How Much Car Can I Afford?

“How much car can I afford?” It’s a question I’ve been asking myself quite a bit lately. As someone with a nearly 14-year-old car, the time may be near when I’ll have to kiss my Corolla Berlin goodbye and give her a final sendoff to car heaven. I’ve personally been trying to figure out how much I can afford, and whether it’s the right time for me to get a new ride. And not being a car person in the slightest (I refer to cars with vague descriptions, such as “the red van” or “green car”), to me buying a new set of wheels is tedious — not to mention a stressful, confusing process.

For starters, there are a bunch of things to consider: Is getting a hybrid worth it? How much do I realistically use my car, now that I work from home and take public transit more frequently? And of course, I want to make sure I don’t spend more than I can afford.

Here are some key questions I’ve asked myself to figure out what kind of car fits my lifestyle and budget. During my car-buying process, I’ve found them to be helpful and hope you will, too:

What am I paying right now for transportation?

Figuring out your current costs for transport will help you gauge your car needs. Don’t forget to look at the full picture. Tally up how much you spend taking public transportation, rideshares, or if you use a company car part of the time. Understanding your transportation needs will help you determine what value a car contributes, whether it’s simply saving time or allowing you to cut back on pricey rideshares.

In the past year I started working from home so went from using my car every day, to just a few days a week. Plus, a new metro rail stop opened up just a few blocks from my place, making it that much easier to hop on mass transit. I’ve noticed I drive more during the weekends when I am driving to parts of town that are harder to get to by bus or train. By checking how much I was driving versus taking other modes of transportation in the past year, I had a better idea of my future needs. 

To help you spot trends in your spending, consider using a banking app like Chime which helps its members keep a watchful eye on their spending by surfacing spending trends alongside each transaction. For example, you’ll know much you’ve spent on, say, Uber rides in a given month any time you check your spending account.

What are the real costs of driving? 

Besides the price tag of your new set of wheels, you’ll need to factor in insurance, maintenance, gas, registration and recurring parking fees. The average annual costs of owning a car is $8,558, or $713 a month. Note that this doesn’t include the cost of purchasing the car itself. 

Of course, these costs vary depending on where you live, and it’s important to look at the difference in costs if you’re moving. For instance, when it comes to insurance, some states require liability insurance. And if you’re moving to an area where fires or natural disasters are more frequent and a real concern, comprehensive insurance may be worth it. You can compare car insurance rates with NerdWallet’s nifty auto insurance estimator tool.

How much is my car worth?

Next, if you own a car, you’ll want to figure out how much you’re paying currently, suggests Matt DeLorenzo, a managing editor at Kelley Blue Book. That way, you can see just how much you’ll need to adjust your personal budget so you can afford your new whip.

Also think about the trade-in value of your current car, which could help offset the costs a bit. Selling a used car yourself usually nets you more money than trading it into the dealer. If you’ll be uprooting to a new city, keep in mind that your insurance rate may go up.

Do I go new or used?

If it’s been awhile since you purchased a ride, keep in mind that car costs have shot up quite a bit in the past few years. According to Kelley Blue Book, depending on what kind of ride you have your eyes on, the average price of a new car is $33,000. That’s certainly no chump change, so a used car may make more sense within your budget. Ultimately, this decision comes down to your comfort level. Would you be okay with inheriting a used car’s potential problems? Do you have the know-how — or is friends with someone who does — to spot a lemon? It can be scary to buy a car if you don’t know what to look for. You can order a car’s history report, through sites such as AutoCheck or Carfax. To see what’s out there and if anything suits your fancy, you can scour online for used cars on Shift or Carvana.

It’s also helpful to look at the price of the car and its financing as two separate things. And according to Experian’s most recent “State of Auto Financing Report,while average monthly payment for a new car is $495, it’s $362 for a used car. And the average APR to finance a new car is 4.69%, it’s 8.48% for used cars. So you’ll want to take both the price and financing into account and talk to the person selling you the car on the costs for both.

Buy or lease? 

To figure out whether leasing or buying is a better option for you, think about your personal preferences and needs. If you’re into what’s hot and trending, plan on keeping your car for only a few years, and don’t put many miles on it in a given year (let’s say anywhere from 10,000–12,000), leasing could be an attractive option, explains DeLorenzo. While you won’t build any equity with a leased car, you might be able to snag a deal on a new ride little or no money down. On the other hand, interest rates for leased cars can be, on average, 4.58% higher than if you’re buying. So do the math to see if leasing is worth it, and make sure that you can make payments on time. 

You’ll also want to keep in mind that the value of a new car drastically drops when you drive it off the lot. We’re talking anywhere from 10 to 50 percent of its value. By the end of its first year, that car will lose, on average, 10 percent of its value. If you plan on keeping the car for the long haul, consider what it’s trade-in value will be when it comes time to sell it. 

What’s my credit score?

When looking at financing options, it helps to know your credit score and get a pre-approved loan from your bank, suggests DeLorenzo. This will give you leverage, and make sure the dealer isn’t pulling wool over your eyes.

You can get a free credit report from AnnualCreditReport.com. You’re also entitled to one free credit report from each of the three credit bureau agencies — TransUnion, Experian, and Equifax — per year. There are a handful of companies that offer free credit monitoring, such as Credit Karma and Credit.com

If your credit score is less than stellar, you might not be able to get a low APR than if you had a higher credit score. So that may weigh into your decision as to whether you should buy used or new.

Get out there and drive

It’s easy to get caught up in the excitement of test driving your potential new whip on the car lot. Try this out instead: rent out the same car or similar model for about a week or so. This will get you a bit more familiar with the car, and you can see how it fares in your day to day life. It’s one thing when you’re riding alongside a car sales dude for 20 minutes, and another when you’re out and about on your own, running some errands.

I hope these questions help you answer the “How much car can I afford” like they helped me. While I had opened a savings account and automated my savings to sock away about $10,000 for a new car, I ultimately decided that it wasn’t the right time. Even though I had been dreaming of riding around in a sexy new whip, the questions above helped me realize that I have been driving a lot less than I assumed. Luckily, I plan to keep contributing to my savings so I can be in an even better position when the time is right.

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