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How to Budget for a Car

Car ownership is one of the most significant sources of expenses for the average American. Learn about what owning a car costs and how to budget for it.

November 5, 2021

When it comes to the highest expenses for the average American, transportation is second only to housing costs. That means you have to learn how to budget for a car effectively if you want to meet your long-term savings goals.

Here’s what to know about budgeting for a vehicle, including what kinds of car costs you’re likely to incur and roughly how much to spend on them.

Car expenses for your budget

Whether you finance your car purchase or save up enough to buy with cash, you’re going to have upfront and recurring costs. 

Here are the expenses you’re likely to run into, so you can include them in your budget before, during and after the car purchase.

Closing costs

When you purchase a car, you’ll incur costs upfront. Even if you don’t have the cash to buy it outright, you can still make a down payment to minimize your interest costs. Twenty-percent of the purchase price is a popular benchmark.

If you’re wondering “what fees should I pay when buying a used car?,” you’ll also have to cover certain closing costs on the sale. There are fees for things like transferring the title, getting your tags or shipping the vehicle from another location. The fees tend to be similar whether you’re buying a new car or a used car.

Sales tax is another significant expense that ranges from roughly 5% to 10% of the sales price. If you’re buying the car outright, you’ll pay this upfront, but financed purchases may roll the amount into the loan.

Before signing a contract, it’s important to read through it carefully. When thinking about what additional costs are involved in buying a car, don’t hesitate to ask your sales rep for an explanation.

Debt service

Despite the high interest rates on auto loans, approximately 81% of cars have some form of financing attached to them. 

If you finance your vehicle, your auto loan payment will probably be your highest car-related expense each month. The average car payment is $576 for a new car and $413 for a used one.


Auto insurance can be a surprisingly expensive aspect of vehicle ownership. To comply with state laws, you’ll need to pay for at least the minimum level of liability coverage. It's not usually wise to drive around without insurance because it can pose a serious risk. 

Even if your financial goal is to save money upfront, you’ll end up paying more in accident fees and fines as an uninsured driver than you would for the lowest levels of insurance.

Unfortunately, if you have a loan on your vehicle, you can’t get away with liability coverage alone. You’ll also be required to pay for comprehensive and collision coverage so your lender can recoup their loan if you happen to total your car.

For a full coverage policy, the average insurance costs are about $147 per month.

Vehicle registration

Once you own your car, you’ll pay registration fees every year or two. These fees vary by state, but you can find the costs and timelines for your state online.

On average, you’ll pay roughly $30 to $75 per year. That said, there could be additional inspection costs that inflate this number slightly.


When you think about budgeting for a car, gas costs are probably one of the first expenses that come to mind. Unfortunately, if you use your vehicle as much as the average American, they can be significant.

In 2020, despite the quarantine protocols, consumers spent an average of $1,568 on fuel and motor oil, which comes out to $130.66 per month.

That said, gas is one of the few car expenses that’s within your control. If you live near your job site, work from home or use a bike to get to places within a few miles, you can cut down your  gas usage significantly.

Maintenance and repairs

Depending on the make and model of your car, maintenance and repair costs can vary quite a bit. 

At a bare minimum, it’s wise to maintenance and repair expenses like:

  • Oil changes

  • Engine checkups

  • Tire rotations and replacements

  • Car washes

That said, these items probably won’t be too expensive compared to some of your other car costs. For example, an oil change costs about $50 on average, and you might only need a few of them each year.

Repairs, on the other hand, can be incredibly expensive, and their costs can add up fast. A simple brake repair can set you back roughly $500. For this reason, it can be better for your budget to buy a reliable car than a flashy, fickle one.

How much does it cost to buy a car?

In 2020, the average purchase price for a midsize car was $27,545. At 20% down, that works out to be about $5,500 upfront. Your actual costs will depend on the type of car, your closing costs, whether you buy new or used and how much debt you use.

After the initial purchase, you’ll also face ongoing monthly costs as part of ownership. If you finance the purchase, as mentioned above, you can expect to pay roughly $576 for a new car and $413 for a used car.

In addition, you’ll have insurance, maintenance, gas and registration costs that will average out to roughly $400 per month.

All told, the total average cost of owning a car per month is between $400 and $976, depending on the degree of financing and whether you opt for a new or used car.

How much of your monthly budget should go to car expenses?

A popular rule of thumb is that no more than 10-15% of your monthly net income should go toward transportation expenses.

For example, if your take-home pay is $4,000 per month, your car expenses shouldn’t exceed $600 on average. That includes your debt service, repairs, gas and insurance.

Keep in mind, though, that these types of guidelines are upper limits, not recommendations. Lower is typically better.

You have control over your car purchases, so there’s no need to let societal expectations, your friends or family pressure you into buying something that’s going to leave you financially overextended.

Your budget is personal

The expense estimates in this article are generally national averages. As such, it’s not necessary to think of them as absolute benchmarks. Your costs may vary significantly depending on your circumstances, including your driving habits, car size needs and location.

If the average cost of car ownership seems too high for your current budget, it doesn’t mean you can’t buy one. You can simply find ways to keep your costs below average.

Consider purchasing a less expensive vehicle, using a larger down payment or improving your credit score to lower your interest rate. You could also carve out space elsewhere in your budget to make room.

There's no such thing as a one-size-fits-all budget, so try to focus on the big picture when it comes to your monthly spending.

If you’re planning on buying a car, you can consider using Tally† to help free up space in your budget. Find out more about how Tally can help you pay down credit card debt in an easy, efficient way. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.