How Much Car Can You Afford? Work Backwards From the Budget
A $600 a month car budget does not buy a $600 a month car loan. Insurance, fuel and upkeep take about half of it before the loan gets a look in - leaving $300 for the payment. That buys an $18,255 car over five years, and stretching the loan to seven years only gets you to $20,563 while adding $1,155 of interest.
Start with the whole budget
Most car shopping starts with a payment: “I can do $600 a month.”
Then insurance arrives. And fuel. And a service.
The honest approach works backwards. Your car budget is everything the car costs, and the loan gets whatever is left.
| Monthly | |
|---|---|
| Your total car budget | $600 |
| Insurance | −$120 |
| Fuel | −$110 |
| Servicing and upkeep | −$70 |
| Left for the loan | $300 |
Half the budget is gone before the loan starts. That is the number people miss, and it is why a “$600 a month car” turns into a squeeze by month four.
What $300 a month actually buys
$5,000 down, 7% over five years, including sales tax and fees. From the car affordability calculator:
| Amount | |
|---|---|
| Loan you can support | $15,151 |
| Plus your deposit | $5,000 |
| Car price you can afford | $18,255 |
| Out the door, with tax and fees | $20,151 |
An $18,255 car - not the $35,000 one the payment made you think about.
That is a genuinely useful number to have before walking onto a forecourt, because it stops the conversation being about what you can be talked into.
Stretching the loan barely helps
The obvious response is a longer loan. Here is what it actually buys:
| Term | Car you can afford | Total interest |
|---|---|---|
| 36 months | $13,128 | $1,084 |
| 48 months | $15,781 | $1,872 |
| 60 months | $18,255 | $2,849 |
| 72 months | $20,563 | $4,004 |
Going from five years to six buys $2,308 more car and costs $1,155 more interest - plus a further year of owing more than the car is worth.
The returns diminish sharply. Each extra year adds less car and more interest than the year before, which is the opposite of how people imagine it works.
The 20/4/10 test
A strict but useful filter:
- 20% down
- 4 years maximum
- 10% of gross monthly income, all in
On a $6,000 monthly income buying that $18,255 car with $5,000 down over 60 months at $600 all in:
| Test | You | Pass? |
|---|---|---|
| 20% down | 27.4% | Yes |
| 4 years or less | 5 years | No |
| 10% of income | 10.0% | Yes |
Two out of three, failing on the term - which is the most common way to fail it, and the one worth taking most seriously.
Passing all three is demanding. Most people do not, and that is not automatically a disaster. But knowing which test you are failing tells you where the risk sits.
What this leaves out
Depreciation - the largest cost of owning a car - does not appear here, because no bill arrives for it monthly.
It does not affect what you can afford. It matters enormously for which car to buy, because two cars at the same price can differ by thousands in what they are worth in five years. The true cost to own calculator covers that side.
Before you shop
- Set a whole-car budget, not a payment.
- Get an insurance quote on the specific car before committing. It varies enormously.
- Take the shortest term you can manage. Longer buys little and costs a lot.
- Check yourself against 20/4/10 and know which test you are failing.
- Walk in knowing your price, not your payment.
Work out your own in the car affordability calculator - it works backwards from your whole budget and shows what each loan length actually buys.
Common questions about car affordability
How much car can I afford?
Work backwards from your whole car budget, not the payment. A $600 monthly budget with $120 insurance, $110 fuel and $70 upkeep leaves $300 for the loan - which over five years at 7% supports a $18,255 car including tax and fees.
What is the 20/4/10 rule?
Put 20% down, borrow for no more than four years, and keep total car costs under 10% of gross monthly income. It is a strict test and most people fail at least one part. Failing the four-year test is the most common, and it is the one worth taking seriously.
Does a longer loan let me afford more car?
Only slightly, and it costs a lot. Stretching from 60 to 72 months on the same $300 budget raises the affordable price from $18,255 to $20,563 - $2,308 more car for $1,155 more interest, plus another year of being underwater.
Why count insurance and fuel in the budget?
Because they come out of the same money. A payment you can technically afford is meaningless if the insurance on that car takes the rest of your budget. Insurance in particular varies enormously between vehicles and is worth quoting before you commit.
What about depreciation?
It is the largest cost of owning a car but it does not affect what you can afford monthly, because no bill arrives for it. It matters enormously for which car to buy - see the true cost to own calculator for the whole picture.