π How Much Car Can I Afford?
Apply the 20/4/10 rule: 20% down, 4-year max term, 10% of income on the payment.
20/4/10 Rule Estimate
Estimates for planning only, not financial advice.
How to Use This Calculator
This calculator applies the 20/4/10 rule to your income and tells you what car price you can truly afford, not just what a dealer will lend you. Enter your gross monthly income and your cash down payment, add any trade-in value, and pick a loan term and APR.
Enter your gross monthly income (before taxes). The rule gives you a monthly payment budget of 10 percent of this number.
Enter your cash down payment and trade-in value. Both count toward the 20 percent down requirement.
Pick a loan term (48 months is the guideline maximum) and enter the APR you expect.
Add your estimated monthly insurance and fuel. The calculator compares total vehicle cost to a 15 percent of income guideline.
The 20/4/10 Rule Explained
The three parts of the rule each protect you from a different mistake. Twenty percent down keeps you from owing more than the car is worth the moment you drive off the lot. A four-year maximum term keeps the loan ahead of depreciation: cars lose value fastest in the first few years, so a 72-month loan leaves you underwater for years. The 10 percent payment cap keeps the car from crowding out savings, housing, and everything else in your budget. The 0.80 divisor in the formula is the 20 percent down payment expressed mathematically: if 80 percent of the price is the loan, the price is the loan divided by 0.80.
Worked Example
Gross monthly income $5,000 (a $60,000 salary). Max payment = 5,000 x 0.10 = $500 per month. APR 6 percent, 48-month term: r = 0.005, annuity factor A = ((1.005)^48 - 1) / (0.005 x (1.005)^48) = 42.5803. Affordable loan = 500 x 42.5803 = $21,290.16. With no trade-in, affordable price = 21,290.16 / 0.80 = $26,612.70, or about $26,613. Total loan cost = 500 x 48 = $24,000. The required 20 percent down on a $26,613 car is $5,322.54.
Why the 4-Year Term Is the Important One
The term limit is the rule people break most often, because stretching a loan to 60 or 72 months is the easiest way to make an expensive car fit a monthly budget. The problem is depreciation: a new car sheds roughly 20 percent of its value in the first year and about 15 percent per year after that. On a long loan, the balance falls slower than the value, leaving a period where selling or totaling the car leaves you owing money on a car you no longer own. Insurance and fuel make this worse, not better: most calculators quote the loan payment and stop there, but the real monthly cost includes insurance (higher on financed cars, since lenders require full coverage) and fuel. Add those in honestly. If the total monthly vehicle cost crosses 15 percent of your gross income, the right move is a cheaper car or a bigger down payment, not a longer loan.
Estimates for planning only, not financial advice. Actual APR depends on your credit, and insurance quotes vary widely by car and driver.
Frequently Asked Questions
What is the 20/4/10 rule?
The 20/4/10 rule is a car-buying guideline: put at least 20 percent down, keep the loan term to 4 years or less, and spend no more than 10 percent of your gross monthly income on the car payment. Together the three rules keep you from ending up underwater on a depreciating asset. Most US auto loans today stretch to 60 or even 72 months, which is exactly the trap this rule avoids.
How much car can I afford on a $60,000 salary?
A $60,000 salary is $5,000 per month gross, so the 20/4/10 rule caps your car payment at $500 per month. At 6 percent APR over 48 months that payment supports a loan of about $21,290, which translates to a car price of roughly $26,613 with no trade-in. Add your trade-in value to the loan before dividing by 0.8 to see your own number.
Should I buy a new or used car to stay within budget?
The 20/4/10 rule works for either, but used cars make compliance much easier: lower prices mean a smaller loan, a reachable 20 percent down payment, and a term that stays under 4 years. New cars lose roughly 20 percent of their value in the first year, so a long loan on a new car almost guarantees owing more than the car is worth.
Does my trade-in count toward the 20 percent down?
Yes. The down payment in the 20/4/10 rule means total equity you put into the purchase: cash plus trade-in value. If your target car costs $25,000 and your trade-in is worth $6,000, you already exceed the 20 percent requirement and only need cash for the rest of the down payment, if any is needed at all.
How do insurance and fuel change the math?
The 10 percent cap covers the loan payment alone, but a car costs more than its payment. This calculator adds your estimated monthly insurance and fuel to show total monthly vehicle cost against a 15 percent of income guideline. If the total pushes past 15 percent, consider a cheaper car or a bigger down payment, since insurance and fuel are not optional.