Cars are a necessary expense for most Canadians. This is why, it’s important to account for all factors before purchasing a car, including the price of the car, insurance, gas and repairs, loan payments, and more. Let’s take a look at some key considerations and tips to help you budget for your next car.
How Much of Your Salary Should Go to Your Car Payments?
Not everyone has the same financial or transportation scenario. That being said, not everyone will have the same approach to budgeting for a car. Depending on your income and frequency of use, you may decide to spend more or less on your car budget. Regardless, here are a couple of common approaches to budgeting for car payments.
The 20/4/10 rule
One common car budget rule is the 20/4/10 rule. With a 20% down payment, and 4 years to pay the car loan, you can buy a car provided that the monthly car payments do not exceed 10% of your income.
Total Debt Ratio
Consumer experts say that one shouldn’t spend more than 36% of their income on debt. This includes monthly payments on credit cards, student loans, mortgages, and more. Find out how much of your income every month goes toward your debt (debt-to-income ratio). Then, you can see if there’s any room to add to it with a car loan payment. For example, if you find that you spend 30% of your income on debts, account for another 5% that you can spend on car loan payments.
Expenses to Consider When Budgeting For a Car
When buying a car, you aren’t only paying for the amount listed on the price tag. There are other expenses to consider, like tax, warranties, gas, and more. Let’s take a look at some expenses you need to consider when buying a car.
Total Price
So let’s say the car you’re interested in buying costs $5,000. This does not mean your car budget should only be $5,000. You want to make sure you have some wiggle room to account for other costs associated with the purchase price, like sales tax, title and registration fees, and optional items such as warranty.
Fuel
You will need to budget for the cost of gas when driving your new car. Depending on the model, you may need to spend more or less on your gas budget. If the car is good on gas, you may be able to save a bit of money here. However, some models use up a lot of gas, which in turn requires you to have a higher gas budget.
Repairs and Maintenance
Experts say that you should budget at least $2,000 on car repairs every year. However, this is a general number. Depending on your car model, repairs and maintenance can be more expensive. You’ll want to be on top of maintenance visits and ensuring your car is running smoothly. Additionally, you’ll want to be prepared for any possible accidents or issues that could result in your car needing repairs.
Down Payment
The down payment will often require you to use money out of pocket, as lenders will want to see that you can put some money down toward your car. Although some lenders will finance your purchases with less than 20% down, it is ideal to make a 20% down payment on a car. The higher your down payment, the lower your monthly payments will be, and the more likely a lender will be to finance your purchase.
Don’t Forget Car Insurance
If you are in the market for a car, you should know that car insurance is mandatory. It’s the law to have insurance on any vehicle you operate. If you are caught driving without insurance by the police, you could face heavy fines and even confiscation of your vehicle. Insurance offers you financial protection if you get into a car accident, if your car gets stolen, and if a variety of other incidents happen to damage or otherwise compromise your car. In exchange for a monthly premium, you can file a claim with an insurance company if an incident takes place with your car.
When choosing an insurance policy that works for you, it’s important to take many factors of a policy into consideration:
How much coverage will you need?
Make sure that you do your research and examine each policy in detail. You’ll want to make sure you are informed about what your policy includes. If you think you’ll require more coverage, it might help to discuss your needs with an insurance agent to make sure you are adequately covered by your policy.
What are the premiums like?
Sometimes, you could get a better deal by paying annually as opposed to monthly. Examine your policy to get a good idea about what the premiums will look like.
Thinking of purchasing your car insurance online? Check out our guide on buying insurance online.
How much should your deductible be?
If you make a claim, you will have to pay a deductible before your insurance covers you financially. You have control over the amount of your deductible. Generally, the lower your deductible, the higher the monthly premium, and vice versa.
Does the insurance company offer any discounts?
Sometimes you might be eligible for discounts from your insurance company, based on the following criteria:
- Low mileage car
- Student status
- Retired
- Security systems
- Clean driving record
- Your occupation
- Electric/low-gas vehicles
Check out how gender plays a role in car insurance rates.
Is the cost of the policy within your budget?
Ensure you aren’t paying for more than you need with your insurance policy. Budget accordingly, and make adjustments if you find the policy is out of your budget.
Best Car Loan Providers in Canada
Amount Interest Term (Months) 
$500 - $50,000 Up to 46.96% 12 - 84 Learn more 
Varies 8.49% + 24 - 96 Learn more 
$500 - $35,000 29.99% - 46.96% 9 - 60 Learn more 
$500 - $10,000 12.99% - 39.99% 9 - 36 Learn more 
$5,000 - $40,000 Varies 12 - 72 Learn more 
$5,000 - $45,000 4.90 % - 29.95% 36 - 72 Learn more 
Varies 11.9% + 12 - 84 Learn more 
Up to $50,000 Varies 12 - 84 Learn more 
Up to $50,000 8.99% + 12 - 72 Learn more
How to Save and Budget For a Car
Now that we’ve looked at all the costs associated with buying a car, you have enough considerations to inform your budget. Once you calculate your monthly costs (including monthly payments, insurance, gas, repairs and maintenance, registration fees, etc.), you can create an accurate budget for yourself. Make sure that your monthly income is enough to cover your monthly car expenses in addition to all of your other expenses, like food, living costs, additional debts – even a simple list of monthly expenses can help you visualize your budget.
Ways to Track Your Budget
There are a few budgeting programs and apps that can help you stick to your budget, YNAB, Mint, and Quicken to name a few. However, you can also create a strong budget by just recording your expenses in a simple list or an excel spreadsheet.
Experts recommend setting time aside to document a budget for your expenses. However, if you don’t have a budget, it’s wise to at the very least create a separate savings account for your car expenses. The separation adds an extra layer of protection so that you don’t spend the allocated money.
Bottom Line
If you invest in a car for your main method of transportation, there are many expenses that can add. But if you budget accordingly and conduct enough research to ensure your car choices suit your needs, owning a car can be affordable and doesn’t need to be a financial burden. For those in the market for the best car financing to meet their needs, Loans Canada can help match you with a lender in your area.
Glossary
| TERM | DEFINITION |
|---|---|
| Add-Ons | Any features or services that are applied on top of the base price of a car are considered add-ons. These can include things such as tinted windows, heated seats, leather seats, alarms, and wheel locks, to name a few. |
| Base Price | The base price of a car is the cost of the vehicle without any upgrades or added features that can be added after the car is ordered from a dealership. Only standard equipment and the manufacturer’s warranty are included in the base price, but any other fees will be added afterward. |
| Certified Pre-Owned (CPO) | CPO cars refer to used cars that have been certified, either by the dealership selling the car or the manufacturer of the vehicle. This gives consumers confidence knowing they are buying a used vehicle that is in good condition. When a used car is obtained by a dealership, it is inspected by a certified mechanic. The car is then repaired if it meets the required standards and is then ready to be sold as a CPO vehicle. |
| Clear Title | A clear title means that the owner of the car has a free and clear title and no longer carries a balance owing on a car loan. There are no liens of the title or levies from creditors. |
| Dealership | Auto dealerships are businesses that are authorized to sell new or used automobiles to consumers and serve as a direct dealer for automakers |
| Dealership Financing | Consumers can obtain dealer financing to help fund the purchase of a vehicle. A contract is signed with a dealership that requires a consumer to pay for a specific amount plus interest and funding fees over a certain period of time. Dealers will send the details of the consumer’s financials to various lenders to find one that will approve the loan. |
| Depreciation | Depreciation refers to the decline in the value of a vehicle. Immediately after purchase, a vehicle will become less valuable as soon as it is used. Put another way, depreciation is the rate at which an automobile loses its value over time |
| TERM | DEFINITION |
|---|---|
| Extended Warranty | Vehicles come with a manufacturer’s warranty when purchased, but buyers can choose to purchase an extended warranty. This serves as a form of insurance policy on the vehicle to cover the cost of potential repairs in the future. An extended warranty is usually good for a certain period of time and/or mileage. |
| TERM | DEFINITION |
|---|---|
| Lease | A contract that allows an individual the right to use or occupy a property for a specified period of time in exchange for a monthly payment. Leases are common for a property like apartments and vehicles. The individual on the lease does not own the asset at the end of the lease’s term, it is strictly for rental purposes. |
| TERM | DEFINITION |
|---|---|
| MSRP (Manufacturer’s Suggested Retail Price) | Car manufacturers will offer recommendations on how much a car should be priced at the retail level, known as the manufacturer’s suggested retail price, or MSRP. The purpose of the MSRP is to standardize pricing in the automobile industry so that there is not a lot of fluctuation in price from one dealership to another. |
| TERM | DEFINITION |
|---|---|
| Title Loan | A title loan uses the vehicle title as a form of collateral to secure a loan. Borrowers must own their vehicles free and clear and no longer owe any amount on a car loan. A lender will place a lien on the car title in exchange for funds. If the borrower defaults on the loan, the lender can take possession of the vehicle and sell it to cover any losses. |
| Trade-in Allowance | A trade-in allowance is the amount that a car dealer will reduce the cost of a new car purchase by after the consumer’s old vehicle has been traded in. It is somewhat like being given credit from the sale of an existing vehicle that is then applied to the purchase of a new vehicle. |
| Trade-in Value | A trade-in value is the amount that dealerships offer consumers for their vehicle and is typically applied toward the purchase price of another vehicle. Dealerships will assess the value of the vehicle and will base the amount that can be applied to a new car purchase. The consumer will then trade in the old vehicle and the assessed value amount will be deducted from the price of another vehicle. Trade-in value is often different than what the vehicle may be worth when sold in the open market. |
| TERM | DEFINITION |
|---|---|
| Vehicle Identification Number (VIN) | Every vehicle will have its own unique vehicle identification number, which is used to identify a specific vehicle. No two vehicles will have the same VIN, making them easily identifiable with this unique 17-character code. |
