A car is the second biggest purchase decision after a house. Therefore, determining the purchase budget in advance will help you choose the right vehicle. Calculating your new car budget is extremely important as it helps you to shortlist potential options.
However, before deciding on a budget for buying a new car, the obvious question in your mind will be how much to spend on a car. The answer to this question depends on various factors such as your requirements, financial situation, what features you are looking for in a car, etc. In the following sections, factors with a detailed explanation are mentioned which will solve the query of how much should you spend on a car.
Points to consider when calculating your car budget
As previously mentioned, there are several factors to consider before deciding how much to spend on a car. Here are the points you should keep in mind before budgeting for a new car purchase.
Remember the rule of thumb: Always remember the rule of thumb to not spend more than half of your annual income on a new car. Remember to always factor in the on-the-road price of the car when calculating your budget, as this is the final price you’ll pay to drive your vehicle off the showroom floor. Another rule to consider if you are buying a car on credit is 20/4/10. Confusing? Let’s simplify the numbers. When buying a car on credit, deposit 20% of the car price. Opt for a loan maturity that is no longer than four years. And finally keep your monthly payments (EMI, maintenance, etc) at 10% of your salary.
Choose the right car size: Choose the right car according to your use. Always choose the size of your car based on two factors: family size and use. A hatchback is suitable for a family of four. However, if there are teenagers or adults, a sedan is the ideal choice. Similarly, a joint family may need a MUV (Multi Utility Vehicle). To summarize, don’t choose a bigger car than required, it will stretch the budget unnecessarily.
Affordability vs. Luxury: Before deciding on a car brand, make sure you consider factors like your financial situation. Just because a luxury car offers top performance and comfort doesn’t mean you go into it blindly. Always choose a brand according to your budget, even if you have to settle for an affordable brand. Spending too much on a luxury car can lead to financial instability in the future.
Consider negative compounding: A car is a depreciating asset. When you take your new car out of the showroom, its value will drop by 5%. After five years, the value will depreciate to less than half the price you paid. So it is not ideal to spend more than necessary. The higher the loan amount, the higher the interest you pay. So be wise when setting your car budget.
Cost of ownership: It’s not just the car’s on-the-road price that matters when deciding your car budget. You should also factor in the cost of ownership. When calculating your car budget, consider factors such as fuel economy, service/parts costs, maintenance costs, car insurance premiums, etc. At first, the cost of ownership may seem insignificant, but it can be a financial burden if you end up miscalculating your budget. So next time remember these points if you wonder “how much should I spend on a car”
A car is a complex machine and the know-how of the technical specifications will help you in making budget decisions. Research the technical aspects of the vehicle to calculate the budget. Questions such as petrol or diesel car, manual or automatic or how much power the engine produces can be answered if you do a quick survey of the car’s specifications. With an exhaustive list of automotive websites, you can easily search for the technical specifications of a car online. You can also read/watch expert reviews of the vehicles you have selected. It will be useful for you to reset the vehicle.