the Bureau of Labor Statistics reports the annual mean wage was $61,900 as of May 2022. That means someone who made the average annual income and who paid the average car loan payment for a new vehicle would be spending close to 15% of monthly income on their vehicle.

The good news, though, is that there are steps you can take to ensure your car payment stays within your budget. To do that:

  • Buy the cheapest reliable used vehicle you can. You can always save up for a fancier car later if you want better wheels.
  • Drive your car for as long as possible. Once your car loan is paid off, keep making the “payments” into a savings account. Use that saved money to buy your next car in cash eventually, or at least put a large down payment on it.
  • Maintain your vehicle. If you take good care of your car, it will last longer so you can drive it longer and you can avoid costly repairs.
  • Shop around for a car loan. Don’t assume dealer financing is always the way to go.

One thing you don’t want to do, though, is choose a car loan with a longer repayment term. While this would make your monthly payment cheaper, it makes your total borrowing costs more expensive and it leaves you in debt longer.

By following these tips, hopefully you can keep your car loan payment to a reasonable level so you’ll have plenty of money left over for other things that help you build a secure future.

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