How Much Car Can I Afford? 5 Things to Consider

Buying a car is emotional. But figuring out how much car you can afford is a practical—and necessary—thing to do before you even head to a dealership. One time I bought a car on impulse, letting my emotions take over. It was a sports car. I saw it, I liked it, I bought it. And a year later I regretted it. I hadn't thought about the practical things like repairs, what my family needed, or even where I'd park it.

Today, I'm looking at a sports car again. I want it. My wife says, "Okay, let's buy it." But I've learned. I'm thinking about what I can really afford. Raising my 7-year-old son is expensive and will only get more expensive. We're saving for his college. Plus, I'm still 15-20 years from retirement. So, I've decided the expensive car will have to wait. Maybe I'll reevaluate for a future milestone birthday, but we can't do it right now.

So how much car can you afford? The key is to look at your whole financial situation. You may need the car for a number of things, but what else are you trying to achieve? To help you decide what car you can buy—without limiting other important goals—you need to take some very practical steps. Here's what I recommend.

Start with the monthly payment amount. Look at your current monthly expenses and your overall spending and savings plan. Assuming you already have the essentials covered, including saving for emergencies and retirement, how much more can you handle per month? One rule of thumb is to spend no more than 10% of your take-home pay on a monthly car payment. So do the math. If your after-tax pay each month is $3,000, you might be able to afford a $300 car payment.

When determining the monthly payment, look at the total cost of the purchase, which includes the taxes and title fees. They can add several thousand dollars to the total cost of the car. The first time I bought a car, I was totally taken by surprise by these costs. How will you cover them? Ideally you should be ready to pay cash. Financing them will only increase your payment.

You've most likely heard that a car is a depreciating asset. We try to spin it differently when we really want something, but it's true. That sports car I bought on a whim? I ended up selling it for a third of the purchase price.

It's generally accepted that a new car loses 30% of its value as soon as you drive it off the lot. With the average cost for a new car in 2025 just under $48,000, according to Car Edge, that's an immediate loss in value of $14,400. By comparison, the average cost of a used car in 2025 is just over $25,000, Car Edge reports. 

Chances are, you could get a lot more car for your ideal monthly payment by buying used. And there are plenty of options, including certified pre-owned cars, loaners, leases, and more. Consider that a 1-year-old car with low mileage is almost like new and likely to still be under warranty. Just make sure to do your research before you buy.

Once you know what you can afford to pay for a car, you have to decide how you're going to pay for it. There are two basic options for a car purchase: cash or financing. If you can do cash, that's great. But most likely, you'll be looking for financing. Here are some things to consider:

• Pre-approved bank or credit union financing: With this type of financing, you'll often get better terms. You'll know exactly how much you can spend, which will help you negotiate with an auto dealer or a private seller. Start by checking your credit history. (If your credit score is below 680 or your debt-to-income ratio is high, your options may be limited.) Then contact your local bank or credit union—preferably one where they know you. But don't stop there. Do some comparison shopping to see what other lenders are offering.
• Dealer financing: Dealer financing can sometimes be a good option, especially if you have a lower credit rating. And some dealerships may offer special rates and terms on certain vehicles, but you won't know if it's a good deal if you haven't researched what other lenders are offering. In fact, don't settle on one dealer. Comparison shop here, too, for the best financing rates and terms.

There's more to financing than just how large an auto loan you can get. As you comparison shop, ask about loan interest rates, terms, and financing charges. Explore how a larger down payment or a shorter loan term might bring down financing costs. Again, an online calculator can help you run some different scenarios.

And when you're running those numbers, be a little conservative. Put in a higher interest rate; go for a shorter loan term, ideally no more than five years. Lower interest and a longer loan term may get you to the lower monthly payments you want, but it could cost you more over time.

Most states require you to have a minimum amount of liability insurance for accidental bodily injury and property damage. And if your car is financed with a loan, full coverage is often required. American drivers now pay an average of $2,313 annually for full coverage car insurance, according to Insurify. That's almost $200/month. Premiums vary by state, but you have to factor this into what you can afford.

Plus, the average car costs around $900/year to repair and maintain, according to Consumer Affairs. And then there's always the possibility of an unexpected major repair. It's a good idea to have an emergency fund specifically for car repairs.

We all want the shiny new object. We can just see ourselves in that car. And we think we can cut corners to make it work, whatever the sticker price may be. But don't fall into that trap. Instead, plan ahead. I always tell people that taking time upfront could save you a lot of financial headaches in the future. Spending a little extra time and doing a little extra research now will help you make a more informed car-buying decision that fits with your overall financial plan. Stick to your plan. You'll not only feel better about spending the money—you'll possibly be able to negotiate an even better deal on your next car.