RateCity.com.au
  1. Home
  2. Car Loans
  3. Articles
  4. How much should I spend on a car?

How much should I spend on a car?

Vidhu Bajaj avatar
Vidhu Bajaj
- 6 min read
How much should I spend on a car?

How much money you’ll need to buy a car depends on your personal expectations and financial situation. Before you start looking at different options, it’s a good idea to check your budget and calculate how much you can afford to spend on the purchase. This figure will typically depend on your salary, monthly expenses, and other factors, like your savings and investment goals. Once you have a ballpark figure, you can consider different car models and try to find a vehicle that fits your budget and meets all your requirements.

How much money do I need to buy a car?

Working out how much you should budget for when purchasing a car often depends largely on your personal expectations. This could be whether you want a new or used car, how much you want to pay and how much you can afford, based on your financial situation. It’s best you only shortlist and look at cars you can afford based on your salary or income - we all love a little fantasy but it’s sensible not to dream too big.  

A smart way to calculate how much money you can spend on a car is to budget 10-20 per cent of your income for the purchase. You could be financially savvy and also include additional upfront costs, such as registration and insurance into your calculations. This way, you’re not stretching your finances too far. For example, if you earn $6,000 a month (after tax), you may spend approximately $3,500 on expenses, such as rent, utilities and food. This leaves you with roughly $2,500 a month you can possibly put towards your car purchase. However, it wouldn’t be wise to end each month with no money, so perhaps budget around $1,200 a month, which is 20% of your monthly income. 

With this calculation, you can either save up the funds to purchase a car or research and find a car loan where the repayments are no more than $1,200 a month. You can use RateCity’s car loan comparison calculator to  determine the repayments on different car loans.

Should you buy a used car or a new car?

One of the first decisions you must make when buying a car is whether you are buying a new, used, or second-hand car.

A brand-new car is often more expensive than a used or second-hand car, but it does come with some perks. For example, a new car often comes with a full warranty, which means that if you face a mechanical problem within the warranty period, it will be fixed at no cost to you. Your car will also have the latest technology, so you won’t feel the urge to upgrade or add anything. 

Being brand new also means that there is no wear on the car, which will minimise the upkeep costs in the first few years. Some new cars will come with free post-purchase servicing, which will also assist with upkeep costs. You will also get the enjoyment of customising the vehicle to your tastes, like choosing paint colour, engine or transmission type and other features like leather seats, an in-dash GPS or reversing cameras.  

When you’re looking at the pros and cons of a new car vs a used or second-hand one, you need to consider that there is a higher upfront cost with a new car, and its value will instantly depreciate when you drive it off the lot. This will mean that when you go to resell or trade in the vehicle, you’re not going to get your money back and need to consider if it’s worth the additional costs.

Choosing to purchase a used car means you’ll likely save a considerable amount on the purchase price, compared to buying a new vehicle. The depreciation rate - the time it takes to reduce in value - will also be slower than that of a new car.  Most cars experience their sharpest depreciation in the first three years.  Buying a car over three years old will mean you won’t suffer such a sharp drop in value and, therefore, resale price.  

There are, however, other considerations beyond the upfront costs when purchasing a used or second-hand car. You’ll have higher maintenance costs, likely more expensive insurance and a lower resale value.  You could also run the risk of having to deal with outdated technology, difficulty in getting spare or replacement parts, and not having up-to-date safety features.

Ultimately, deciding between purchasing a brand new or used car comes down to your budget, how much you want all the latest bells and whistles and how well you’ll take care of it.

Should you buy outright or take out a car loan?

Deciding to buy your car outright really comes down to if you have the money. You could save your money and then pay for your car and drive away. This will eliminate application fees or interest that comes with a loan, but a car loan may be the smarter option if you need to purchase your car sooner.

Getting a car loan to pay for your new car will help you get the car sooner if you don’t already have the cash. Ensure you research which car loan is right for your purchase.  In some cases, it might be better to opt for a personal loan rather than a car loan if the interest rates are more competitive. You need to remember that in the long run, you’ll pay more if you use a loan to purchase the car, rather than your own money.

What other costs should you budget for?

Besides the purchase price for the actual vehicle, you need to remember that additional costs include registration, insurance, fuel and ongoing maintenance costs. 

You may wonder how much you spend on car maintenance per year. This will depend on the car’s age, how much you use it and what you use it for. You should consider all these costs when budgeting for a new car.

Car insurance is vital, but you can choose what level of insurance you want to buy. Without insurance, you could incur huge expenses if you have an accident and subsequent repairs for your car and any others involved.

Registering your car is a legal requirement in Australia before you can drive the car. With a brand new car, you’ll need to be fully registered to drive it. If you purchase a used or second-hand car, you’ll likely only need to change the name on the registration to yours once you’ve made the purchase.

For more details on the added costs when buying a car, you could refer to the real cost of buying a car.

ratecity-newsletter

Subscribe to our newsletter

Compare car loans in Australia

Product database updated 25 Jun, 2024

This article was reviewed by Personal Finance Editor Peter Terlato before it was published as part of RateCity's Fact Check process.