The percentage of salary for car is the amount of money that an employee contributes to the payment of his or her car. The percentage of salary for car is calculated in a variety of ways, depending on the type of vehicle and the employee’s income level.

Employees who earn less than $60,000 per year can typically expect to pay between 10% and 15% of their gross income toward their car—which includes both monthly payments and insurance premiums. Employees with higher salaries may need to pay even more: up to 20%, depending on their financial situation.

The percentage of salary that you should spend on your car depends on a number of factors.

If you’re paying more than 5% of your salary on a vehicle, you might have an issue. This can be an indication that you’re spending too much money in this area and need to reevaluate your options.

If you’re just starting out in the working world and making less than $40,000 per year, it’s best to keep your car expenses around 2-3% of your total income. If you are making more than $40,000 per year and don’t have any other debt, it’s okay to spend up to 5% of your total income on a vehicle.

Percentage Of Salary For Car

How much car you can afford depends on a number of factors, including your monthly income, your credit score and how many add-ons you want to include in your purchase. Experts typically recommend spending no more than 20 percent of take-home pay on a car purchase. This recommended spending limit includes the cost of car payments, fuel, insurance and more. Determining affordability requires finding a balance between meeting your vehicle needs and staying within your budget.

Determine how much car you can afford

A vehicle is often one of the most expensive purchases people make so it is critical that you crunch the numbers to determine whether you can truly afford the car you’re considering. And remember — the true cost of a vehicle goes well beyond the sticker price or monthly loan payments. Ongoing costs like fuel, maintenance and car insurance can vary significantly based on the type of car you purchase and should also be factored into your affordability calculations.

Get an initial figure by using a car loan calculator

The interest rate you receive on an auto loan plays a big part in calculating your monthly payment amount. A higher credit score will score you a lower interest rate, which will ultimately lower your monthly payment and your total overall loan cost.

You can use a car loan calculator to determine how different interest rates will affect your monthly payment. Here is how: 

• Pull a copy of your credit report and find out your credit score.  
• Get prequalified with a few lenders to determine the average interest rate you could be offered.  
• Plug in your interest rate, desired repayment term length and car price to the calculator.

Bankrate insight

Use a car loan calculator to get an idea of what your monthly payments will be before you complete a full auto loan application.

Three more factors to consider

While a car loan calculator is a good starting point, it isn’t the only figure you will need to account for. It’s wise to also consider your salary, additional vehicle costs and if you plan to lease or buy.

1. Your salary

Your salary is the primary factor in determining which car and auto loan is best for you.

• Edmunds recommends that a new-car payment should be no more than 15 percent of your take-home pay each month
• A used-car payment should be no more than 10 percent, but that number varies by expert.
• When insurance, fuel and other regular monthly expenses are included the cost should not exceed 20 percent of your monthly take-home pay.

Your income also matters if you are trying to get approved for a loan. To approve you, lenders will look at your debt-to-income ratio, or DTI. This measure compares your monthly bills to your gross monthly income. Most car dealers like to see a DTI no higher than 45 or 50 percent before approving a loan, according to The Car Connection.

Even if you have the cash available to pay for your car outright, you will still want to consider your purchase in the full context of your annual salary and expenses. Specifically, you’ll want to weigh buying something in cash — and possibly eating into or wiping out your emergency fund — versus paying for something affordably over time.

2. Additional vehicle costs

When it comes to affordability, don’t forget to factor in other monthly costs related to car ownership. Two of the largest additional costs that come with car ownership are fuel and insurance costs. Not all cars are equal when it comes to these factors, so it’s important to calculate these additional costs before signing off.  

One site to search for mileage estimates for your car of choice is fueleconomy.gov. Selecting a car with good gas mileage will save you money each month and could help you maximize any employer mileage reimbursements.  

Insurance costs also vary by vehicle and individual. Two cars that look similar to you might be vastly different to your insurance company. The only way to know exactly what your insurance costs could be is to get quotes from a few companies. A car insurance calculator is a great place to start understanding what your potential insurance costs will be and what factors the insurance company will consider when developing their price quote. Typically, companies will evaluate:  

• Your driving record.  
• How much you use your car.  
• Your location.  
• Your age.  
• Your gender.  
• Your credit.  
• The type and amount of coverage you selected.  
• The discounts you qualify for.  

Depending on the state you live in, there may be restrictions on what insurance companies can use when pricing your auto insurance.  

3. Leasing versus buying

Understanding the financial implications of leasing or buying a car is a helpful consideration when deciding how much you can afford to spend. Leasing is a great option for drivers who want a lower monthly payment and the ability to drive the newest model cars. Buying on the other hand, places you fully in the driver’s seat, with none of the mileage limits or additional charges for potential wear and tear that are typically associated with leases

Take advantage of a leasing versus buying calculator to calculate your potential savings.

The bottom line

The process of purchasing a new car is an exciting endeavor but being realistic with your budget will ensure that you won’t have to pinch pennies once you bring your new ride home. Before settling on a car, consider all of the potential costs, including insurance, maintenance and fuel. When calculating all of the expenses, aim to find a car that costs no more than 20 percent of your take home pay. The goal is to find a car that meets your expectations and allows you enough breathing room financially to accommodate any unforeseen costs or reduced income.