Auto Insurance: How Much Of Your Income Should You Spend?

Auto insurance is an important financial consideration for many people. While it is not the most expensive form of insurance, it is the second most costly, after health insurance. On average, auto insurance costs Americans $1,759 per year, or about $147 per month. This amounts to 2.57% of the average American's annual income, though this varies by state and metropolitan area. For example, in Louisiana, drivers spend over 5% of their annual income on auto insurance, while in Maine, drivers spend just over 1%.

The cost of auto insurance also varies depending on age, with teens spending the highest proportion of their income on auto insurance, at almost 25%. This is because teens are considered inexperienced drivers and are more likely to be in a crash. As people get older, their premiums drop, and by the time they are 55-64 years old, they are paying just 2.8% of their income on auto insurance.

Other factors that affect the cost of auto insurance include the type of car, driving record, credit score, and location.

How much of your income goes on auto insurance if you're a teen

Auto insurance for teens can be expensive. According to Insure.com, teens spend almost 25% of their income on car insurance. This is because they are inexperienced drivers and are more likely to be in a crash. The AAA Foundation for Traffic Safety found that 16 to 17-year-old drivers are nine times more likely to be in a crash than adults. This risk results in very expensive insurance premiums.

The average cost of teen car insurance varies based on the driver's age, their ZIP code, driving history, and vehicle type. For example, a 16-year-old driver who has just received their license will likely pay more for insurance than an 18-year-old with more driving experience. As teens get older, their insurance rates can decrease, especially if they maintain a clean driving record.

There are ways to reduce the cost of auto insurance for teens. One option is to add a teenage driver to an existing insurance policy, such as a parent's policy, rather than purchasing a separate policy. This is usually a more cost-effective option, as the teen can benefit from the lower rate that the parent has earned as a more experienced driver. Some insurance companies offer discounts for teens, such as good student discounts, multi-car discounts, and safe driving discounts. Additionally, purchasing a safer car and increasing the deductible on the coverage can help lower the cost of insurance.

While auto insurance for teens can be expensive, there are ways to mitigate the cost by taking advantage of discounts, adding teens to existing policies, and choosing safer vehicles.

How income affects your auto insurance premiums

Income does not directly affect auto insurance premiums, but it does play an indirect role. While insurance companies do not consider income when setting rates, they do take into account factors that are closely related to income, such as your ZIP code, job title, and employment status. Here's how income can influence your auto insurance premiums:

ZIP Code

Insurance companies often use your ZIP code when calculating your insurance rate. If you live in an area with a high population density, there is a higher risk of theft, vandalism, and traffic accidents. As a result, your insurance premium may be higher. Lower-income individuals are more likely to live in these high-crime areas, which can lead to higher insurance rates.

Job Title and Employment Status

Your job title and employment status can also be factors in determining your insurance rate. Certain occupations may be perceived as riskier by insurance companies, leading to higher premiums. Additionally, those with lower incomes may have less flexibility in choosing their place of residence or employment, which can impact their insurance rates.

Affordability

Income also affects the affordability of auto insurance premiums. The same insurance premium may represent a larger proportion of income for someone with a lower income. For example, a $100 monthly premium is more affordable for someone earning $8,500 per month compared to someone earning $3,500 per month, even though their insurance rates were not determined by their income levels.

Age

Age is another significant factor in auto insurance rates. Younger drivers, especially teens, tend to pay a higher percentage of their income on car insurance due to their lack of driving experience and the higher risk of accidents. As individuals move into adulthood and gain more driving experience, their insurance premiums decrease relative to their income.

Other Factors

In addition to the indirect influence of income, several other factors directly impact auto insurance premiums. These include the make and model of your car, demographics, driving record, mileage, and various discounts offered by insurance companies. The type of coverage and deductible amount also play a role, with higher coverage and lower deductibles resulting in higher insurance rates.

How to save money on auto insurance

Auto insurance is the second most expensive form of insurance, and it can take up a significant portion of your income. The cost of insurance varies depending on age, location, and other factors, but there are ways to save money on auto insurance. Here are some tips to help you reduce your auto insurance expenses:

• Choose the right vehicle: The type of car you drive can significantly impact your insurance rate. Generally, the cheaper, safer, and heavier the vehicle, the lower the insurance rate. Sedans are often cheaper to insure than coupes or SUVs, and luxury vehicles and sports cars tend to be more expensive to insure.
• Improve your credit score: In most states, insurance companies use your credit score to determine your premium. By improving your credit score, you can lower your car insurance premium.
• Maintain a clean driving record: Insurance companies often view a poor driving record as an indication that you are more likely to file a claim in the future. By maintaining a clean driving record and avoiding accidents and traffic violations, you can keep your insurance rates low.
• Compare insurance providers: Rates can vary significantly between insurance providers. Shop around and compare rates from multiple insurers to find the best deal.
• Increase your deductible: Opting for a higher deductible can lower your insurance premium. However, keep in mind that a higher deductible means you will have to pay more out of pocket if you need to file a claim.
• Bundle your policies: Consider bundling your auto insurance with other types of insurance, such as homeowners or renters insurance. Many insurance companies offer discounts for customers with multiple policies.
• Take advantage of discounts: Insurance companies often offer various discounts, such as good student discounts or discounts for safety features in your vehicle. Ask your insurance provider about any available discounts that you may be eligible for.
• Adjust your coverage: Review your insurance policy and consider adjusting your coverage limits or dropping unnecessary coverage to reduce your premium. However, be sure to maintain the minimum level of coverage required by your state.
• Pay annually: If possible, pay your insurance premium annually rather than monthly. Paying in full can often result in a discount, and you may also avoid additional fees or interest charges associated with monthly payments.
• Consider usage-based insurance: If you drive infrequently or have low mileage, you may benefit from usage-based insurance, which bases your rates on your driving behaviour and mileage.
• Relocate: Insurance rates can vary by location, so consider relocating to an area with lower insurance rates. However, keep in mind that other costs, such as rent or housing prices, may also vary, so be sure to consider the overall impact on your budget.

The average cost of auto insurance

The cost of auto insurance varies depending on a range of factors, including age, gender, driving history, credit score, and location.

Average Cost of Auto Insurance by Age

According to Insure.com, the percentage of income spent on auto insurance varies across age groups. Teenagers spend the highest proportion of their income on auto insurance, with 24% of their income going on full coverage. This figure drops to 8.8% for 19-24-year-olds, 4.4% for 25-34-year-olds, 3.1% for 35-44-year-olds, and 2.8% for 45-54-year-olds. For those aged 55-64, the figure is 2.8%, and for those 65 and over, it rises again to 3.6%.

Average Cost of Auto Insurance by Gender

In most states, men pay more for auto insurance than women. This is because men are statistically more likely to engage in riskier driving behaviours. However, the difference between male and female drivers' premiums tends to be negligible after the age of 25. In some states, gender is not used as a factor in calculating insurance premiums.

Average Cost of Auto Insurance by Driving History

Drivers with a clean driving record pay, on average, $1,771 per year for full coverage auto insurance. This figure rises to $2,614 for drivers with an at-fault accident on their record, an increase of 48%. For drivers with a DUI on their record, the average cost of auto insurance is $3,237, an increase of 83%. A speeding ticket on a driver's record leads to an average increase of 27%.

Average Cost of Auto Insurance by Credit Score

Drivers with poor credit pay, on average, more for auto insurance than those with good credit. According to NerdWallet, drivers with poor credit pay, on average, $2,794 for full coverage auto insurance, compared to $1,522 for those with good credit. This is because drivers with poor credit are seen as more likely to file insurance claims. In some states, credit score is not used as a factor in calculating insurance premiums.

Average Cost of Auto Insurance by Location

The cost of auto insurance varies significantly by state. According to Bankrate, the average cost of full coverage auto insurance in the US is $2,348 per year. However, this figure ranges from $1,326 in Idaho to $3,757 in New York. The Zebra reports that the average cost of auto insurance in New York State is $1,582 per year.

How to calculate how much you can afford to spend on a car

When calculating how much you can afford to spend on a car, it's important to consider not just the price of the car, but also the additional expenses that come with owning a vehicle. These include fuel, insurance, maintenance, registration fees, loan interest, and more.

A commonly used rule of thumb is the 20/4/10 rule, which states that you should limit your transportation expenses to 10% of your salary. This includes your car payment, insurance, fuel, and other fees, and assumes that you have made a down payment on your vehicle of at least 20% and financed it for no more than four years.

For example, if your annual salary is $100,000, you should budget about $833 per month for transportation. After factoring in insurance, fuel, and maintenance costs, this leaves $330.50 per month for your car payment. If you take out a 48-month loan with an interest rate of 8.30% and put down 20% of the vehicle price, the most you could afford is $16,687.50. With a 20% down payment, you would borrow $13,350 and have a monthly payment of $328.

It's worth noting that this range is just a guideline and may need to be adjusted based on your income, expenses, and debt obligations. For instance, if you live in an area with high housing costs or have significant debt payments, you may need to budget less for your car.

When considering a car loan, it's important to shop around for the best interest rates and terms. Your credit score will also impact your interest rate, with lower rates typically available to those with good or excellent credit. Additionally, some lenders may offer discounts or special programs that can help lower your overall costs.

By carefully considering your budget, expenses, and financing options, you can make an informed decision about how much you can truly afford to spend on a car.

Frequently asked questions