How much car can you really afford?
The price on the windscreen is the smallest part of the story. Here is how to budget for the payment and everything that comes after it.
Work out the most expensive car you can afford from a comfortable monthly payment.
Working out how much car you can afford is not really a question about the price on the windscreen. It is a question about the monthly payment you can carry comfortably, and the running costs that follow you for as long as you own it. Get those two things right and the sticker price sorts itself out.
Start from the monthly payment, not the price
Dealers love to talk in monthly payments because a big price can be made to sound small by stretching it over enough years. You can use the same logic in your favour. Decide what you can pay each month without straining, and work backwards to a price.
A common guideline is to keep your total car costs, the loan payment plus insurance and running costs, under about 15% to 20% of your take-home pay. On a take-home pay of 3,000 a month, that points to roughly 450 to 600 for everything car-related, not just the loan.
The costs people forget
The loan payment is the part everyone plans for. The costs that quietly break budgets are the ones that come after you drive away:
- Fuel. Depends heavily on the engine, your mileage, and how you drive. A thirsty engine can cost hundreds more a year than an efficient one for the same journeys.
- Insurance. Often much higher on newer, faster, or more expensive cars, and on new drivers.
- Servicing and repairs. A rough rule is that these rise as a car ages, so a cheap old car is not always cheap to keep.
- Depreciation. The value the car loses while you own it. This is usually the single biggest cost of a newer car, even though you never see a bill for it.
Depreciation is the hidden giant. A car that drops from 30,000 to 18,000 over five years has cost you 12,000 in value alone, which works out to 200 a month before you have bought a drop of fuel. Our cost of ownership calculator puts a number on this so you can compare cars honestly.
A worked example
Say your take-home pay is 3,200 a month and you decide 18% is the most you want to spend on the car in total, which is about 576. You expect insurance, fuel and upkeep to come to around 250 a month. That leaves roughly 326 for the loan payment. Feed that payment into a car affordability calculator with a realistic interest rate and term, and you get the actual price range you should be shopping in. It is almost always lower than the number a salesperson will steer you toward, and that is the point.
A note on loan length
Stretching a car loan to seven years makes the monthly payment look friendly, but you pay more interest and you often owe more than the car is worth for years. A shorter term costs more each month and far less overall. If a car only fits your budget on the longest possible loan, it is a sign the car is too expensive, not that the loan is too short.
The bottom line
Set a total monthly car budget from your take-home pay, subtract realistic running costs, and let the leftover set your loan payment and price. Buy the car that fits the budget with room to spare, not the one that fits only if nothing ever goes wrong.
Frequently asked questions
What percentage of income should go on a car?
A common guideline keeps all car costs, the loan plus insurance, fuel and upkeep, under about 15% to 20% of take-home pay. The loan payment alone should be well below that so there is room for running costs.
Is a longer car loan a bad idea?
Longer loans lower the monthly payment but raise the total interest and keep you owing more than the car is worth for longer. If a car only fits on the longest term, it is usually too expensive for the budget.
Why does depreciation matter if I am not selling?
Depreciation is real money the car loses while you own it, and you feel it the day you sell or trade in. On newer cars it is often the largest cost of all, which is why cheaper used cars can be far kinder to a budget.