Car Affordability Calculator

The most commonly cited guideline is the 20/4/10 rule: put at least 20% down, finance for no more than four years, and keep total vehicle costs under 10% of gross monthly income. It is conservative by design.

• 20% down offsets immediate depreciation. A new car loses roughly 20-35% of its value in the first year, so a small down payment leaves you owing more than the car is worth almost immediately.
• Four years or less keeps the loan shorter than the period in which major repair bills typically begin, and stops you paying interest for six or seven years on an asset that is losing value throughout.
• 10% of gross income for everything - payment, insurance, fuel, maintenance and tax. The payment alone is usually only about half of that total.

Note. A common alternative is the 20/3/8 rule: 20% down, a maximum three-year term, and total transport costs under 8% of gross income. It is stricter and, for most buyers, more realistic about what a car actually costs.

The finance payment is under half of it. Depreciation is often the single largest line and it never appears on a statement - you only see it when you sell.

Running the affordability calculator on the payment alone will therefore understate the real commitment by roughly a factor of two. Add the running costs to the figure before deciding.

Each additional $100 of monthly payment supports roughly $4,040 of borrowing, which at 20% down is about $5,050 of vehicle. Stretching from four to six years raises the affordable price by roughly 20% - and raises total interest by about 55%.

Note. A longer term increases the price you can "afford" while making the car more expensive. The calculation shows the temptation rather than the wisdom of it.

• New cars lose roughly 20-35% in year one, then around 15% a year for several more. A $35,000 car can be worth $21,000 after three years.
• The most expensive years to own a new car are the first three - that is where the depreciation concentrates.
• Cars roughly two to five years old have absorbed the steepest loss while retaining most of their life, which is why they are often the best value.
• Some models hold value far better than others. Resale value varies enough between models to outweigh a difference in purchase price over a normal ownership period.
• Finance terms interact with depreciation. A long loan on a fast-depreciating car regularly produces negative equity - owing more than the car is worth - which becomes a serious problem if it is totalled or traded in.

1. Get insurance quotes first. The payment may be affordable while the combined cost is not, and insurance on a financed car must be comprehensive and collision, not liability only.
2. Check the total price, not the monthly. Dealers negotiate the payment by extending the term or adding a balloon/residual, both of which raise the total.
3. Read the annual percentage rate separately from the payment - a low payment can hide a high rate or a long term.
4. Watch for add-ons - extended warranties, GAP insurance and protection products sold in the finance office, often at large mark-ups.
5. Know your trade-in value independently before entering the negotiation, so you can recognise a poor offer.
6. Compare the total cost of buying against leasing only if you will reliably change vehicles on schedule; leasing suits frequent changers and penalises everyone else.