How Much Income Do I Need to Buy a Car

Coins inside the glass jar

Buying a car can be a big draw on one’s available finances. However, a car can also help to expand your income possibilities. A reliable car can enable you to arrive at work on time every day. In this Car Talk story, we will examine how much money you need to make in order to finance a car. If you had enough in savings already to pay cash for your vehicle, you wouldn’t be reading this.

As important as your income is, your costs are also part of the equation lenders use to determine how much car you can actually afford. We will overview the terms the lenders use, and we will look closely at the cost side so that you can build up your own accurate budget for your future vehicle purchase.

Buying and Owning a Car

When you buy a car, be it new or used, you need money for fuel, money for a down payment, money for insurance, and enough money to pay for the loan you take out. The loan has two parts. First, the interest you will pay on the loan, and second the principal. The principal is the money you owe after the down payment is applied.

You may have noticed we started with fuel costs. That is because with conventional cars your highest cost associated with the vehicle won’t be the car itself, your insurance, or any loan fees. The cost to buy gas will be larger than any of those. If we were advising any buyer in 2022 on which type of car to get we would say, “Start with a car that gets at least 40 MPG.” The list of models that can meet that benchmark is now very, very long and some of them are also the fastest and most reliable vehicles made today.

Understanding Your Budget

Your overall budget is both simple and also detailed. The 30,000-foot view is simple. Your budget is how much you bring in vs. how much you spend. For most of us, estimating our income is easy. Earnings after taxes equal one’s available money to spend. It’s the cost side that most of us often struggle to honestly estimate.

The cost side of your budget will include all aspects of your life. This means everything from your housing, your vehicle’s total cost of ownership, your food and clothing, plus entertainment, medical, and savings allotments. If you are not budgeting now, you should be. In fact, stop reading this and start making a budget. Without a budget, you will often be stressed out when periodic large costs come up. If you have budgeted for this eventuality, you can sit down and say to yourself, “I knew this payment would come, and I have planned accordingly, and can pay it with ease.”

There are many free online resources to help you learn how to start and maintain your budget, like this non-profit organization called Mapping Your Future. There are also a number of apps that can help you track your finances from your smartphone. A simple search online will yield many options for anyone wanting to get their finances on track. Car Talk suggests this step before deciding on financing a car.

How Much to Spend on a Car Based on Monthly Income

How much of your budget should be car-related? Car Talk polled the World Wide Web and created the matrix below for your consideration. Note that these suggested percentages of income are just for the car payment itself. Not the total cost of ownership.

SourceSuggested % Of Income For a Car

The consensus is that you should not have a car payment greater than 15% of your earnings. Those folks at MoneyUnder30 aren’t wrong that you can stretch this. However, the qualifiers may include living at home with parents and not having a rent or mortgage payment.

We will keep the math simple for our readers (and ourselves). Here is a quick chart that lists what 15% of various income levels equates to in terms of a car payment. We included a 10% tax hit. You may pay more or less in taxes depending where on the income scale you land, what your deductions are, and if your state has an income tax.

Hourly PayAnnual Income After 10% TaxMonthly Income After 10% Tax15% Per Month For Car Payment

Our chart above assumes that you work 40 hours each week and are paid for each of the 52 weeks per year.

How Much Down Payment Do I Need To Buy a Car?

The widely accepted answer to how much down payment is needed to buy a car is 20% of the purchase price. So, if you are buying a car that costs $30,000, you need $6,000 as the down payment. However, well-qualified buyers may be able to take advantage of “low money down” offers from manufacturers in some cases. Even leases require an up-front payment in almost all cases.

Actual Cost of Owning a Car

When you buy a car, it’s easy to focus on the cost of the car loan and assume that will be the biggest part of the vehicle’s cost of ownership. This is not true in the case of a vehicle with a conventional engine that uses gasoline. Let’s take a 2022 Ford Ranger 4X4 midsize pickup as an example. The Ranger has an annual fuel cost of $3,600. So, over 15 years of ownership, the Ranger will cost its owner $54,000 in gas. A new Ranger XLT 4X4 has a price of around $36,000. So the gas will cost a lot more than the actual truck will. Per month, the cost of fuel will be about $300.

To find out what the average annual fuel costs for various vehicles are, visit www.FuelEconomy.gov. This site makes it easy to compare models to one another.

Ford does not include maintenance with its trucks. You will need to budget roughly $200 per year in the first 2 or 3 years of ownership, and about $600 in the 4th year. In year 5, you will need tires. So over the coming 5 years or so, the Ranger will cost you about $3,600 in maintenance and repairs if things all go well. That averages to about $60 per month.

Insurance is tricky to nail down, but most people in America pay about $1,600 per year. That averages to about $133 per month. Call your insurance provider to get your cost for insurance. Shop around. The prices can vary considerably.

See Car Talk’s List of Best Insurance Providers here.

If you add up fuel, maintenance, and insurance, the total monthly cost will be about $493. Throw in your registration fees and it is easy to round up to $500 per month. This is the number many do not consider when budgeting for a small 4X4 truck.

Lender Lingo

When you apply for an auto loan, lenders are going to use a pair of terms that those buying a car should fully understand. They are your debt to income (DTI) and payment to income (PTI) ratios. Lenders will have a minimum income level below which they will not lend to you. That could be somewhere between $2,000 and $2,500 per month. As you can see from our chart above, that equates to an hourly wage of roughly $15 per hour.

The DTI and PTI ratios are tools that your lender uses to ensure the loan you take out will fit your overall budget. The DTI ratio compares one’s pre-tax earnings to one’s existing bills. The PTI ratio helps lenders to estimate how much of your available income would be used to pay your monthly auto loan payment along with car insurance. Your lender has a vested interest in making sure you include insurance in your budget since they are the actual title holder.

If you would like to calculate your DTI, Wells Fargo has a handy calculator you can use. PTI calculations are a simple ratio. Divide your monthly loan amount by your total monthly income to get the ratio.

These terms are used by your lender to help determine how much they will lend you for a vehicle purchase. We list them here so that if they come up, you will be better educated about the process and hopefully make a good decision.

Learn more about the Auto Loan industry here.

Finding a Car in Budget

Once you have worked out the borrowing details with a lender, you can start your car search. Whether you are shopping new or used, the internet is your friend here. You can find the price of a car by phoning the dealers who are selling the vehicles in your area, or by using an online shopping site if they offer a final purchase price.

An important tip; Many popular models are now in short supply. Dealers have been adding markups of $5K to $10K on many models. You can no longer rely on “MSRP” as a guide to the prices of new cars.

Read more on How to Buy a Car here.

FAQ

How much income do I need to buy a car?

In order to finance a car, financial experts suggest that you spend no more than 15% of your earnings on the loan.

If I earn $50,000 per year, how much should my monthly car payment be?

Using guidelines suggested by financial experts, we estimate your total payment should be close to $600 if you earn $50K per year.

If I earn $35,000 per year how much of a monthly car payment can I afford?

Using the 15% of earnings rule, your monthly car payment should fall around $450 per month. Remember to factor in gas, maintenance and insurance, if possible.

My auto lender is saying that my DTI is an issue. What does this mean?

Debt to Income (DTI) is a ratio that lenders use to estimate how much of a loan you can add to your monthly budget. The DTI ratio compares one’s pre-tax earnings to one’s existing bills. If your existing bills are too high, adding more debt may be problematic.

How much down payment do I need to finance a car?

The general rule of thumb is 20% of the vehicle’s purchase price.

Editor's note and disclaimer: Car Talk is supported by our fans, readers and listeners. When you click on some of the links on our website, we may receive referral compensation. However, you should know that the recommendations we make are based on our independent editorial review and analyses.