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How Much Should I Be Spending on a Car?

06 Nov 2023

Buying a car is a significant financial decision, whether you're buying a new or used vehicle, determining how much you should spend on a car is crucial.

Determining Your Budget: Factors to Consider Before You Buy

Before you start, take a close look at your financial situation. Assess your monthly income, expenses, and savings. Make sure to factor in your existing financial commitments, such as rent or mortgage, utilities, groceries, insurance, and any outstanding debts.

Once you have a clear picture of your financial situation, create a budget specifically for your car purchase. This budget should include not only the cost of the car itself but also related expenses, including:

  • Monthly loan or lease payments
  • Fuel costs
  • Insurance premiums
  • Maintenance and repairs
  • Registration and taxes
  • Depreciation (the decrease in your car's value over time)
  • Emergency fund for unexpected expenses

Spending on a Car? Use the 15% Rule to Keep Your Finances in Check!

A common guideline to determine how much to spend on a car is the "15% rule." This rule suggests that your car expenses should not exceed 15% of your monthly income. This includes all car-related costs, such as the monthly payment, insurance, fuel, and maintenance. By following this rule, you can ensure that your car doesn't put a strain on your overall financial health.

The Power of a Down Payment

If you're financing your car purchase with a loan, consider making a substantial down payment. A larger down payment reduces the amount you need to borrow, which can lead to lower monthly payments and less interest paid over the life of the loan. Experts recommend a down payment of at least 20% of the car's purchase price.

Striking a Balance: The Ideal Length for Your Loan

Car loans are often available with various term lengths, ranging from 36 months to 84 months or more. While longer loan terms can result in lower monthly payments, they also mean paying more interest in the long run. Aim for a loan term of 48 to 60 months to strike a balance between affordable payments and minimizing interest costs.

Don't Overspend: How Prioritising Needs Can Save You Money When Buying a Car

When shopping for a car, it's essential to prioritise your needs over your wants. Consider your daily commute, family size, and lifestyle. Choose a car that meets your practical requirements without excessive luxury features that can drive up the price.

Maximising Your Car's Value: The Importance of Accounting for Depreciation

Cars are assets that depreciate over time, so it's essential to be mindful of a cars depreciation rate when setting your budget.

Studies have revealed that Australians tend to favour automatic transmission vehicles over manual ones, as well as cars with white, black, red, or silver paint jobs. If you're planning to purchase a car and want to ensure a higher resale value, it's important to consider which vehicles will be most in-demand among future prospective buyers.

Opting for a car with popular features and colours can help you avoid rapid depreciation and give you a better chance of getting a good resale price in the future.

Take Control of Your Car Buying Experience: The Power of Shopping Around and Negotiating

Buying a car is a significant financial decision, and it can be a stressful experience for many people. However, it doesn't have to be. By taking control of the car buying process, you can save money, find the best car for your needs, and ensure a positive purchasing experience. Here are our top tips to help you take control of your car buying experience.

  1. Research: Don't settle for the first car you come across. Do your research on the car models you're interested in and their prices. Look up reviews and ratings to ensure you're getting the best value for your money.

    Consider buying a used or certified pre-owned vehicle to get better value for your money.
  2. Test drive: Take the car for a test drive to ensure it meets your needs and expectations. Pay attention to the car's features and performance.
  3. Be prepared: Before negotiating, know your budget and stick to it.
  4. Know the extras: Understand the additional costs, such as taxes, registration, and insurance, and factor them into your budget. Don't forget to ask about any warranties or maintenance plans.

Determining how much you should spend on a car requires a thorough assessment of your financial situation and needs. By following the 15% rule, creating a realistic budget, and making informed decisions, you can ensure that your car purchase fits within your financial means. Remember that a car is just one aspect of your life, and maintaining a healthy overall financial picture should always be a priority. Make your car purchase a responsible and well-informed choice that aligns with your long-term financial goals.

Applying for a car loan? The team at Finance King are here to help

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