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Driving is an expensive endeavour, no matter where you live in the world. Gas, maintenance, insurance, and registration all need to be factored in when it comes to calculating the true cost of owning and operating a car. While some people have no problem dealing with those costs, others need to scrape together every penny to keep up with their payments. 

So, our question is this: how much car can you realistically afford? If you’re a regular driver and are thinking of buying, leasing, or financing a car sometime soon, this is a question you need to ask yourself before making any big decisions.

How Much Car Can I Afford?

The cost of buying and financing a car involves more than just the ticket price. In addition to your loan payments, the total cost will also include maintenance and operating costs, such as the following:

  • Insurance
  • Gas
  • Repairs
  • Oil changes and other maintenance requirements 

To help you get a clear understanding of how much car you can afford, you’ll need to look at both the cost of buying a car and all your current financial obligations. You should have plenty of money left over after all your current bills are paid to comfortably cover car payments. 

How Much Can I Afford Through The 20/4/10 Rule?

When it comes to financing new or slightly used cars, some vehicle experts recommend that drivers stick to the 20/4/10 Rule. This is a basic calculation you can follow to make sure you choose a vehicle you can afford. 

The 20 –

This refers to the down payment that you’ll need to make on any car that you’re looking to finance. It’s suggested that you make a down payment of 20% or more. If you decide to put less than 20% as a down payment, you’ll likely fall victim to the depreciation of the vehicle and end up spending more on loan payments than the car is actually worth.

The 4 –

This has to do with your car loan payment term. 4 years is the recommended cut-off point, meaning a term any longer will start to make the car unaffordable and will have a greater impact on your finances in the long run. While a 3-year financing period is an even better choice, know that the more years you add on to your payment period, the more you’ll pay in interest.

The 10 –

This refers to the idea that you should be spending no more than 10% of your net income on your car payments, which include the principal, interest, and insurance fees. Depending on your financial and living situations, spending more than 10% of your net income could result in you draining your chequing account very quickly. This is money that you could be putting in other places, such as your TFSA or RRSP. 

How To Calculate How Much Car You Can Afford Using the 20/4/10 Rule

Let’s take a look at an example of how you can use the 20/4/1 rule to calculate an affordable car payment based on your financial situation.

For instance, let’s say you earn an annual net income of $48,000, which works out to be $4,000 per month. Using the 20/4/10 rule, the maximum you should spend per month on a car, including all related expenses, is $400 ($4,000 x 10%). 

Assuming your other car related expenses cost $200 a month, you’d have $200 left for your car loan payment. This means the maximum car loan you can finance would be $9,600 ($200 x 48 months – the maximum recommended car loan term)

While this is the total amount you can finance, the car you can afford can increase by the down payment you’re able to make. For example, if you’re able to make a $1,000 down payment, you’d be able to afford a car price worth $10,600.  

With this information, you can then compare car financing offers for the loan amount required. 

How Much Car Can I Afford Through the 10% To 15% Rule?

Another strategy for determining how much you can afford in car payments is by using the 10% to 15% rule. Ideally, your car payments should be no more than 10% to 15% of your annual income based on this budgeting strategy. 

For instance, if you earn $50,000 per year, your car payments shouldn’t exceed $5,000 to $7,500 per year. This means your monthly budget for car payments would range between $416 to $625. 

How To Calculate How Much You Can Afford Using the 10% To 15% Rule 

Your monthly car payment budget calculation is based on your income. Calculating your budget simply involves multiplying your annual income by 10% to 15%. 

Let’s take a look at what you should be budgeting for based on various annual incomes:

Annual Income10%15%Monthly Car Budget
$20,000$2,000$3,000$167 – $250
$50,000$5,000$7,500$417 – $625
$70,000$7,000$10,500$583 – $875
$90,000$9,000$13,500$750 – $1,125
$100,000$10,000$15,000$833 – $1,250

Other Car Expenses To Consider

In addition to the purchase price of your vehicle, there are various other expenses to factor into your budget, including the following:

Fees

There are plenty of additional fees you may need to pay when buying a car, which will be specified in your contract. Such fees can include car registration fees, sales tax, dealer fees, freight fees, pre-purchase inspection fees, and so forth. 

Add-Ons

Cars are often advertised with their starting price. This price is for the base model with no additional features. If you choose to add additional features that are not included in the base price, you’ll need to pay extra for each one. 

Make sure you find out exactly what is included in the base price, as well as how much each additional feature costs to determine the final price for your new car. 

Warranty

New car purchases typically come with a basic factory warranty, which covers just about everything on the vehicle except wear and tear items, such as filters, brake pads, and tires, among others. But if you want an extended warranty, you’ll need to pay for it. 

Fuel

Gas is pretty pricey these days, which can eat up a big chunk of your finances every month. Estimate roughly how far you drive every month and how often you have to fill the gas tank to get an idea of how much you can expect to pay to fuel up each month. 

Repair And Maintenance

Cars need regular maintenance to keep them running smoothly and safely. That includes paying for services like oil changes, car washes, tire rotations, and so forth. And every so often, you may have to cover the cost of unforeseen issues, such as bodywork for dents or fender benders. 

How To Calculate The Highest Car Price You Can Afford

To determine how much you can afford for a car with great accuracy, follow these steps: 

Step 1: Figure Out How Much You Can Afford Monthly

When calculating how much you can afford for a car, the most obvious step is to base your affordability on your income. But it’s your take-home pay — or “net ” pay — that you should consider, and not your pre-tax income — or “gross” income. This will give you a more accurate idea of how much money you can afford to spend.

Once you know what your net monthly take-home pay is, you can use any one of the above-mentioned tactics to come up with an accurate idea of your maximum monthly car payments based on your current finances.

Step 2: Determine How Much You Can Borrow

Once you’ve calculated the monthly car payment amount that best fits into your budget, you’ll have a better idea of how much you can borrow. This will depend on several factors besides your income, such as the following:

  • Your credit score. The higher your score, the lower your interest rate will likely be.
  • Your loan term. A longer term means lower monthly payments.
  • Your current debt load. A high income may give you more money to work with when taking out a car loan, but your current debts should be manageable before adding another payment to the mix.  
  • Whether you’re buying new or used. New car loans typically come with lower interest rates compared to used car loans.
  • Your savings. If you have adequate assets on the back-burner, this can provide you with a financial cushion in case you stumble upon financial hardship that may hinder you from making timely car payments. The more assets you have to your name, the more your lender may allow you to borrow. 

Step 3: Calculate The Vehicle’s Price

The total cost of buying a car doesn’t end at the ticket price of the vehicle. Be sure to factor in sales tax, registration fees, documentation fees, and other expenses, which your car lender and dealer will lay out for you. 

How To Increase Your Car Buying Power

To maximize the car loan amount you may qualify for, consider these tips:

  • Keep your spending in check. Come up with a budget to help you keep tabs on your spending. This will help you create less debt while putting more into savings. You can then apply those savings toward a car purchase, which can then help you qualify for a more expensive car. 
  • Cut down on debt. If your debt is a bit out of control, consider hunkering down to pay off as much as you can before buying a car and applying for an auto loan. A lower debt level will show lenders that your debt is under control and that there’s enough income left to cover your car loan payments. The lower your debt, the more income you’ll have left to put towards your car. 
  • Comparison shop. Don’t apply for a car loan with the first lender you come across. While that may be the one you end up working with, you should still see what else is out there. You can use an online loan aggregator to compare different car lenders and loan offers. Moreover, many lenders offer pre-approvals which can show you the loan amount you may secure based on your current financial and credit profile. 
  • Use a cosigner. You can minimize the risk for the lender by adding a cosigner to your car loan contract. This will not only boost your odds of loan approval, but you may also secure better terms, a lower rate, and a higher loan amount. 

FAQs On How Much Car Can You Afford

How do I reduce my car loan costs?

To reduce your overall car loan costs, you can apply for a shorter loan term to ensure you don’t pay as much in interest, and make sure your credit score is healthy to secure a lower rate.  To reduce your monthly payments, on the other hand, taking out a longer term will help keep your monthly payments low, though you’ll pay more in interest overall. You can also make a higher down payment to lower the loan amount you apply for.

How do I decide what car I can afford?

Once you’ve calculated your maximum monthly car loan payments, you can determine the highest purchase price you can afford and shop around for vehicles that fall within this price range. Just make sure you’re looking not only at the listed MSRP, but also all fees and taxes applicable. 

Can I get a car loan without being employed?

Income is a general requirement to qualify for a car loan. Traditional employment is a typical source of income that lenders look at, but it’s not the only one. There are some other sources of income that may be considered even if you’re not working, such as unemployment benefits, pension, investment dividends, rental income, or alimony, among others.

How much should I spend on a new vs. old car?

New car models are more expensive than a used vehicle of the same model, so you’ll be paying more for a new car versus a used one. If you’re looking to spend less, consider buying a used car. Generally speaking, car depreciation slows as the car ages. As such, you may want to consider buying a used car that’s a few years old to take advantage of significant savings.

Bottom Line

Cars come in all shapes and sizes. Some are cheaper than others, some guzzle more gas. Whatever car or truck you’re looking to buy, remember that you should ensure you can not only afford the car loan payments but any potential repairs and maintenance requirements.  A car can be a valuable tool that you can use to get ahead in life, as long as you work hard to take care of it.

  

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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