How Much Should I Pay for a New Car?

Buying a new car can be exciting, but finding out later that you overpaid can sting. It pays to shop around for the best deal before pulling the trigger on a car purchase or a refinance. 

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So, what should you pay for a new car? While there’s no one-size-fits-all answer, factoring in your budget, the car’s value and current market conditions can help you figure out a fair price range for your next ride. 

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Key takeaways

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• Have a budget in mind before car shopping. Knowing what you can comfortably afford helps you avoid overspending. 
• Aim to spend no more than 10% to 15% of your monthly income on a car loan. 
• Research the car’s current value to learn how much you should pay for a new car and ensure the dealer’s price doesn’t exceed it. Negotiate closer to the car’s invoice price instead of the MSRP.
• Look out for manufacturer rebates or dealer incentives that can lower the final price.

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Budget before you buy

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Knowing how much you should pay for a new car gives you a savings target and helps you prepare to shop around. If you plan to finance your car, consider how much of your monthly income can comfortably go towards a car payment. With this insight, you’ll have an easier time determining if a car fits your budget or if you should choose a less expensive option.

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Follow these tips to budget for your car purchase:

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1. Consider the total: Don’t just consider the down payment and monthly payments when budgeting for a new car. Instead, look at the total cost, which will include registration and dealership fees, taxes, vehicle insurance, refueling and other expenses.
2. Apply the 15% rule: General advice is that your monthly car payment should be under 15% of your monthly income. You could stretch this to 20%, but going higher may strain your finances. 
3. Use a calculator: An auto loan calculator can help you estimate potential monthly payments based on your down payment. The bigger your down payment, the smaller your monthly payments will be. 
4. Leave room for emergencies: Your budget should have some wiggle room for unexpected expenses or financial changes. 

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Determine your monthly payments

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Your lender ultimately decides the car loan amount and monthly payments you qualify for. But you can still estimate what your payments will be based on these factors:

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• Credit score: Lenders offer loan terms based on your credit score. The higher your credit, the better your loan terms could be, such as lower interest rates or more affordable monthly payments. If you don’t have the best credit, it could benefit you to take steps to improve it before buying a new car.
• Interest rate: Lower interest rates lead to lower monthly payments. If your credit is good, you’ll usually be offered lower rates.
• Car price: Pricier cars require bigger loans, leading to higher monthly payments. If you want lower payments, go for a less costly vehicle.
• Down payment: A larger down payment may seem pricey and inconvenient, but it lowers how much you need to borrow and how much you’ll pay monthly to repay it.
• Loan term: The longer your loan term, the smaller your monthly payments will be. However, you’ll pay more in interest over the life of the loan, making the loan more expensive.

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After you estimate your monthly payment and know how much you can afford to pay for a car, you’re ready to shop around. Armed with your budget, you can negotiate a fair price for your desired vehicle and avoid overpaying for a new car.

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Understand how to negotiate price

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Car prices aren’t set in stone, but preparation is key to negotiating. You can prepare by first understanding invoice vs. MSRP pricing. The MSRP (Manufacturer’s Suggested Retail Price) is the sticker price you find on the car. The invoice price, on the other hand, is what the dealer paid for the car. 

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In some cases, the sticker price can be 20% more than the invoice price. You’ll get the best deal by negotiating closer to the invoice price instead of the MSRP. You can discover a car’s invoice price with websites like Kelley Blue Book (KBB) or TrueCar, or by asking the dealer directly.

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You can boost your negotiating power by researching the best times to buy, when dealers are close to deadlines to meet quotas and are more likely to compromise on price to close a sale. 

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Also, check for rebates, cash-back deals or special financing options and make sure the dealer applies them to your purchase. These can lower what you pay for a car without additional haggling. 

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Remember ways to save down the road

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As prepared as you may be to pay for a new car, lenders still may not offer the terms you expect. Not because your credit is bad or you’ve done something wrong, but because the economy and other factors can influence interest rates and lending policies.

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For example, President Trump’s tariffs will likely affect car loans in the U.S. by driving up vehicle prices and increasing monthly payments. Auto lenders have also responded to the tariffs by tightening lending criteria to favor borrowers with the best credit. 

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Fortunately, even with these challenges, there are still ways to lower your monthly payments. You could make a larger down payment to reduce the loan amount you need for the car and, consequently, your monthly payments. Alternatively, delay purchasing a car until you’ve raised your credit score and improved your chances of qualifying for better loan terms.

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If you already bought a car with a high-interest auto loan, you could save money by refinancing – replacing the current loan with one that offers better terms. Compare refinancing offers today with RefiJet.

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FAQs

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Here are answers to some popular questions about what you should pay for a new car:

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How much should I pay to comfortably afford a car?

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For most people, comfortably affording a car means keeping monthly payments between 10% and 15% of their income. However, you may exceed this range if you earn more than enough to easily afford the car of your choice.

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How much down payment should I put down?

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The popular recommendation is to put down 20% for a new car and 10% for a used one. However, you may be able to put down more (or less). A larger down payment reduces the loan amount you need and, consequently, the monthly payments to pay it off. 

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What percentage of my monthly budget should go towards a car payment?

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You can spend 10% to 15% of your monthly budget on car payments, or push it as far as 20% if necessary. This allows room in your budget to cover other necessary expenses and debts. 

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How do I calculate my monthly payment based on the car's price?

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The easiest way to calculate your potential monthly payment based on the car’s price is with an online auto loan calculator. The best ones factor in the car’s price, down payment, loan term and interest rate to give accurate results.

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Can I refinance my auto loan to lower my monthly payment?

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Yes, refinancing can help you lower your monthly payments by replacing your current auto loan with one that offers better terms. However, qualifying for refinancing may be difficult if your credit score or car’s value has significantly dropped since taking the original loan.

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