The Car Buyer’s Guide To Finance [2021 Update]

The car buyer's guide to finances showed that 24 percent of car owners wish they had a lower monthly payment, including 26.1 percent of female car owners and 26.5 percent of Millennial car owners. The dire financial situations of everyday American citizens compounded this regret of not negotiating for a lower monthly rate when buying a car, with 33 percent of people living paycheck to paycheck wishing they had a lower monthly car payment.

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A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP®

UPDATED: Mar 23, 2021

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When it comes to acquiring new cars, Americans spend freely: Prices have reached record highs in recent years as buyers opt for larger, well-appointed vehicles. Even used cars are fetching a pretty penny, with price tags nearing $20,000 on average.

If you’re one of many Americans who get a headache thinking about all the details about car buying or are apprehensive setting foot in a dealership, relax. In this car buyer’s guide to finance, we’re going to cover the simple rules about how to buy a car within your budget.

Because, even if a strong economy makes these car purchase prices feasible, there’s no guarantee that they’re fiscally responsible. With dealers eager to max out customers’ budgets, plenty of consumers end up in cars they can’t actually afford.

One common standard of analyzing how much you should spend monthly on car expenses is to spend 20 percent or more of the total car cost on a down payment and 10 percent or less on total monthly car expenses.

This smart car buying guideline is based on the popular 20/4/10 rule proposed by financial experts. This guideline incorporates a vehicle’s sticker price, associated costs, and the length of the financing period to gauge whether a purchase is prudent.

But if car buyers would benefit from adhering to this guideline, how many actually do? For those who exceed these limits, do financial hardships inevitably ensue? We endeavored to find out, surveying more than 1,000 car owners about their car buying decisions.

Comparing their costs to their income, we uncovered the challenges car buyers face when they splurge and stretch their budgets. We’ll look at all these factors and touch on financing a car, car loans, first-time car buyer tips, and that all too dreaded statement: I regret buying a new car.

Of course, buying a car and securing a loan to pay the balance off is just one part of owning a vehicle. Another part is car insurance, which almost all states require. Car insurance cost can vary by state, within urban versus rural areas, or areas with high vehicle theft rates.

Whether you a first-time car buyer or an experienced car owner, if you’re ready to jump right in and get a quote, just plug your ZIP code into our free online quote comparison tool to compare rates from car insurance companies in your area based on your demographics and location.

Now, how do your car expenses stack up to the average American? Keep reading to find out.

Buying a Car: Rule vs. Reality

With an average annual income of $45,205, our respondents would need to spend roughly $377 or less on total car expenses each month to comply with the smart car buying guideline. For our purposes, we combined respondents’ monthly insurance and their car payment to determine total car expenses.

In practice, people tended to spend considerably more, shelling out $434 each month on average. That $57 differential reflects several factors, including the flexible lending practices of car dealerships (for which customers’ fiscal prudence is hardly a top priority).

Another force driving up car ownership costs is the popularity of SUVs: Larger vehicles translate to larger monthly payments.

Interestingly, however, respondents seemed capable of making significant down payments – exceeding the requirements of the smart car buying guideline in many cases.

Indeed, with an average purchase price of $17,491, a 20 percent down payment would be $3,498; respondents surpassed that mark by $1,935 on average.

In many respects, these findings bode well: Putting more cash down up front lowers monthly payments and minimizes borrowing costs. Taken together, however, these findings affirm just how costly car buying can be. Even after making sizable down payments, consumers often end up with hefty monthly bills.

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The Smart Car Buying Guideline

As our results make clear, few car owners actually adhere to the smart car buying guideline. Overall, 69 percent of respondents did not meet that rigorous standard, suggesting those who do possess either high incomes or admirable spending discipline. More than a quarter of baby boomers met the rule’s criteria, however, surpassing Gen Xers and millennials.

Perhaps older Americans have learned fiscal prudence over their lifetime – or simply tend to earn more than their younger counterparts. In another interesting contrast, buyers of new cars were less likely to follow the rule than people who purchased pre-owned vehicles.

How Long To Save Before Buying a Car

If a small portion of car buyers follows the smart car buying guideline, are they more privileged than other shoppers or simply more patient? Our findings indicate that people who follow the guideline save for their purchase over a longer period — and put away far more cash as a result.

On average, our respondents saved for seven months before buying, amassing a lump sum of nearly $6,200. Those who did not follow the guideline saved for just six months, putting away $4,742 on average.

By contrast, people who adhered to the guideline saved for nine months on average, acquiring savings over $9,400. Some might even argue that saving that much cash for a car is unwise: One could put some of that money toward long-term investments or in an emergency fund instead.

Yet, some Americans find large debts so daunting that they avoid them at all costs. Some millennials, for example, are particularly debt-averse, thanks to the lingering impacts of the Great Recession and the specter of student loans. For this demographic and others with concerns about sustainable repayment putting away as much as possible for as long as possible may seem like the safest choice.

Consequences of Car Expenses

For those who exceed smart car buying guideline limits when buying a car, what are the most common financial consequences? 52 percent of those who did not follow the rule said their car expenses made it difficult to save money, whereas just a quarter of rule followers said the same.

Indeed, high car payments may leave little left over for families to build a nest egg: According to one study, merely 4 in 10 Americans could afford an unexpected $1,000 expense. In keeping with this theme, those who didn’t follow the smart car buying guideline were more likely to report that their car expenses threatened their financial security more generally.

A smaller percentage of respondents reported their car payments interfered with necessities. Among people who did not adhere to the smart car buying guideline, for example, 12.3 percent said their car expenses made affording food more difficult.

More often, people who didn’t follow the rule opted to forego nonessentials – or delay long-term financial goals.

More than 39 percent said car expenses interfered with their ability to pay for things they wanted, while 35.1 percent said vehicle costs impeded their ability to invest money. This short-term focus on affording a car can have devastating implications over time: Currently, 30 percent of older Americans have neither a pension nor a retirement savings account.

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Penalties for Missing a Car Payment

When car owners spend beyond the limits of the smart car buying guideline, how often do they find themselves unable to make payments? Around 8 percent of people who did not follow the rule reported missing at least one car payment, whereas just 1.5 percent of rule followers said the same.

While missing a single month won’t immediately result in the repossession of your vehicle, the consequences can be considerable – including a significant drop in your credit score. 

Unfortunately, respondents who reported missed payments have plenty of company: A stunning 7 million Americans are over 90 days late on their car payments. There are consequences of being late on your car payments, just like there are for missing payments on your car insurance policy.

Banks and other lenders often require car buyers to purchase a car insurance policy before extending the loan. Check out our article, “What insurance is needed for a car loan?,” to learn more.

Young people are particularly likely to be delinquent on their loans, with borrowers between the ages of 18-39 frequently falling behind. Experts suggest that these data points reflect growth in risky car loans, as lenders are increasingly willing to cut deals with Americans with poor credit scores. So if you are wondering what credit score is needed to buy a car, the answer is that it varies depending on the lender. 

But delinquencies also reflect the prices of new cars, which have outpaced inflation in recent years. If more borrowers stuck to the smart car buying guideline, it’s safe to assume fewer loans would fall behind.

Car Buying Regret by Demographic

Among those who followed the smart car buying guideline, buyer’s remorse was rare: 9.9 percent wished they’d purchased a less expensive vehicle.

Unfortunately, those who did not adhere to that standard were substantially more likely to regret their purchase, with 30.3 percent wishing they’d bought something less expensive.

Given the challenges we’ve already discussed regarding higher payments, it’s no surprise that some buyers wish they’d practiced more restraint in retrospect. Moreover, buyers with big payments can easily find themselves “upside down,” owing more on the car than it’s currently worth.

The odds of regret decreased with age, with each successive generation more likely to wish they’d bought something cheaper. Women were also more likely than men to regret their choice. Interestingly, those with new cars were more likely than used car owners to wish they’d purchased something with lower payments.

Indeed, many financial experts suggest that buying a new car is a poor investment because its value depreciates immediately upon leaving the lot. If our findings are any indication, buyers of pre-owned vehicles are less likely to regret their decision later.

Prudent Protection: Insuring Your Investment

Car buyers often understand the full ramifications of their purchase only in retrospect. Once a contract is signed and the new car smell fades, owners often find themselves forced to make financial sacrifices.

Breaking the smart car buying guideline won’t doom you to poverty though: Most people don’t adhere to this high standard and find ways to make ends meet.

Part of that means finding a car insurance policy that works for you and your personal financial situation. This is especially true of people buying their first car, as insurance rates may be higher than typical if their driving record is poor.

But if you can confine your purchase to this guideline, you’ll be investing in another valuable commodity — peace of mind on matters of personal finance. No matter how luxurious your ride, no car can supply that kind of comfort.

Whether you’re considering a new car or looking to lower your current expenses, there are many ways to make owning a vehicle more affordable. One key is shopping around for the best insurance, so you can simultaneously protect your ride and keep premiums low.

You can also look for policies that fit your specific needs and payment plans, such as an annual rate payment versus a semi-annual rate payment versus a monthly insurance rate payment.

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Frequently Asked Questions: Tips for Car Buyers

Now that we’ve covered some financial issues facing a car buyer, let’s get to some of your frequently asked questions. In this section, we’ll answer many questions, including:

  • What is a car buyer’s order?
  • What is a good APR for a car loan?
  • What should I look for in a car contract?

And many more. Let’s dive right in.

#1 – What is a car buyer’s order?

A car buyer’s order is also called the Bill of Sale and is the sales contract between the buyer of the car and the seller of the car. For a car buyer, receiving the original or copy of the buyer’s order is critical for registering the car. Any verbal agreements between the buyer and seller must be laid out in writing in the buyer’s order.

#2 – What is the best option for a first-time car buyer?

Often, a first-time car buyer will go for a cheaper, used car rather than a new model due to the cost. If the used car is just a few years old, it will have many technological features as well that can reduce the risk of the driver getting into an accident. These may also lead to discounts on car insurance.

#3 – Is it better to finance a car through a bank or dealership?

What is the most economical way to buy a car? There is no absolute “correct” answer to this question. Much of it depends on your personal circumstances and situation. Some people might get a lower APR with a bank or credit union, while others might get it through first-time car buyer dealerships.

Do car dealers want you to finance? It’s important to note that financing a car through the dealer means they just handle the process — taking your information and submitting it to multiple lenders. Because of this, they may include additional fees that you don’t know about when they present your options. This means they may push for you to finance through them.

#4 – What is a good APR for a car loan?

Car buyers with good credit can often get APRs as low as 5 percent for loans on new cars or 6 percent for loans on used cars. But, like everything else, this varies according to the individual. Some car buyers might have a higher APR while some car buyers may get loans with no APR.

#5 – What documents do I sign when buying a car?

Perhaps the most important document is the Bill of Sale or the car buyer’s order, which should include all the detailed information about the car such as the make, model, VIN, and mileage. What financial information do you need while buying a car? You should also include financial information such as the amount you paid in fees or the value you received by trading in your old car.

#6 – What should I look for in a car contract?

Some things to look for in a car contract include the vehicle sale price, the trade-in value of your old car, the first-time car buyer interest rate and length of your loan rate, the amount financed, and the cost of any add-ons such as extended warranties that you signed up for.

#7 – What should you not say to a car dealer?

When negotiating with a car dealer, there are certain phrases that, if you were to say them, would weaken your negotiating position. Saying, “I need to buy a car today” or “I don’t know that much about cars” are red flags that a salesperson will use to their advantage. Sharing as little information as possible can be a benefit, especially if the salesperson starts trying to rope you in with nefarious and persuasive sales techniques.

#8 – Which month is the best month to buy a car?

According to some experts, October, November, and December are the best months to buy a car because dealerships have sales quotas that they need to meet by the end of the month, quarter, or year. At the end of the year, all of those quotas are in play, meaning the salespersons may not push you as hard as they usually would because they don’t want to risk losing a sale.

#9 – Do car dealers call your employer?

Car dealers may call your employer if they need to verify your income. Car dealers usually do this to make sure that customers are able to make car payments on time and aren’t lying about their income. However, car dealers may not even bother calling your employer, especially if you have a good credit score.

Methodology: The Impact of Buying a Car

Utilizing Amazon’s Mechanical Turk, we collected survey responses from 1,010 people who purchased their own car. 72.5 percent of our participants spent 10.0 percent or less of their income on their total car payment; 27.5 percent spent more than 10 percent of their income on their total car payment.

20.4 percent made a down payment that was 20 percent or more of their car’s purchase price, and 79.6 percent made a down payment that was less than 20 percent of their car’s purchase price. We defined a car payment as the monthly amount car owners pay for their car loan plus their monthly car insurance cost.

Participants ranged in age from 18-79 with a mean of 37.8 and a standard deviation of 11.9. Respondents who did not own a vehicle were disqualified. Respondents who owned a vehicle, but were not the primary person who paid for the vehicle were also disqualified.

We grouped respondents into those who “follow guideline” and “don’t follow guideline” based on two criteria. They had to have a down payment that was less than 20 percent of their income AND have total monthly car costs that were over 10 percent of their income. 

Fair Use Statement

Feel free to share this project widely: You may just help a friend make a better car-buying decision in the future. If you do want to use our work on your own website or social media, we kindly ask that you do so only for non-commercial purposes. We’d also appreciate a link back to this page so that other readers can read our project in full.

Want to find savings? Through our proprietary quote generator, we allow you to compare quotes from multiple insurers at once, so you can find the best deal without spending hours looking online. When it comes to respecting your time and money, no one has your back as we do. Whether you participated in a first-time buyer car program or just bought your tenth car, learn how much you could be saving with a customized quote today. 

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