The Car Buyer’s Guide To Finance

Joel Ohman
Founder, CFP®

UPDATED: May 15, 2019

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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.

But if a strong economy makes these purchases 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.

How much should one reasonably spend each month on total car expenses? One common standard is to spend 20 percent or more of the total car cost on a down payment and 10% 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. How do your car expenses stack up to the average American? Keep reading to find out.

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.

Following the Rules

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.

Waiting and Saving

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? Fifty-two 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.

Debt Deadlines

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.

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.

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.

Realizations and Regret

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

As the results of this project suggest, 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. Of course, breaking the smart car buying guideline won’t doom you to poverty: Most people don’t adhere to this high standard and find ways to make ends meet.

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. allows 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 like we do. Learn how much you could be saving with a customized quote today.


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. 


This study is based on self-reported survey data. This means there are some inherent issues such as incorrect recall, minimization, telescoping, and exaggeration. The data is neither weighted nor statistically tested and is based on means alone.

The 20/4/10 rule is also just a guideline, and there are many ways to responsibly purchase a vehicle.

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.



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