Car affordability calculator

How the car affordability calculator works

Instead of starting with a car and asking if you can make the payment, this calculator starts with your budget and works out the car price it can support. It uses a simple guideline for car spending based on your monthly take-home pay.

• Car payment: about 10% of take-home pay. Keeping the loan payment near a tenth of what you bring home leaves room in your budget for housing, food, savings and everything else.
• Total car costs: about 15% of take-home pay. The payment is only part of owning a car. Insurance, fuel, maintenance, repairs, parking and registration come on top. Capping the whole lot at about 15% means the remaining 5% or so covers those running costs.

These are guidelines, not hard limits. If you drive a lot, live where insurance is expensive, or have other large debts, aim lower. With the payment set, the math follows standard loan rules.

1. Loan amount. The calculator finds the loan your payment can repay over the term at your APR, using the standard amortization formula: loan = payment x (1 minus 1 divided by (1 + monthly rate) raised to the number of months) / monthly rate. The monthly rate is the APR divided by 12. At 0% APR, the loan is simply the payment times the number of months.
2. Car price. Your loan, down payment and trade-in together cover the car and its sales tax. So car price = (loan + down payment + trade-in) / (1 + sales tax rate).
3. Interest and total cost. Total interest is all your payments added up, minus the loan amount. Total cost is the car price plus sales tax plus interest, which is the same as your down payment, trade-in and all your payments combined.

How to read your result

The large number is the most you should spend on the car itself, before tax, if you follow the 10% guideline. The tiles show your maximum monthly payment, your total monthly car budget, the interest you would pay over the life of the loan, and the full cost of the car once interest and tax are included.

The table shows where the money comes from and how much of your 15% budget is left each month for insurance, fuel and upkeep. Get an insurance quote for the car you are looking at and check that it fits in that leftover amount. If it does not, aim for a cheaper car.

Try switching the loan term. A longer term raises the price you can afford with the same payment, but the total interest climbs too. A shorter term buys less car but costs less overall.

A worked example

The calculator opens with $5,000 a month in take-home pay, a $4,000 down payment, a $3,000 trade-in, a 60 month loan at 7% APR and 6% sales tax.

1. Maximum payment: 10% of $5,000 is $500 a month. The total car budget at 15% is $750, which leaves $250 a month for running costs.
2. Loan amount: $500 a month for 60 months at 7% APR repays a loan of about $25,251.
3. Car price: $25,251 + $4,000 + $3,000 = $32,251. Divide by 1.06 for sales tax and you get a car price of about $30,425, with about $1,826 in sales tax.
4. Interest: 60 payments of $500 is $30,000, minus the $25,251 loan, which is about $4,749 in interest.
5. Total cost: $30,425 + $1,826 + $4,749 = about $37,000, the same as $4,000 down, $3,000 in trade and $30,000 in payments.

Mistakes to avoid

• Shopping by monthly payment alone. A dealer can almost always hit a payment by stretching the term. Look at the price and the total cost, not just the payment.
• Forgetting fees. Dealer fees, title and registration can add a noticeable amount. Ask for the out-the-door price.
• Counting a trade-in you still owe money on. Enter only the equity, the value minus what is left on the loan. If you owe more than it is worth, that gap adds to your new loan.
• Skipping the rate shopping. A lower APR lets the same payment buy more car. Getting a preapproval from a bank or credit union before you visit a dealer gives you a number to compare.
• Using gross pay. This calculator is built on take-home pay, the money you actually have to spend. Using your salary before tax makes the car look more affordable than it is.

Common questions

What percentage of my income should go to a car?

A common guideline is to keep the car payment around 10% of take-home pay and all car costs, including insurance and fuel, around 15%. If you have other debts or are saving for a big goal, staying below those numbers gives you more breathing room.

Is a 72 month car loan a bad idea?

Not always, but it costs more in interest, and cars lose value quickly, so you can owe more than the car is worth for much of the loan. If you only fit the car you want with a 72 month term, a cheaper car on a shorter loan is often the safer choice.

How does sales tax work with a trade-in?

It depends on where you live. Many states charge sales tax only on the price minus your trade-in, while some tax the full price. This calculator taxes the full price to stay on the safe side, so if your state gives a trade-in credit, you can afford slightly more.

Should I talk to someone before I buy?

If the purchase is a big part of your budget, or you are weighing a car loan against other debts or savings goals, a financial adviser can help you see the full picture. The numbers here are an estimate to guide your search, and the lender's offer is what sets your real payment.