Car Affordability Calculator

The calculation itself

Start from gross monthly income and the share of it a lender will let all your debt take — commonly 36%, sometimes 43%. That gives total debt capacity. Subtract the debts you already pay to get what is left for a car.

Then subtract insurance, fuel and maintenance, because they come out of the same monthly money and are not optional. What remains is what the loan itself may cost, and running that payment backwards through the annuity formula gives the loan, which with your deposit and trade-in gives the price.

The price step reverses the sales tax rather than subtracting it: the loan has to cover price plus tax, so the price it supports is (loan + deposit) ÷ (1 + tax rate), not (loan + deposit) × (1 − tax rate).

In practice

On $6,000 a month at a 36% target, total debt capacity is $2,160. Existing debts of $700 leave $1,460 for the car.

Insurance at $150, fuel at $180 and maintenance at $90 come to $420 — nearly a third of that $1,460. What is left for the loan is $1,040 a month.

At 7% over 60 months, $1,040 supports a loan of $52,522. With $4,000 down and 7% sales tax, that is a car at about $52,824.

Now run it again ignoring the running costs, the way most affordability calculators do. The affordable price comes out at $72,648 — an overstatement of $19,823 on the same income. That gap is the whole reason this page subtracts them first.

Why the term is the trap

Stretching the loan does not make a car more affordable; it makes a more expensive car fit the same payment. $25,000 at 6% is $483.32 a month over 60 months and $365.21 over 84 — a saving of $118 a month that costs $1,679 more in total.

Worse, it changes when you get your equity back. Cars lose value fastest in the first year while an 84-month loan repays principal slowly, so the two lines cross and stay crossed for years. That is the mechanism that produces the negative equity people carry into their next purchase.

The four-year ceiling in the old 20/4/10 guidance is doing exactly this work. It is not that 48 months is magic — it is that it is roughly how long a typical car takes to stop depreciating faster than the loan pays down.

Where the figure deceives

Lenders use gross income, so this does too, and your approval will turn on that. Your budget will not: run it again on take-home pay and the gap between the two answers is roughly the size of the mistake.

The running costs here are estimates you supply, and insurance in particular varies by far more than most people expect — by driver, postcode and by the specific car. A quote on the actual vehicle is worth getting before the purchase rather than after.

And a payment you can sustain is not the same as one a lender will refuse. Approvals regularly come in above what the borrower should take, because the lender is underwriting their repayment risk rather than your budget.

Acting on it

Get the insurance quote on the specific model before agreeing anything. It is the running cost that varies most and the one that most often breaks the arithmetic afterwards.

Walk in with the payment rather than the price. Dealers work in monthly payments because it lets them solve for term; naming the payment and the term together removes that.

Size the deposit to cover roughly the first year of depreciation. That is what keeps you the right way up, and it is the reasoning behind the conventional twenty percent.