How Much Car Can I Afford?

There are a lot of options out there when it comes to paying for your new ride and it can often be confusing on how much you “should” be spending each month. A general rule of thumb that is popular in the automotive industry is the 20/4/10 rule. Here’s how it works:

• You pay 20% or more of the total cost of the vehicle as a down payment
• You take out an auto loan for 4 years or less
• Your total transportation cost (vehicle, insurance, gas, etc.) does not exceed 10% of your monthly income

It’s important to note that this isn’t a hard-and-fast rule that everyone can or should abide by. Rather, it’s a simple way to touch base with your finances to ensure you’re not overextending yourself on your automotive expenses.

If the 20/4/10 rule doesn’t work for you, that’s okay! There are plenty of steps you can take in your car buying journey to make sure you’re being economically sensible.

As with all major purchases, you should always start by setting a budget and sticking to it. The most important number to consider should be the total cost of the vehicle, including interest. From there, figure out how much you can afford to spend each month.

You’ll also need to determine the overall duration of your car loan. A longer term means you’ll ultimately pay more due to interest, and these days the national average term for an auto loan is over six years. A car loan this long isn’t ideal; opt for a shorter term if possible. Although the monthly payments on a shorter-term will be higher than on a long-term car loan, you’ll likely save yourself interest charges.

It’s worth noting that there is nothing inherently wrong with longer-term loans, especially for shoppers who intend to keep their purchase for a long time. Just be mindful of monitoring interest costs between longer and shorter loans, and then decide which works best for you.

And while new buyers often focus solely on the amount they spend each month paying for their car loan, it’s easy to forget about fuel, insurance, and maintenance. For reference, in 2022, AAA found that drivers spend around $894 per month or $10,728 per year in car ownership costs.

First, what is leasing? A lease is a long-term rental, a subscription of sorts, to a vehicle you’ll have for 24–36 months, that you’ll then return to the dealership. You’ll be subject to mileage and other limitations, but typically will have a lower monthly payment than if you were to finance the same model.

For many people, the most important difference between buying and leasing is the long-term cost of ownership. Most of your vehicle’s depreciation takes place within the first five years, meaning that the amount of time you plan to keep your new car will have financial consequences.

If you plan to keep your car for more than five years or drive more than 15,000 miles a year, we generally recommend buying. Your out-of-pocket costs may be higher over the length of your loan, but in time you’ll have a vehicle with equity that you can continue driving without a monthly payment. When factoring in the vehicle’s resale value, buying usually makes more sense in the long term—especially if you own a reliable vehicle.

For those who prefer to keep the same car for less than four years, leasing can make a lot of sense. Because of the way leases are calculated, leasing will usually require you to pay less over the course of the lease than you would have paid in the same time frame had you purchased the same vehicle.

Also, when a lease term is complete and it’s time to move on to a new vehicle, there’s virtually no risk of being “upside down.” This is a consideration many people who finance a car will have to contend with should they decide to trade out of the vehicle in three years or so.

Finally, if you opt to lease, you normally won’t have to worry about heavy maintenance costs, as most lease lengths will be covered under a new car’s limited or “bumper-to-bumper” warranty.

If you’re okay with buying a used vehicle, there’s a good chance you’ll be able to find an incredible value. This can be a great opportunity to get an older model of the car you want at a significantly reduced cost. And while you may lose out on that factory warranty, used cars are also more reliable than they’ve ever been.

By shopping used, you can often use your savings to get the car you want with additional features or amenities. In some cases, you may be able to step up to a luxury vehicle on an economy budget. How about a used Lexus ES for the price of a new Toyota Camry? Or, if you’re considering going electric, a used electric car is a great way to cut back on your upfront purchase and long-term ownership costs.

You also have the option of shopping for a certified pre-owned vehicle, which can provide the value of a used car and the confidence of a factory warranty. Programs vary depending on the manufacturer, but most certified vehicles undergo a thorough inspection by factory-trained technicians.

If you’re going to be financing your vehicle, it’s always worth shopping around for the best interest rate. We recommend getting pre-qualified for an auto loan with your bank or credit union. This gives you a starting baseline to work with at the dealership, which may be able to beat that rate if you have an offer in hand.

Assuming you don’t need a new car right away, it’s also a good idea to wait for manufacturer incentives such as promotional interest rates and cash back. Many automakers offer these incentives during seasonal sales events, plus holidays such as the Fourth of July and Labor Day.

To see current incentives available for the car you want, you can check each automaker’s website. But for a more streamlined experience, use TrueCar to configure a vehicle and see the latest offers all in one place. This includes any special offers for college graduates, military appreciation, or brand loyalty. You can also see all the best deals summarized each month on the TrueCar Deals page.

If you’re going to be trading in your vehicle, you’re going to want to maximize its value. You might be surprised to know that something as simple as cleaning your vehicle’s exterior and interior can make a big difference in its perceived condition at the dealership.

But while a simple wash and wax is often a great investment, be cautious of getting any major work done on your vehicle before trading it in. Spending hundreds or even thousands of dollars on mechanical repairs won’t dramatically improve your vehicle’s trade-in value, as dealerships can perform the work themselves without marking up the cost.

Check out these top tips for selling and trading in your vehicle.

When you’re ready to trade in your vehicle, you can see the value of your car and get a cash offer in minutes with TrueCar. All you have to do is enter your license plate number or VIN, and you’ll see your car’s value in real-time. Then, you can cash out or trade-in for your next new or used car.

What is the average car loan length?
The average car loan term today is nearly 6 years (72 months); however, you can find a variety of loan lengths, such as 24-, 36-, 48-, 60-, 72-, 84- and even 96-month terms.

What if you are upside down on your loan?
Being upside down on a car loan means you owe more on the loan than your car is worth. We’ve got an in-depth guide on what to do in this situation here.

Is it better to lease or buy a car?
Whether you lease or finance your new car is a personal decision. If you plan on keeping your car for the long-run and putting lots of miles, financing will likely be better for you. But, if you like to switch cars often, don’t drive much and want the latest tech for a lower monthly payment, leasing might be a better option for you.