How Much Should You Spend on Your First Car?
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
Your first car doesn’t have to be a clunker.
With a decent budget and willingness to take on a car loan, along with some research on the best car that fits your budget and understanding the costs that come with owning a car, you should be able to find a good, dependable first car that can last years.
Jump To
How much should you budget for a car?
Your budget is your budget. Meaning you know better than anyone how much you can afford for your first car.
But some guidelines can make determining how much to spend easier so that you’re not going over budget or even under so you can save a few bucks but end up with a clunker.
If you don’t have a budget for a car purchase, we’ll help you figure one out. We’ll also go over:
- Car ownership costs
- Why you shouldn’t listen to a car salesperson
- How to improve your budget
- Benefits of financing over cash
- Ways to save money on a car
- The best first cars to buy
Use Bankrate to Save Money on Car Insurance
- Save up to $610 Per Year on Car Insurance
- See Quotes in Minutes
- Compare 30+ Insurance Providers
- Switch Online or Speak to a Licensed Agent
- No Fees to Check Rates, Ever
How much an average car costs
First, it’s worth knowing how much you should expect to pay for a car. It may be well beyond your budget, and cause you to consider riding your bike or taking public transportation to work. At least your bank account will thank you for such a decision.
The average new car costs $45,000, according to September 2021 data from Kelley Blue Book and Cox Automotive. The average cost of a used car was $25,410 in the second quarter of 2021, according to Edmunds.
Either way, a car purchase requires a substantial amount of money, requiring a car loan and a monthly payment, a hefty down payment, or a lot of cash in your pocket.
Cars don’t gain value, so don’t think of this as an investment. According to Carfax, the value of a new vehicle drops about 20% in the first year of ownership and loses about 15% of its value each year for the next four years.
A better budget for your first car
However, those costs are for an average car. Your first car will likely be less than average as far as quality, meaning it may require some minor repairs or not look new and shiny anymore. A used car with a lot of mileage can be a bargain if you get it inspected by a mechanic first.
A dependable first car can cost between $5,000 and $10,000. That doesn’t include other costs such as car insurance, oil changes, and other types of maintenance and repairs. If it fits your budget, a new car or used car with monthly payments you can afford on a car loan will likely get you in a better car.
A car cheaper than $5,000 may be unreliable, while cars at more than $10,000 are usually too expensive for first-time buyers.
How to determine your budget
We’ll go over a few ways to determine how much you should spend on your first car, but the first thing to remember is that the best budget for your first car is what you can afford.
Just as you don’t want to spend too much on rent, spending too much on a car can leave you in debt and hurt your finances in many other ways. Miss a few car loan payments that you can’t afford, and your car could be repossessed, and your credit score will likely fall. That will make it harder to get loans in the future.
Here are some ways to figure out a budget for your first car:
No more than 20% of your take-home pay
Don’t spend more than 20% of your take-home pay, or up to 15% of your gross pay, on buying a car. Take-home pay is probably easier to find because it’s the amount you get to keep from each paycheck.
According to this affordability rule, take home $2,500 each month, and your monthly car payment can be up to $500.
The more money you earn, the better vehicle you can afford. Some experts lower this figure to 15% of your take-home pay, which may make more sense if your rent is high or you have other expenses that take up a lot of your income.
At least a 20% down payment
If you don’t have enough cash to buy a car outright and plan to get a car loan, then try to put at least a 20% down payment in to start the auto loan.
A $10,000 car should have at least a $2,000 down payment. This will lower your a little each month, which could be the difference between qualifying for a loan or not.
4 years of car loan payments
Auto loans used to last no more than four years. But as car prices have gone up, so have loan terms.
You can now extend a car loan for 96 months. That’s eight years. Twice the amount of time as many car loans used to be for.
When buying your first car, you don’t want to be tied down to more than four years of car payments. And having more than four years repaying an auto loan will drag down more than your bank account if the used car you’re still financing isn’t running anymore. You may buy another car, forcing you to finance two cars while only one of them is working.
A longer loan term makes a car look more affordable because the monthly payments will be cheaper, but you’ll end up paying more in interest with a longer loan term.
Try your car budget out first
Before picking out a car and signing the loan documents, try out your car budget for a few months and make the payments to yourself.
For example, if you’ve determined that $500 is 20% of your take-home pay, then automatically deposit that amount to your savings account and don’t touch it. Also put aside a 20% down payment if you can, and don’t touch it.
If you find after a few months that your normal budget isn’t affected by these expenses, then you can either buy a car immediately or keep the payments to yourself up for a few months more to come up with a bigger down payment.
Who knows, you may like living without a car after a few months that you decide to do without one for years.
Improving your budget
Another way to come up with your car-buying budget is to improve it. A raise at work would be nice, but you might have better expenses to put that money toward.
And we’re not talking about cutting your household budget so you can afford a car, though that can be an option if owning a car is a high priority.
Without spending more than what you can safely afford, such as 15-20% of your take-home pay, you can add money to your budget by making a car more affordable. This includes negotiating a good price for the car you want, getting the best financing deal before you walk into a dealership, and finding the best incentives car manufacturers are offering.
Other options include:
Leasing. Leasing a car is cheaper than buying because you’re only paying for depreciation during the length of the contract, such as for three years. You don’t own the car, but the monthly payments are usually much lower with a lease.
Certified pre-owned. Used cars are usually cheaper than new ones, but used cars don’t often come with warranty coverage. Something in between is a factory-certified used car, called CPOs. They’re used cars that are a few years old, have low mileage, no accidents, and come with a warranty.
Bigger down payment. A 20% down payment is a good way to qualify for an auto loan, but a bigger down payment makes qualifying easier and lowers the interest costs and time you need to pay off the loan.
Raise your credit score. Check your credit score before applying for a car loan. If it’s not so good, you may be charged a higher interest rate on loan. Even if you have a good credit score, taking a few months to move it up to excellent can qualify you for the best loan rates.
Use Experian To Get Your Free Credit Score
- Free Credit Score, Credit Report & Identity Protection
- Simple & Secure. Sign Up In Less Than 90 Seconds
Don’t let the car salesperson know your budget
One of the first things a car salesperson will do when you walk into a car dealership is asking what your budget is and how much of a monthly payment you’re looking for. Don’t fall for it. Don’t answer these questions, which are lousy ways to determine how much you should spend on a car, especially your first car when your budget is likely low.
A skilled salesperson and the dealership’s finance department can develop many ways to add costs to a car loan that you may not recognize. We won’t discuss how to negotiate a car purchase but telling a salesperson what your monthly budget is won’t help you get a deal.
Instead, you should first figure out how much you want to pay at home, what you can afford, and what reasonable loan length you want. Remember that a long car loan doesn’t end if the car breaks down or is totaled in an accident. There are also other car ownership costs to include in your budget, which we’ll get to soon.
Consider financing over cash
Buying anything with cash is almost always cheaper than paying with credit. A credit card won’t be more affordable than paying cash, but if you pay the credit card bill off completely each month and thus don’t pay interest charges, then a rewards credit card can give you free rewards such as miles, hotel stays, and cash.
Buying a car entirely with cash means you own the car immediately. You don’t have monthly payments or pay interest on a car loan. This is a smart way to buy your first car if you can afford it.
However, you may want to consider financing if you can easily afford the monthly payments and want a newer or better vehicle. You’re paying more than the sticker price by paying interest on the loan, but you’ll likely be able to buy a newer car.
Other car ownership costs
A car’s price is just the first of many costs you’ll have when buying and owning a car. Some may negotiate or shop for better deals, but you should add them to your annual costs.
These costs are usually added to the 20% in your budget to buy the car. If they make car ownership too expensive, then you may want to cut your purchasing budget to 15% of your take-home pay.
Car insurance
Car insurance isn’t cheap. Your insurance costs can easily be $100 to $200 per month.
Our review of the best cheap car insurance companies found annual rates for drivers in their 30's ranging from $963 to $1,942. Drivers in their 20s can find average annual premiums from $1,261 to $2,686, as seen in Best Car Insurance for Young Drivers.
Get in an accident, file a claim, or have risky behaviors, and you could face much higher insurance rates. Since your first car is probably the first time you’ll need auto insurance as a young driver, you’ll likely pay more than you will in your 30s and beyond.
Use Bankrate to Save Money on Car Insurance
- Save up to $610 Per Year on Car Insurance
- See Quotes in Minutes
- Compare 30+ Insurance Providers
- Switch Online or Speak to a Licensed Agent
- No Fees to Check Rates, Ever
Taxes
Sales tax rates vary by state and county. In the county where I live in California, the sales tax rate is 10%, which is a big chunk to pay when buying a car. For a $10,000 car, that’s $1,000 in taxes.
This tax must be paid to register your car in your state. If you’re buying a used car, either from an individual or car dealership, you’ll need a bill of sale to register your vehicle.
Gas
Buying gas is a no-brainer for most car owners, but it’s a cost you may not consider when buying your first car. A fuel-efficient car or an electric car can be cheaper to own than a gas guzzler.
According to AAA, the national average price for a gallon of gas was $3.41 on Nov. 9, 2021, up from $2.11 a year earlier.
Maintenance and repairs
Your first car may not need repairs now, but it will eventually. At the very least, your car will need oil changes twice a year, and the tread on tires wears down over time.
Used cars can be more expensive to maintain than new cars as things break or wear out over time.
An annual auto survey by Consumer Reports found that a 5-year-old 2016 model costs an average of $205 per year to maintain and repair. A 10-year-old 2011 model costs $430 over the same time.
Saving money on your first car
One of the main goals in buying your first car is to get a reliable car that you can afford. Chances are your finances will improve over the years, and someday you’ll be able to afford the car of your dreams.
Until then, there are several ways to save on your first car. The most obvious choice is to buy used. We’ve already discussed certified pre-owned cars, but used cars bought from private sellers can be cheaper. Just make sure to have a mechanic check it out before you buy it.
Smaller cars, engines
Smaller cars and smaller engines are cheaper to run. They burn less fuel than large vehicles and can be cheaper to maintain. Small cars aren’t, however, always cheaper to insure. They can be damaged more in accidents than larger cars, and can be more costly to fix.
Hybrids and electric cars
Hybrid and electric cars can be more expensive to buy than gas-powered cars, but they can be much cheaper to maintain and run.
You won’t have to buy as much gas, or any at all, and electricity is much cheaper than gas as a way to run a car.
Electric cars don’t need oil changes and much fewer moving parts require maintenance. However, if a part on an electric car breaks, it will likely be more expensive to fix or replace.
The best first cars to buy
A car isn’t an investment, but some cars are more reliable than others and hold their value better. This will help when you decide to sell your car, which you likely will at some point.
Here are some of the best cars for first-time buyers that are reliable and can hold their value, in no specific order:
Honda Civic 2001-present
For around $5,000, you should be able to find a Honda Civic that can last for 250,000 miles or more if proper maintenance is done. Used and new parts are easy to find at affordable prices.
2013 Chevy Volt
U.S. News & World Report listed the 2013 Chevy Volt as one of its top used cars, costing an average of $10,082. It’s a plug-in hybrid with an all-electric range of 38 miles.
Toyota Prius
The Toyota Prius is one of the most fuel-efficient cars on the road at 58 mpg in the city and 53 mpg on the highway. It’s a top safety pick by the Insurance Institute for Highway Safety, and U.S. News listed the 2017 Prius as the best hybrid car for the money, costing $14,830 to $24,213.
2012 Ford Fusion
The average cost of a 2012 Ford Fusion is $7,509. It’s a great midsize car that looks nice and has superior handling.
Pros and cons
Pros
- Ideally, you should budget for up to 20% of your take-home pay for your first car. This will keep room in your budget for other expenses and shouldn’t cause a financial burden.
- Buying a reliable, used car for cash means you won’t have to pay interest on a loan and own the car outright.
- Electric cars cost more than gas-powered cars, but electric cars cost less to maintain over time because they have fewer moving parts in the engine.
Cons
- Small cars are common first cars because they’re cheaper than large ones. However, small cars can cost more to insure and get into accidents more often, and are more expensive to fix.
- Insurance, maintenance, and other costs of owning a car make car ownership more costly than the price of a car.
- New cars are usually more expensive than used ones, so it may make financial sense to make your first car a used one without many of the technological advances that new cars have.
Use Bankrate to Save Money on Car Insurance
- Save up to $610 Per Year on Car Insurance
- See Quotes in Minutes
- Compare 30+ Insurance Providers
- Switch Online or Speak to a Licensed Agent
- No Fees to Check Rates, Ever
The bottom line
Shopping for your first car can be nerve-racking. The biggest worry can be deciding what you can afford. With a car-buying budget that fits your overall budget needs, you should be able to buy a good, reliable car that doesn’t put you on the brink of financial ruin.
Any car you buy today will have to be replaced at some point, so try not to fret if your first car isn’t your ideal car. That can come years from now when your budget will likely grow, and you can afford the car of your dreams.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Writer
Aaron Crowe is a freelance journalist who specializes in personal finance writing and editing. He has worked at newspapers, where he won a Pulitzer Prize, and has written for numerous online publications. These include AOL, US News & World Report, WiseBread, Bankrate, AARP, and many websites focusing on housing, credit and insurance. He lives in California with his wife and daughter.
Share this article
