How to work out what car you can afford
Most car shoppers do not start with a price. They start with a number they are comfortable paying every month, such as "$400 a month". This calculator turns that number into a price. It takes the payment you can carry, works out how much a lender would let you borrow for it over your chosen term, adds your down payment and trade-in, and then removes the sales tax and fees that sit on top of the price. What is left is the sticker price your budget can support.
It is the same math as the auto loan calculator, run in the other direction, so the two always agree.
The formula, and what every variable means
amount you can borrow = payment × (1 − (1 + r)−n) ÷ r
price = (amount you can borrow + down payment − fees) ÷ (1 + sales tax rate) + trade-in value
| Symbol | Meaning | How it is found |
|---|---|---|
| Payment | The monthly loan payment you can afford | Your budget minus insurance, fuel and upkeep |
| r | Monthly interest rate | APR ÷ 12 ÷ 100 (7% becomes 0.005833) |
| n | Number of monthly payments | The loan term in months |
| Down payment | Cash you pay up front | Entered directly |
| Fees | Title, registration and dealer fees you finance | Entered directly |
| Sales tax rate | Tax on the price, as a decimal | 6% becomes 0.06 |
| Trade-in value | What the dealer credits for your old car | Entered directly. Most states tax only the price minus this value. |
The second line comes from the auto loan equation: amount financed = price + tax + fees − down payment − trade-in, where tax = (price − trade-in) × tax rate. Setting the amount financed equal to the amount you can borrow and solving for the price gives the formula above.
Worked example 1, by hand: $400 a month
Assume a $400 monthly payment, $2,000 down, no trade-in, 6% sales tax, a 7% rate and a 60-month loan.
- Monthly rate: 7 ÷ 100 ÷ 12 = 0.005833.
- Growth factor: (1 + r)60 ≈ 1.4176.
- Amount you can borrow: $400 × (1 − 1 ÷ 1.4176) ÷ 0.005833 ≈ $20,200.80.
- Add the down payment: $20,200.80 + $2,000 = $22,200.80 to spend on the price and its tax.
- Take out the sales tax by dividing by 1 + 0.06: $22,200.80 ÷ 1.06 ≈ $20,944.15.
So a $400 payment supports a car of about $20,944. To check it, run the answer forwards: $20,944.15 plus $1,256.65 of tax less $2,000 down leaves $20,200.80 to finance, which at 7% over 60 months costs $400.00 a month. Over the whole loan you would pay $3,799 in interest, and the car's true cost including your down payment is $26,000.
Worked example 2: the same budget over different loan lengths
Nothing changes here except the number of months. The budget stays at $400 a month.
| Loan length | Most car | Total interest |
|---|---|---|
| 36 months | $14,108 | $1,445 |
| 48 months | $17,645 | $2,496 |
| 60 months | $20,944 | $3,799 |
| 72 months | $24,021 | $5,338 |
| 84 months | $26,890 | $7,097 |
Going from 36 to 84 months lets the same payment reach a car that costs $12,781 more, but you pay $5,652 more interest and make payments for four extra years. This is why a salesperson who asks "what monthly payment are you looking for?" can nearly always hit your number: they lengthen the loan. Decide the price and the term first, then look at the payment.
Worked example 3: insurance, fuel and upkeep
If your limit is $500 a month for owning the car, not just paying the loan, the other costs must come out of it. Say insurance, fuel and upkeep total $200 a month.
| Budget is only for the loan | Budget also covers running costs | |
|---|---|---|
| Monthly loan payment | $500.00 | $300.00 |
| Most car you can afford | $25,708 | $16,180 |
Counting the running costs lowers the affordable price by $9,529. The loan payment is only part of what a car costs each month, and it is the part people remember. Put your real insurance quote in the calculator before you decide.
Worked example 4: the interest rate
The same $400 budget at four different rates over 60 months:
| Interest rate | Most car | Total interest |
|---|---|---|
| 4.5% | $22,128 | $2,544 |
| 7% | $20,944 | $3,799 |
| 10% | $19,647 | $5,174 |
| 14% | $18,105 | $6,809 |
The payment does not change, yet the car you can reach falls by $4,024 between the lowest and highest rate. A better credit history, a larger down payment or a competing offer from a credit union can all move you up this table.
Testing your answer against the 20/4/10 rule
A popular rule of thumb for buying a car, not an official standard, is to put at least 20% down, borrow for no more than four years, and keep total car costs under 10% of your gross income. Take example 1 with a $60,000 income. The down payment is 10% of the price, short of 20%. The loan is 60 months, longer than 48. The $400 payment is 8.0% of monthly income, inside the 10% limit. So the plan meets one of the three tests. It is not a bad plan, but it shows where the risk sits: a small down payment and a five-year loan make it easier to owe more than the car is worth. The calculator runs this check for you when you enter your income.
For scale, the 10% limit means a $400 monthly budget suits an income of about $48,000 a year or more.
Common mistakes to avoid
- Leaving out insurance and fuel. The loan is not the only monthly car cost.
- Letting the term grow to hit a payment. Compare the interest column, as in example 2.
- Forgetting sales tax and fees. They sit on top of the price and are financed too.
- Using a dream interest rate. Try a rate a couple of points higher as a stress test.
- Treating the result as a target. It is a ceiling, and you usually do better by buying below it.
Before you go shopping
- Get pre-approved by a bank or credit union so you know your real rate and limit.
- Get an insurance quote for the exact model, since it differs a lot between cars.
- Ask for the out-the-door price in writing, including tax and fees.
- Then test the real price in the auto loan calculator, and see how much you would pay to get out early with the loan calculator.
Sources and review
The formulas are the standard fixed-rate amortization formula, solved for the amount borrowed, and the tested auto loan equations. The calculator's results are checked against the auto loan calculator in our test suite. The Consumer Financial Protection Bureau's advice is to add up every cost of owning a car before you borrow, not just the payment: how much you can afford to borrow for a car. It also says to compare offers on more than the monthly payment, and shows that a longer term lowers the payment but raises the interest paid: how to compare auto loan offers. See the loan-to-value ratio and trading in a car that is not paid off. Sales tax rules differ by state, so confirm yours with your state revenue department. More in the CFPB's auto loan tools. Last reviewed September 2026. Read about our methodology.