How It Works

Financial guidelines suggest keeping total car costs between 10-15% of your monthly take-home pay. The popular 20/4/10 rule provides more specific guidance for car purchases.

The 20/4/10 Rule

20% minimum down payment
4 year maximum loan term
10% maximum of gross income for total car costs

Basic Affordability Formula

Maximum Monthly Car Payment:

=monthly_take_home * 0.10

Maximum Total Car Costs (including insurance, gas):

=monthly_take_home * 0.15

Example

Your Situation:

Annual Salary: $60,000
Monthly Take-Home: $3,800
Monthly Insurance Estimate: $150
Monthly Gas Estimate: $200

10% Rule (Payment Only):

=$3,800 * 0.10 = $380/month max payment

15% Rule (Total Costs):

=$3,800 * 0.15 = $570/month max total
$570 - $150 (insurance) - $200 (gas) = $220/month for payment

Depending on your other financial priorities, aim for $220-$380/month.

Building a Car Affordability Calculator

Input	Value
Annual Gross Income	$60,000
Monthly Take-Home Pay	$3,800
Current Car Insurance/Mo	$150
Estimated Gas/Mo	$200
Maintenance Budget/Mo	$100
Down Payment Saved	$5,000
Interest Rate	6.5%
Desired Loan Term (Years)	4

Output	Formula
Max Total Car Cost (15%)	`=B2*0.15`
Non-Payment Costs	`=B3+B4+B5`
Available for Payment	`=B9-B10`
Max Loan Amount	`=PV(B7/12, B8*12, -B11)`
Max Car Price	`=B12+B6`

Results:

Max total costs: $570/month
Operating costs: $450/month
Available for payment: $120/month
Max loan: ~$5,100
Max car price: ~$10,100

From Payment to Car Price

Use PV function to convert payment to loan amount:

=PV(rate/12, months, -payment)

Example: $350/month at 6.5% for 48 months:

=PV(6.5%/12, 48, -350) = $14,756

With $5,000 down: $14,756 + $5,000 = $19,756 max car price.

Quick Reference Table

Monthly Take-Home	10% Payment	Max Car (4yr, 7%)	Max Car (5yr, 7%)
$3,000	$300	$12,850	$15,100
$4,000	$400	$17,100	$20,100
$5,000	$500	$21,400	$25,200
$6,000	$600	$25,700	$30,200
$7,000	$700	$30,000	$35,200

Assumes no down payment - add your down payment to these figures

True Cost of Car Ownership

Monthly payment is just part of the cost:

Expense	Typical Range	Annual
Car Payment	$300-$700	$3,600-$8,400
Insurance	$100-$300	$1,200-$3,600
Gas	$150-$400	$1,800-$4,800
Maintenance	$50-$150	$600-$1,800
Registration	$50-$200	$50-$200
Parking	$0-$300	$0-$3,600

Formula for total annual cost:

=(payment*12) + insurance + gas + maintenance + registration + parking

New vs. Used Analysis

New Car ($35,000)

Factor	Value
Purchase Price	$35,000
Down Payment (20%)	$7,000
Loan Amount	$28,000
Monthly Payment (5yr, 7%)	$554
Year 1 Depreciation	~$5,250 (15%)
Year 3 Value	~$22,000

Used Car ($18,000, 3 years old)

Factor	Value
Purchase Price	$18,000
Down Payment (20%)	$3,600
Loan Amount	$14,400
Monthly Payment (4yr, 8%)	$351
Year 1 Depreciation	~$1,800 (10%)
Year 3 Value	~$12,500

3-Year Cost Comparison:

New: $19,944 payments + $13,000 depreciation = $32,944
Used: $16,848 payments + $5,500 depreciation = $22,348

Loan Term Impact

Same $25,000 car at 7% interest:

Term	Monthly Payment	Total Interest	Total Paid
36 mo	$772	$2,786	$27,786
48 mo	$598	$3,721	$28,721
60 mo	$495	$4,702	$29,702
72 mo	$427	$5,730	$30,730
84 mo	$379	$6,808	$31,808

Shorter terms save thousands in interest.

Down Payment Benefits

20% Down on $30,000 Car

Scenario	Down	Loan	Payment (5yr, 7%)	Total Interest
0% Down	$0	$30,000	$594	$5,640
10% Down	$3,000	$27,000	$535	$5,076
20% Down	$6,000	$24,000	$475	$4,512
30% Down	$9,000	$21,000	$416	$3,948

More down = lower payment + less interest + avoid being underwater.

Debt-to-Income Consideration

Lenders look at your total DTI:

=all_monthly_debts / monthly_gross_income

Guideline:

<36%: Good position to add car debt
36-43%: May qualify but stretching
43%: Difficult to get approved

Before:

Mortgage: $1,500
Student loans: $300
Credit cards: $100
Total: $1,900
Income: $6,000 gross
DTI: 32%

After adding $400 car payment:

Total: $2,300
DTI: 38% (still reasonable)

The Half-Your-Salary Rule

Alternative guideline: don’t spend more than half your annual income on a car.

=annual_salary * 0.5

Annual Salary	Max Car Price
$40,000	$20,000
$60,000	$30,000
$80,000	$40,000
$100,000	$50,000

This is an upper limit - spending less is always better.

Lease vs. Buy Quick Comparison

Factor	Lease	Buy
Monthly Payment	Lower	Higher
Ownership	Never own	Own after payoff
Mileage	Limited (12-15K/yr)	Unlimited
Maintenance	Often included	Your responsibility
Long-Term Cost	Higher (perpetual)	Lower (eventually no payment)

Lease makes sense if:

Drive <12,000 miles/year
Want new car every 3 years
Business use (tax advantages)

Insurance Impact by Car Type

Insurance varies significantly - factor this into affordability:

Car Type	Annual Insurance
Economy (Honda Civic)	$1,200-$1,800
Midsize (Toyota Camry)	$1,400-$2,000
SUV (Honda CR-V)	$1,500-$2,200
Luxury (BMW 3-Series)	$2,000-$3,000
Sports (Mustang GT)	$2,500-$4,000

Get insurance quotes before deciding on a car.

Pro Tips

Get pre-approved - know your rate before shopping; don’t rely on dealer financing
Total cost, not payment - dealers love to focus on monthly payment while extending terms
Factor in depreciation - you’re “paying” for depreciation whether you see it or not
Consider total transportation cost - car payment + insurance + gas + maintenance + depreciation
Save for maintenance - budget $100/month for repairs, especially for used cars

Common Errors

Stretching to 72-84 month loans: Lower payment but way more interest and underwater risk
Forgetting insurance changes: New/expensive cars cost more to insure
Ignoring fuel economy: $100+/month difference between 20 MPG and 35 MPG
Only looking at payment: A $200 payment for 84 months costs more than $350 for 48 months
Not including all costs: Registration, parking, maintenance add up quickly

Car Affordability Calculator