Determining your car budget is about more than just checking the sticker price. To maintain financial health, experts recommend looking at your gross annual income and your existing debt-to-income ratio. A car is a depreciating asset, so overextending your budget can impact your ability to save for retirement or a home.
The 10% Rule for Car Payments
A standard financial guideline is that your total monthly car-related costs (including insurance and fuel) should not exceed 10% to 15% of your gross monthly income. This calculator uses a conservative 10% threshold for the monthly payment alone to ensure you have breathing room for maintenance and rising gas prices.
Understanding the Inputs
To get an accurate estimate, you need to consider several factors:
Gross Annual Income: Your total earnings before taxes and deductions.
Monthly Debt: Existing obligations like student loans, personal loans, or minimum credit card payments. This helps ensure your total debt load remains manageable.
Cash and Trade-In: These represent your "equity" in the new purchase. The more you put down upfront, the less you pay in interest over the life of the loan.
Financing Term: While 72 or 84-month loans offer lower monthly payments, they often lead to "upside-down" loans where you owe more than the car is worth. A 60-month term is generally considered the healthy maximum.
Example Calculation
If you earn 60,000 per year, your gross monthly income is 5,000. Applying the 10% rule, your target car payment should be approximately 500. If you have 5,000 in cash and a 5,000 trade-in, and you secure a 5% interest rate over 60 months, you could afford a car priced at approximately 36,000.
function calculateAffordability() {
var income = parseFloat(document.getElementById('annualGross').value) || 0;
var debt = parseFloat(document.getElementById('monthlyExpenses').value) || 0;
var cash = parseFloat(document.getElementById('cashSavings').value) || 0;
var trade = parseFloat(document.getElementById('tradeIn').value) || 0;
var term = parseFloat(document.getElementById('loanDuration').value) || 60;
var apr = parseFloat(document.getElementById('apr').value) || 0;
if (income <= 0) {
alert("Please enter a valid annual income.");
return;
}
// 1. Calculate Monthly Gross Income
var monthlyGross = income / 12;
// 2. Calculate Maximum Monthly Payment (10% of Gross)
// We also check if total debt + car payment exceeds 36% of gross income (standard DTI limit)
var maxPaymentByIncome = monthlyGross * 0.10;
var maxPaymentByDTI = (monthlyGross * 0.36) – debt;
// Use the more conservative of the two
var targetMonthlyPayment = Math.min(maxPaymentByIncome, maxPaymentByDTI);
if (targetMonthlyPayment 0) {
var monthlyRate = (apr / 100) / 12;
loanAmount = targetMonthlyPayment * (1 – Math.pow(1 + monthlyRate, -term)) / monthlyRate;
} else {
loanAmount = targetMonthlyPayment * term;
}
// 4. Calculate Total Affordability
var upfrontTotal = cash + trade;
var totalCarPrice = loanAmount + upfrontTotal;
// 5. Display Results
document.getElementById('affordResult').style.display = 'block';
document.getElementById('resMonthly').innerText = '$' + targetMonthlyPayment.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('resLoan').innerText = '$' + loanAmount.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('resUpfront').innerText = '$' + upfrontTotal.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('resTotal').innerText = '$' + totalCarPrice.toLocaleString(undefined, {minimumFractionDigits: 0, maximumFractionDigits: 0});
}