Budgeting For an Auto Loan
How much car can you afford? If you figure that out before you begin searching for your next set of wheels, your search may be less stressful.
Create a budget
Many financial advisors recommend creating a budget to determine your monthly spending, including fixed obligations such as rent, and optional expenses like eating out four days a week.
Consider the 20% rule
Some financial experts recommend that your car payment and all related automotive expenses shouldn’t be more than approximately 20% of your net monthly (not your gross) take-home pay and other steady (not occasional) additional income. This is simply a guideline. If your monthly obligations, such as rent, mortgage, childcare, or medical expenses are excessive, you might want to consider a lower percentage. On the other hand, if you have few obligations and low living costs or expenses, you might be comfortable at the 20% ceiling or slightly above.
More than just a car payment
Getting a car involves much more responsibility than simply the car payment. When calculating how much money you can comfortably spend on your auto, it’s a good idea to also take into consideration all the expenses that may go along with owning an auto, such as:
- Fees — including sales tax, registration fees, and documentation fees
- Optional aftermarket products
- Car insurance
- Yearly registration fees
- Maintenance and repairs
The expenses associated with owning a car could be as much or more than your car payment, and researching them as much as possible before purchasing a car may help you to come up with an obligation that doesn’t cause your heart to race every month and may allow you to maintain your emergency fund as well as meet your savings goals.
Auto insurance varies
Once you’ve done your research and narrowed your search down to a few models, getting insurance quotes on the models you’re considering can be helpful in better determining the ultimate cost of ownership. You might be surprised. Although, you might view several models as comparable, your insurance agent might evaluate them quite differently, and the rates could vary accordingly.
In general, the more you are able to put down on financing the auto purchase, the less finance charges you may end up paying. However, the annual percentage rate of your auto loan and the length of the loan also influence the cost of financing your auto. Some experts recommend putting down 20% of the purchase price.
Consider sales tax
Keep in mind that the higher the price of the car, the higher the sales tax and registration fees will likely be.
Daily ChangeSM app
If you’re looking for a way to have more money to spend on your new car or place in savings, consider tweaking your current discretionary spending habits. The Wells Fargo Daily Change app can help you identify spending habits that you could change — such as buying beverages on your way to work. Daily Change motivates you by transferring the money you would spend on the beverage each work day from your checking account into your savings account and sending you daily reminders that cheer you on.
"Dealer financing and rebates: What you need to know." Wells Fargo, 1999 – 2017
"How to get a great deal on a new car." U.S. Department of Agriculture, Center for the Study of Services, 2007
"Buying and borrowing tips." Federal Deposit Insurance Corporation, Winter 2015
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