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How much should you spend on a car?

Vidhu Bajaj avatar
Vidhu Bajaj
- 7 min read
How much should you spend on a car?

Purchasing a vehicle is a significant process, and your budget arguably plays the largest role in this decision. 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.

Calculating your next car purchase budget

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.

Some experts recommend trying to keep the value of the car between 10-15% of your income. However, your dream car could cost you anywhere from 30% onwards, depending on what you’re looking for. It really comes down to what works for you and your needs. Everyone will be different in this respect. However, it’s generally advisable to consider shortlisting and looking 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. 

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. 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 you could perhaps budget around $1,200 a month, which is 20% of your monthly income. 

Once you’ve finalised a budget, you can either save up the funds to purchase a car or research and find 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 cars within the range of $13,500-$17,000

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 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, 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 should help to 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 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 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. 

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 take care of it.

What other costs should you budget for?

Remember that the drive-away price of the car is a one-time expense, but there are ongoing costs associated with owning it. This includes: 

You’d want to keep these costs in mind while making a purchase decision. 

How to finance your car purchase

Most people either purchase a car 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. However, getting a car loan to pay for your new car could help you get the car sooner if you don’t already have the cash. 

But remember that in the long run, you’ll pay more if you use a loan to purchase the car, rather than your own money. Moreover, there are multiple types of car loans, which means you need to choose the right loan type for your circumstances. One of the ways to compare car loans is looking at the key components of the 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 
  • Adding 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. 

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Product database updated 22 Jun, 2024

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