Buying a car involves more than just the monthly payment. To maintain financial health, experts recommend the 10% rule, which suggests that your total vehicle-related expenses (including insurance and fuel) should not exceed 10% of your gross monthly income. This calculator focuses on the financing portion of that budget.
The 20/4/10 Budgeting Rule
A standard benchmark for vehicle purchasing is the 20/4/10 rule:
20% Initial Contribution: Put at least 20% down to avoid "gap" situations where you owe more than the car is worth.
4 Year Finance Term: Limit the financing period to 48 months to minimize interest costs.
10% Income Limit: Keep your monthly payment under 10% of your gross monthly pay.
How This Calculation Works
The calculator uses the 10% income threshold as the "Safe Monthly Payment." It then applies the Present Value of an Annuity formula to determine how much you can borrow based on that payment, the duration of the term, and the financing rate. Finally, it adds your initial cash and trade-in value to arrive at the total sticker price you can afford.
Expert Tip: Don't forget to account for sales tax, registration fees, and dealer documentation fees, which usually add 8-10% to the final purchase price.
Example Calculation
If you earn $6,000 per month and have $5,000 in savings:
Target Payment: 10% of $6,000 = $600/month.
Financing: At a 5% rate over 48 months, a $600 payment supports a loan of roughly $26,000.
Total Budget: $26,000 (Loan) + $5,000 (Savings) = $31,000 Affordability.
function calculateAffordability() {
var income = parseFloat(document.getElementById('monthlyIncome').value);
var debts = parseFloat(document.getElementById('monthlyDebts').value) || 0;
var cash = parseFloat(document.getElementById('cashDown').value) || 0;
var trade = parseFloat(document.getElementById('tradeIn').value) || 0;
var months = parseInt(document.getElementById('loanTerm').value);
var rate = parseFloat(document.getElementById('annualRate').value);
if (isNaN(income) || income <= 0 || isNaN(rate) || rate < 0) {
alert("Please enter valid income and financing rate values.");
return;
}
// Rule: Monthly payment should be 10% of gross income
var suggestedPayment = income * 0.10;
// Check Debt-to-Income (DTI) constraint
// Total debt including car shouldn't exceed 36% of income (conservative)
var maxDebtLoad = income * 0.36;
var currentDebtLoad = debts;
var availableForCar = maxDebtLoad – currentDebtLoad;
// Use the lower of the 10% rule or the DTI headroom
var finalMonthlyBudget = Math.min(suggestedPayment, availableForCar);
if (finalMonthlyBudget <= 0) {
finalMonthlyBudget = income * 0.05; // Set a minimum floor if DTI is tight but user still needs a car
}
// Financing math
var monthlyRate = (rate / 100) / 12;
var loanAmount = 0;
if (monthlyRate === 0) {
loanAmount = finalMonthlyBudget * months;
} else {
// Present Value formula: PV = PMT * [(1 – (1 + r)^-n) / r]
loanAmount = finalMonthlyBudget * ((1 – Math.pow(1 + monthlyRate, -months)) / monthlyRate);
}
var totalBudget = loanAmount + cash + trade;
// Display results
document.getElementById('totalCarPrice').innerText = '$' + Math.round(totalBudget).toLocaleString();
document.getElementById('suggestedPayment').innerText = '$' + Math.round(finalMonthlyBudget).toLocaleString();
document.getElementById('financedAmount').innerText = '$' + Math.round(loanAmount).toLocaleString();
var adviceText = "";
if (availableForCar < suggestedPayment) {
adviceText = "Note: Your existing debts are high. We reduced the target payment to keep your total debt-to-income ratio manageable.";
} else {
adviceText = "This budget follows the conservative 10% rule, ensuring you have plenty of income left for maintenance and other life goals.";
}
document.getElementById('affordabilityAdvice').innerText = adviceText;
document.getElementById('resultsArea').style.display = 'block';
// Scroll to results
document.getElementById('resultsArea').scrollIntoView({ behavior: 'smooth', block: 'nearest' });
}