How much should you spend on a car?

Working out how much you should budget when purchasing a car often depends largely on your personal expectations. This could vary depending on whether you want a new or used car, how much you want to pay, and how much you can afford in your financial situation. It really comes down to what works for you and your needs, so everyone’s best choice will be different. It’s generally advisable to shortlist cars you can comfortably afford based on your salary or income - we all love a little fantasy, but it’s sensible not to dream too big. 

One way to calculate how much money you can spend on a car is to budget a percentage of your income (say 10% to 20%) for the purchase. A benchmark used by some experts is to look at cars priced between 10% and 15% of your household income. If you have your heart set on your dream car, you could consider going as high as 30%, depending on what you’re looking for. You could also include additional upfront costs, such as registration and insurance, in your calculations. This way, you’re not stretching your finances too far. 

For example, if you earn $6000 a month (after tax), and spend approximately $3500 on expenses, such as rent, utilities and food, this leaves you with roughly $2500 a month you could potentially put towards your car purchase. However, it may not be wise to end each month with no money, so you could perhaps budget around $1200 a month, which is 20% of your monthly income. This hypothetical example is for illustrative purposes only – consider your own personal financial situation before buying a car.

Once you’ve finalised a budget, you can either save up the money to purchase a car, or look for a car loan with affordable repayments according to your income and financial situation. You can use RateCity’s car loan comparison calculator to determine the repayments on different car loans. You could also apply for a car loan pre-approval with some lenders. 

With the financing in place, it’s time to check cars within your range. From hatchbacks to large SUVs, the car market offers a wide array of models for you to choose from. If you want to keep your costs low, you could opt for smaller new cars starting from under $18,000.

One of the first decisions you must make when buying a car is whether you are buying a brand new car, or a 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, so if there was a mechanical problem within the warranty period, it can be fixed at no cost to you. Your car will also have the latest technology, so you shouldn’t feel the need to upgrade or add anything. 

Being brand new also means that there is no wear on the car, which should help to minimise the upkeep costs in the first few years. Some new cars will come with free post-purchase servicing, which could also assist with upkeep costs. You may also get to customise the vehicle to your tastes, by choosing the 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, remember that there is typically 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 the same amount of money back. You may need to consider if a new car’s benefits are 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 - may also be slower than that of a new car.  Most cars experience their sharpest depreciation in the first three years, so buying a car over three years old means you shouldn’t suffer such a sharp drop in value and future resale price.

But there are other considerations beyond the upfront costs when purchasing a used or second-hand car. You may need to budget for higher maintenance costs and more expensive car insurance. 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. 

If you’re buying a used car, check for the warranty and get the car thoroughly inspected, especially the safety features. You need to check the personal property securities register (PPSR) and read the contract before you sign it. 

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 be able to take care of your car.

On top of the car’s purchase price, you may need to budget for some extra upfront costs, such as stamp duty in your state or territory. And as well as the one-time expense of the car’s drive-away price, there are also ongoing costs to consider, such as: 

• Fuel 
• Registration 
• Maintenance and repairs 
• Car loan repayments
• Risk of ring interest rates on car loans 
• Compulsory insurance
• Comprehensive insurance (if applicable) 
• Roadside assistance, and more. 

You may want to keep these costs in mind when making a purchase decision.

Some Australians purchase a car outright, while others may take out a car loan.

You can choose to buy your car outright if you have the money available to spend. If you don’t yet have the necessary cash available, you could make a savings plan so you can one day pay for your car and drive away, without having to budget for loan application fees or interest charges.

Getting a car loan to pay for your new car could help you buy a car sooner, without having to save. But in the long run, you’ll pay more if you use a loan to purchase the car, rather than your own money. There are also multiple types of car loans, which means you need to choose the right loan type for your circumstances.

You can compare car loans by looking at the key components of each loan, and choose which option best suits your requirements. Some of the key factors you’ll want to consider include:

• Interest rates and fees 
• Fixed or variable rates
• Secured vs. unsecured
• Extra features, such as a redraw facility

When you compare car loans, it’s important that you compare apples with apples. This is where RateCity’s comparison tables come in, allowing you to filter down and view a range of car loan options side by side. You will be able to view rates, features and potential repayments to help you create a short list of possible financing options.