Worked Numbers
Car Affordability Calculator Based on Income: Budget the Total
To work out how much car you can afford based on income, pick the share of your monthly take-home pay you are willing to give the car, subtract what the car costs to run (insurance, fuel, maintenance, registration), and treat what is left as your maximum loan payment. Then run the loan payment formula backward to get the loan, and add your down payment to get the price. In the illustrative example below, 15% of $5,000 a month supports a car of about $24,164. Spend the same 15% on the payment alone and the answer jumps to $42,967 - $18,803 more car than the budget can carry.
The car loan payment formula
Payment = loan x r / (1 - (1 + r) ^ -n)
where r is the APR divided by 12 and n is the number of monthly payments. The loan is the price minus the down payment and any trade-in.
Worked example (illustrative figures, not a quote): a $35,000 car, $5,000 down, $30,000 financed at 6.9% for 60 months.
- Monthly payment: $592.62
- Total interest over the loan: $5,557.29
- What the car costs by the last payment, down payment included: $40,557.29
The payment is not what the car costs
The payment is the number on the loan paperwork, but the car also has to be insured, fueled, maintained and registered. With the example’s own running costs - all illustrative, so use your own quotes:
| Monthly cost | Amount |
|---|---|
| Loan payment | $592.62 |
| Fuel (12,000 miles a year, 28 mpg, $3.40 a gallon) | $121.43 |
| Insurance $1,800, maintenance $900, registration $300 a year | $250.00 |
| Total a month | $964.05 |
The payment is 61% of what this car costs each month. The other $371.43 arrives whether or not the loan is paid off. All in, the car costs $0.96 for every mile driven. If you drive it for work, the mileage reimbursement calculator post checks whether the IRS rate covers that cost.
Car affordability calculator based on income: the steps
- Pick the share. Decide what share of take-home pay the car gets, counting every cost above. This is your choice, not a rule; the example uses 15% of $5,000, which is $750.00 a month.
- Subtract running costs. $750.00 - $371.43 = $378.57 left for the payment.
- Turn the payment into a loan. Loan = payment x (1 - (1 + r) ^ -n) / r. At 6.9% over 60 months, $378.57 a month supports a loan of $19,164.
- Add the down payment. $19,164 + $5,000 = $24,164.
So on these assumptions the $35,000 car in the first example is $10,836 over budget; its $592.62 payment alone is more than the $378.57 left after running costs.
The overshoot: budgeting the payment instead of the car
If the whole $750.00 goes to the payment, the same formula says $42,967. That is the answer you get from budgeting the payment alone, and it is $18,803 more car than the income-based budget above. The running costs do not disappear: the real monthly total becomes $1,121.43, which is 22% of take-home pay, not the 15% that was chosen. (This holds the example’s running costs fixed. If your insurance or upkeep quote rises with the price, the gap is wider.)
This is the insight the whole calculation turns on: decide the share for the total, and let the payment be whatever is left.
Longer terms buy more car, and cost more interest
With the payment fixed at $378.57, stretching the term raises the price you can reach, and the interest you pay for it:
| Term | Price affordable at $378.57 a month | Interest paid over the loan |
|---|---|---|
| 36 months | $17,279 | $1,349.81 |
| 48 months | $20,840 | $2,331.54 |
| 60 months | $24,164 | $3,550.04 |
| 72 months | $27,268 | $4,989.58 |
Going from 36 to 72 months lets the same payment reach $9,989 more car, at a cost of $3,639.78 more interest. If the car loses value faster than the loan is paid down, a longer term also means more months owing more than the car is worth.
For the $35,000 car itself, at the same 6.9% for every term:
| Term | Monthly payment | Total interest |
|---|---|---|
| 36 months | $924.94 | $3,297.91 |
| 48 months | $717.00 | $4,415.82 |
| 60 months | $592.62 | $5,557.29 |
| 72 months | $510.03 | $6,722.22 |
Stretching from 36 to 72 months lowers the payment by $414.91 and adds $3,424.31 of interest. If your lender quotes a higher rate for longer terms, the gap is wider.
Car loan calculator with extra payments
Paying $100 a month on top of the $592.62 payment ($692.62 in all) from the first month, on the $30,000 loan:
- Payments made: 50 instead of 60, so 10 months sooner
- The last payment is smaller: $661.85
- Interest: $4,600.31 instead of $5,557.29, a saving of $956.98
That assumes the extra goes to principal every month and there is no prepayment penalty. Check both with your lender.
How these were calculated
Payments use the standard amortization formula and are checked by a month-by-month schedule in which each month’s interest is the balance times APR / 12. The affordable loan is each payment discounted back to today, one month at a time. The extra-payment case runs the schedule until the balance is cleared, with the final payment counted exactly. Every figure is computed by the code behind the pack below and again by independent code written for this page; the page only builds if they agree to the cent. The income, the share given to the car, the rate and all running costs are illustrative inputs, not quotes or recommendations. Taxes and fees are assumed to be in the price. This is arithmetic, not financial advice.
If you want to run these on your own numbers, the pack below covers the payment and total interest, interest by term, extra payments, the effect of a bigger down payment, lease versus buy, negative equity, and the total cost a month. It has no income sheet, so do steps 1 and 2 above first and use its total-cost sheet to check the result.