How much should you spend on a new car?
Learn the effective rule for buying cars in your price range.
Key takeaways
- Aim to spend no more than 10–15% of your annual income on a car to keep your purchase affordable and leave room for running costs.
- If you need to finance your purchase, compare secured and unsecured car loans to find the best rate and repayment flexibility for your budget.
- And match your insurance to your car's value: third party cover is often enough for cheaper cars, while comprehensive insurance suits newer or pricier models.
The amount you should spend a new car largely comes down to your personal situation and tastes. The only wrong answer is anything over 100% of your income, but we're going to say the right answer is 10-15% of your annual income in most cases and anywhere from 15-30% of your income if you're a car enthusiast or get a lot of use and enjoyment out of your car.
Why 10-15%?
- For most income brackets there are cars for sale at this price. By following this rule you can be more confident that you've found an affordable option.
- If you're using a loan to buy a car, sticking to this rule can stop you from wasting money by borrowing more than you need.
- Between insurance, petrol, maintenance and repairs, the ongoing costs of owning a car add up quickly. This leaves you a buffer to afford these.
- Sticking to this price range rather than going higher may help you to avoid rental plans and save considerable amounts of money in the long run.
- Car value can depreciate rapidly. Think of your car as a useful tool, not as an investment.
How much should I spend on a new car by salary
By deciding ahead of time that you will not spend more than 15% of your yearly income on a car, you will have a clear price in mind.
| Annual income | How much you should spend on a car (15%) |
|---|---|
| $20,000 | $3,000 |
| $40,000 | $6,000 |
| $60,000 | $9,000 |
| $80,000 | $12,000 |
| $100,000 | $15,000 |
| $150,000 | $22,500 |
| $200,000 | $30,000 |
Buying a car for under $3,000
- At any given time, there are thousands of used cars being sold for under $3,000 in Australia. Check eBay, GumTree, the local classifieds, used car dealerships and online auctions.
- Know what to look for in a used car. By following a checklist and knowing what to be aware of, you can avoid traps and pitfalls.
- Consider financing rather than renting if it can help you get a more reliable or efficient vehicle, or if you're caught short and urgently need a new car to get to work. Specialised used car loans let you borrow as little as $1,000 with fixed interest rates starting at 5.69% p.a.
- You may not want comprehensive car insurance for a vehicle under $3,000, even if you're the kind of person who gives your car a name and emotionally bonds with it. Consider sticking to third party property damage only. This is one of the cheapest types of car insurance, but it still offers important protection in the form of $20 million of legal liability cover.
"While looking for a car insurance I learned that you should only spend between 10-15% of your income on a new car (this surprised me). And you should base your insurance on the cost of the car. If the car is under 10K you should stick to third party insurance."
Buying a car for under $15,000
- You can find recent-model used cars online for $10,000 or less.
- Car loans are available for higher amounts, but you'll be awarded with a cheaper rate if you can use your car as security.
- Vehicle auctions are popular among car dealers. This is where a lot of them go to pick up a bargain for resale at a higher price. Learn about car auction etiquette and you can beat them to the punch, picking up ex-fleet and government vehicles at a fraction of their value.
- You might be able to save money by opting for a more recent or popular model, even if it costs a little bit more. The availability of spare parts can keep repair, maintenance and car insurance costs down.
- Comprehensive car insurance may not deliver value for money in this price range. Consider third party property damage insurance for important but inexpensive cover, or third party fire and theft insurance, which covers legal liability as well as theft and fire damage, while still being relatively affordable.
Buying a car for $15,000 or more
- Used vehicles can be a good choice for various car types, including those in higher price ranges. Look around and you might find current-model cars in almost pristine condition for half of what they would cost brand new.
- Vehicles in this price range and above can be loaded with additional features and electronics. If you want to save money, look for the features that deliver value and safety, rather than the luxuries, cosmetic features or conveniences.
- If you're planning on financing your vehicle, it's usually worth using your car as security when taking out a higher loan amount. Used cars can still be used as security, but you might find that new car loans have a cheaper rate.
- If you want to get a lot of use out of your car and plan on treating it like your own child, comprehensive car insurance can deliver a high level of protection.
- If you're choosing a car that's loaded with electronics and advanced systems, remember that comprehensive car insurance will typically be needed to cover them. This is considerably more expensive than third party only car insurance, but also more useful. Compare a number of different policies to find the right cover for your car.
I'll need to borrow money. What are my car financing options?
Before you start comparing car loans, it helps to know what you're working with. This repayment calculator lets you compare loans by how much they will actually cost you all up, in real money. Simply fill in the loan amount, the loan term, the interest rate and the repayment frequency to see how much different loans actually cost, in real terms.
How to find a car loan that works for you
To find the right car loan, try following the guides below. Remember that everyone's financial situation is different and that you should compare all options critically before deciding on one loan. The following are just suggested guides and may not be right for everyone.
You can use this guide for low rate car loans or this one for used car loans as a baseline for new or used car financing.
- Are you an Uber driver, or planning to become one? Check out Uber car loans to see if they can compete with the options above.
- Have you seen a dealer offering a 0% car loan? Here's what you should know to decide whether it's right for you.
- Want to save money by putting your future car up as collateral? Compare secured car loans.
- Want the safety of an unsecured loan? Compare some options here.
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