How much car can you afford?
A car is usually the second-biggest purchase after a home, and one that loses value from the day you drive it away. Working out a budget before you visit a dealer keeps the conversation on the total price rather than on a monthly payment that can be stretched over seven years.
The 20/4/10 rule
A popular guideline for buying a car with a loan:
- 20% down payment at least, so you do not owe more than the car is worth
- 4 years (48 months) maximum loan term
- 10% of gross monthly income at most for the payment plus insurance
Some planners allow up to 15% to 20% of income for all transportation costs, including fuel and maintenance. Adjust the share in the calculator to match your own comfort level.
How the calculator works
- Maximum monthly payment = income × share − insurance
- Maximum loan = the amount that payment repays over the term at your APR: Loan = payment × (1 − (1 + r)⁻ⁿ) ÷ r, with r = APR ÷ 12 and n = months
- Maximum price = loan + down payment and trade-in
Worked example
You earn $75,000 a year ($6,250 a month), keep the car budget at 10%, pay $150 a month for insurance and have $8,000 to put down. The loan is 48 months at 7% APR.
- Maximum payment = $625 − $150 = $475
- Maximum loan ≈ $19,836
- Maximum car price ≈ $27,836
- Total interest over 4 years ≈ $2,964
- The down payment is 28.7% of the price, which meets the 20% guideline
Ways to stretch the budget, and their cost
| Change | Effect on maximum price | Downside |
|---|---|---|
| 72-month loan instead of 48 | about +$8,000 | more interest, longer negative equity |
| Bigger down payment | +$1 per $1 | less cash in reserve |
| Better credit, lower APR | +$500 to $1,500 | none |
| Cheaper insurance | +$1,000 per $25/month saved over 4 years | compare coverage carefully |
Costs not in the loan
Budget separately for sales tax, title and registration, which often add 5% to 10% to the price, and for fuel or charging, maintenance, tires and parking. AAA estimates the full yearly cost of owning a new car at well over $10,000 once depreciation is included.
New, used or lease?
A two- to three-year-old used car has already absorbed the steepest depreciation and often offers the best value. Leasing gives lower payments but no ownership and mileage limits. Whatever you choose, compare the out-the-door price and the total cost of the loan, not just the monthly payment.
This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.