How Much Should You Spend on a Car?

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Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

, Content Manager - July 22, 2020

There are some general car spending rules that can help give you some guidance if you want to avoid overextending yourself, and set your auto loan up for success. This is especially important if you're dealing with credit-challenges.

3 Common Car Spending Rules

Your income and your credit score make up a lot of your car buying power, so rules and budgets aren’t a one-size-fits-all deal. Everyone’s situation is different, and your car buying budget is also dependent on how much you’re willing to spend.

If you’re not sure where to start, we’ve gathered three different spending rules that can help steer the way as to how much you should spend on your next auto loan:

  • 36% rule – The 36% rule states that you shouldn’t spend more than 36% of your income on all of your loan payments. If you have no other debts (such as a mortgage, student loans, etc.), you shouldn’t spend more than 15% of your income on car expenses.
  • Half your salaryThe 50% salary rule says you shouldn’t buy a vehicle that’s over half of your yearly salary. If you make $40,000 a year, don’t buy a car for $25,000 – you may end up in over your head, since there are lots of other vehicle-related costs.
  • 20/4/10 ruleThe 20/4/10 rule goes like this: put 20% of the car’s selling price down, have a loan term of no more than four years, and your monthly car expenses (payment, insurance, etc.) shouldn’t exceed more than 10% of your gross monthly income.

In addition to these general guidelines, it’s a good idea to put some money down on your loan. Not only does this lower the amount you’re financing, it lowers your monthly payment and interest charges over the course of your loan. As a good rule of thumb, it’s generally recommended that you put at least 10% down on a used vehicle, and 20% down on a new car.

Breakdown of the Spending Rules

Overall, these rules seem to agree that you shouldn’t spend more than 15% of your monthly income on your car payment and other monthly vehicle expenses, such as gas, auto insurance, and regular maintenance.

For the 36% rule, you sometimes may not have a choice but to pay more than that on all your monthly loan payments. If you have a high mortgage or a lot of student loans, you may need to spend over this 36% limit – and you still may need a car!

However, the “half your salary” rule is generally good advice for most anyone, regardless of your credit situation. If you purchase a vehicle that takes up half of your monthly income, the other car-related expenses are probably going to make your monthly budget tight. This could make a loan hard to manage, which may put you at risk for default. Just because you can technically afford that super expensive vehicle doesn’t mean it’s a good idea – remember that loan terms last for years at a time.

Speaking of loan terms, the 20/4/10 rule recommends having a four-year loan term, but this go-to standard in loan terms has changed in recent years. According to an Experian’s State of the Automotive Finance Market report covering the first quarter of 2020, the average loan term falls between 60 to 72 months, or five to six years.

A loan term of four years is becoming somewhat uncommon, due to the rising prices of cars. That being said, you should still aim for the shortest loan term you can afford. The cost of an auto loan is more than the price in the window; don’t forget about interest charges over the course of your loan as well as taxes and fees – all of which raise the cost of a car loan. The longer you owe on the auto loan, the more you’re going to pay the lender.

Other Helpful Budgeting Guidelines

While there are many important aspects of a car loan to consider, such as what kind of vehicle you want and how much of a down payment you have, there’s a calculation that shouldn’t be overlooked: your debt to income ratio, or DTI ratio.

Most auto lenders won’t consider you for a car loan if your DTI ratio is over 45% to 50% (with a vehicle and insurance payment factored in). If you’re already spending over 36% on all your other loan payments, an expensive auto loan could put you over the 50% mark, and you may not qualify for financing.

Before you apply with a lender, add up your monthly debt payments (loans, rent or mortgage, credit card payments, etc.) and then divide that total by your monthly gross income and convert into a percentage.


  • Monthly expenses: $850
  • Monthly gross earned income: $2,500
  • DTI ratio: 34%

Now, when you apply with an auto lender and they’re determining if you're eligible for a car loan, they typically add $100 for your insurance payment on top of your other expenses. They then look at where your DTI lands, and they then determine if you have enough available income to pay for an auto loan.

In the above example, with a $100 insurance payment factored in, the buyer’s DTI is 38%. They are below the 45% to the 50% mark, which means they may qualify for a car loan.

This ratio is not only helpful for lenders, but for you as well, since you can use this to determine how much of a vehicle you can afford.

Begin Car Shopping

Now that you have some common rules on how much you should spend on your auto loan, you can start looking for a dealership to work with, and what makes or models you may want. You can do both here at CarsDirect. We have used and new car prices, so you can compare vehicle listings near you.

We also match borrowers of all credit situations, including bad credit, to dealers with special financing options. To get connected to a dealership in your area that has the resources to work with unique situations, fill out our free auto loan request form.


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, Content Manager

Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

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