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How Much Can I Afford To Buy A Car: Car Affordability Calculator

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Buying a car has become more of a necessity rather than a luxury these days. But fitting a car in regular household budget is not an easy task at all. It requires a lot of calculations and anticipations before starting one more EMI, and car affordability calculator is one of those tools that can help you in reaching the decision.

Car Affordability Calculator

These estimates are based on data as collected by industry. The estimated figure includes everything starting from sales tax, insurance, and registration fees. However, it does not include any add on benefits like extended warranties that you may want to avail while buying a car. Also, no specific amount is calculated rather a price range is given as at the time of buying customers can avail various discounts and offers. The estimated range will be based on the information that you have put in the car affordability calculator.

Main components of Car Affordability Calculator

The basic information that is required to get the estimate is:

  • Whether you are financing a car or paying cash.
  • Annual Income before taxes
  • Rate of Interest
  • Down Payment, you intend to make
  • Length of loan you intend to carry forward your loan
  • Net trade in value

After submitting these components you will get the estimate that what part of your income you can dispose to pay monthly EMI’s.

Different School of Thoughts

Financial experts have not been able to come on consensus as in how much to spend on buying a car. One school of thought believes that total expense including car insurance, gas or diesel expense must not exceed 20% of total pre-taxable income. While there are few experts who believe that there is no harm spending half of your income on buying a car. And then there is another school of thought who suggests not spending 10 to 15% of total income on purchasing a car.

How Much Can I Afford To Buy A Car?

Everyone does not know about what experts believe and thus they don’t follow any strict rule. So if you are wondering how much you can spend on buying a car, I would say not what you are expecting.

Looking at the different school of thoughts, the range in which you can buy the car can be summed up between 10 to 50%. We know that is a big range, but we recommend not to spend more than 35% of your gross annual income. In fact, lower the better.

If you want to limit the money you want to spend on buying a car, you can follow these two principles:

  • Save and then pay cash to buy a car, or
  • Buy a used one so that you can buy the same car at relatively less price.

Rules if You Want To Finance The Car

At times both the above principles don’t fit in as before you save enough, the necessity of car force you to buy the same much before you planned for the same.

If you want to finance a car and also don’t want to disturb your household budget, we recommend following the rule of 20/4/10 ratio. This rule states that you must put 20% as a down payment; finance the car for not more than four years and not to buy a car for more than 10% of your annual gross income.

  • By putting 20% of down payment you eliminate the risk of burdening under car loan. The moment you step out with the car, it loses 9% of its value and by the end of the first-year, it loses about 19% of its value. In case you plan to sell off your car, you may lose if you pay anything less than 20%.
  • Longer the duration of the loan higher will be the interest rate. Also, insurance liabilities will be more and so as the insurance amount. Experts recommend a maximum of four years to run any auto loan to cut down the expenses.
  • Total car payment including loan, taxes, and insurance must not exceed 10% of total gross income. You can go beyond that even, but lower the amount you will put down to buy a car, higher the amount you can keep at disposal for an emergency. You can use the rest of the income to plan your vacations as well. It is also appropriate to deal with circumstantial changes like a job change or pay cut.

These are the basic principles that everyone must follow, but everyone has different situations and circumstances. For eg. If you don’t have 20% of finance for a down payment, you can still buy a car using a car affordability Calculator.

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