How much car can I afford?

You want to buy a car but might be asking yourself if you can afford it. Answering that question now can help ensure you don’t end up stretching your budget too thin with car payments you can’t comfortably manage.

Before taking out any kind of car loan, find out what your personal borrowing power is so that you know how much you’re eligible for and can steer clear of financing you can’t afford.

How much car can I afford?

One of the best ways to decide how much car you can afford is to use strategies like the 20/4/10 rule and the 10% to 15% rule. These strategies factor in important (and expensive) costs beyond the loan payment, like insurance, gas and maintenance, so that your car budget is both realistic and affordable.

Finder survey: Are men or women more likely to rate monthly repayments as an important factor when applying for a car loan?

What is the 20/4/10 rule?

The 20/4/10 rule suggests that you make a 20% down payment, get a loan term 4 years long or less and keep monthly car payments (including principal, interest and all operating costs) at or below 10% of your monthly pre-tax income.

The 20/4/10 rule is meant to be a guideline to help you calculate how much car you can afford—it’s not a strict rule. If you can only afford to put 15% down or need to extend your car loan term to 5 or 6 years, that’s okay.

20% down payment

The 20/4/10 rule suggests that you use a down payment of around 20% when buying a car to offset depreciation that kicks in as soon as you drive off the lot. For example, for a car costing $20,000, you would need a $4,000 down payment.

Start saving your down payment as soon as possible. Making a down payment will reduce the risk of incurring negative equity, which is when you owe more against the car than what it’s worth.

4-year loan term or less

Although car loan terms can range from two to seven years, the 20/4/10 rule states that you should aim for a four-year term or less. That’s because you’ll pay more interest on longer loan terms. You can compare car loan terms and interest rates in the table below. Longer loan terms can also have a negative impact on your car insurance costs.

10% of your monthly income on all car expenses

The last component of the 20/4/10 rule is to keep all costs of car ownership to 10% or less of your pre-tax monthly income. If you spend too much on your car, you may struggle to meet your other financial commitments.

Remember that operating costs include more than just the car loan payment. Consider gas, insurance, maintenance, licence and registration, parking and so on.

The 10% to 15% rule for how much to spend based on salary

The 10% to 15% rule gives you a general guideline for estimating how much car you can afford based on your salary. The rule states that the total operating cost of a car should fall between 10% and 15% of your annual income. Check out the this table to determine how much car you can afford based on your salary.

This rule helps you budget for a car based on your salary, while ensuring you still have income available for other living costs, savings, emergency funds and so on after covering your vehicle expenses.

Remember that the 10-15% rule is merely a guideline. If you spend closer to 20% of your salary, that’s okay too. Everyone’s budget is unique, which means some can afford to spend more on a car.

What car can I afford with my salary?

Using the 10%–15% rule to understand how much car you can afford based on your salary is a good way to help narrow down your vehicle options. To give you an idea of the car you may be able to afford with your salary, here are some potential options.

Keep in mind that the 10%–15% rule is designed to take into account all operating costs, including insurance and gas, which will vary a lot based on the type of car, where you live and how often you drive. So, assuming a 20% down payment, these example vehicles may not fit all budgets but can instead be used simply as a starting point for your search.

What car can I afford with a $40k salary?

Following 10%–15% rule, we can estimate the maximum purchase price that someone earning a $40,000 annual salary can afford to spend on a car is $10,000. While it’s unlikely you’ll find an affordable new car with a $40,000 annual salary, there are many used cars that could fall within your budget.

Used vehicles:

• 2016 Dodge Caravan
• 2016 Kia Sorento
• 2016 Hyundai Elantra
• 2014 Ram 1500
• 2014 Ford Edge
• 2012 RAV4
• 2012 Jeep Grand Cherokee

What car can I afford with a $70k salary?

Based on the 10%–15% rule, cars you can afford on a $70,000 salary will typically have to fall under a MSRP of around $36,000. Vehicles that fall within this range of affordability include the following.

What car can I afford with a $100k salary?

If you’re making an annual salary of $100,000, we can estimate based on the 10%–15% rule that you can spend up to $65,000 (MSRP) on a car. This is only a maximum approximation, so it’s best to carefully examine your personal financial obligations before deciding what works for your budget.

Some of the cars you can afford on that salary include the following vehicles.

• How to use this car loan monthly payment calculator

  1. Enter the amount you want to borrow to buy a new car under Loan amount. If you’re making a down payment, be sure to subtract the down payment from the total loan amount.
  2. Write the amount of time you have to pay off your car loan under Loan terms (in years). If your loan term is in months, divide it by 12 first.
  3. Enter the interest rate you expect to pay on a car loan under Interest rate. If your car loan comes with fees, enter the annual percentage rate (APR) instead.
  4. Hit Calculate.

  In addition to your monthly payment, this calculator shows how much you’d pay on your loan’s principal amount and how much you’d pay overall in interest. The principal amount is the amount that you borrowed and should be equal to your loan amount. The total interest is the amount you would pay on top of the principle; this is the cost of having your loan.

Gas prices for popular makes and models in Canada

With the cost of gas on the rise, it’s important to make sure you factor in realistic gas prices when making your budget to decide how much car you can afford. To help you out, we’ve compiled a list of example gas prices in Canada for popular used car models, assuming you’re filling up an entire empty tank of gas.

Calculate how much car you can afford in 3 steps

There are three main steps to determine how much to spend on a car.

Step 1: Determine how much to spend on a car based on income and savings

In general, there are three main costs associated with buying a car: the down payment, the car loan payment (including principal and interest) and the ongoing operating costs.

It’s easy to find a car loan with no down payment, but most lenders prefer between 10% and 20% upfront when you apply for car financing. Having a large down payment lowers the amount you need to borrow to pay for the car, making it easier to qualify for a loan.

Look into your savings to figure out how much funds you have available to put down without disrupting your monthly spending habits. Don’t have any savings? You might want to hold off on the car loan until you do.

There are a couple of ways to go about determining how much you should spend on a car:

• Review your budget and determine how much you can reasonably afford to spend on a car monthly. Also consider your savings and how much you’re willing to spend upfront on a down payment.
• Use the 20/4/10 rule: 20% on a down payment, a loan term no longer than four years and 10% of your pre-tax income on car loan payments and operating costs.
• Use the 10% to 15% rule: 10%–15% of your pre-tax annual income is a benchmark for car loan payments and operating expenses.

Step 2: Shop around for cars

At this point, you should have a figure in mind for the down payment and monthly operating costs, including car payments and other car ownership expenses. Now you can begin shopping around for cars that are within your budget. Make sure to research the car price, insurance, gas, repairs, maintenance and other costs of ownership. Fortunately, most of this information can be found through a simple Google search. Check out our guide on the best used car sites in Canada to start your search, which includes:

• AutoTrader
• Clutch
• CarDoor
• Kijiji Autos
• Facebook Marketplace

Step 3: Put your budget to the test

Once you have a few cars in mind, it’s time to put your budget to the test. Do the cars you want actually work with your budget? After your down payment, are the monthly car payment and operating costs still within the amount you allocated? To answer these questions, check out the car affordability calculator for Canada here.

If you find that the cars you want don’t fit within your budget, you have a few options. Either explore cheaper cars or revisit your budget. If you still can’t find a way to fit a car into your budget, it may not be the right time for you to make a car purchase.

How do lenders determine my borrowing power?

Borrowing power is the amount of money you can borrow at a specific point in time, based on your financial position. Lenders may use the criteria below to determine the final amount you’re able to borrow:

• Your credit score. This is usually the most critical component influencing how much you may be able to borrow. Lenders use your credit score and credit history to predict a borrower’s potential risk.
• Annual income. Lenders consider your income when determining your ability to repay a loan. If a lender doesn’t feel that your income will allow you to repay a large loan properly, it may only approve you for a small amount.
• Multiple incomes. The more income you have, the more borrowing power you have.
• Living expenses. Lenders want to be sure that your new car payment will fit into your budget along with housing costs, utility bills, credit card bills, student loans and other monthly bills.
• Your savings. How much you have in your savings account could be used as a buffer in the event that you’re unable to repay a car loan with your normal income. If you have more cash savings, a lender may approve you for a larger amount.
• People who are financially dependent on you. Having dependents can add to your monthly expenses, which can impact your borrowing power.

Debt-to-income ratio and borrowing power

Another important factor rolled into how much you can borrow is your debt-to-income ratio. A good rule of thumb is that the debt you pay each month should account for no more than 40% of your gross monthly income; anything much higher may be seen as a red flag.

Note: If your calculation includes only minimum payments on your credit card(s), your debt-to-income ratio is actually higher than you figured. This is because minimum payments don’t show that you’re eliminating debt, just that you’re maintaining it. When looking at your finances, lenders are specifically looking to see how good you are at getting rid of debt. After all, they want you to pay back your car loan, not struggle to make your payments.

How can I increase my borrowing power?

There are a few different ways to convince lenders that you’re capable of taking on a bigger loan, however, it may take some time and effort. A few strategies you can use to get a bigger loan in the future are:

• Spend less. Drawing up a budget and sticking with it can free up some cash flow and help you create less debt. Once your start spending less, you can take those savings and knock down whatever debt you’ve accumulated in the past.
• Improve your credit score. Paying bills on time, decreasing your debt-to-income ratio, using your credit card responsibly and correcting mistakes on your credit report can nudge your score in the right direction.
• Eliminate debt. Cutting your debt minimizes your credit utilization ratio, showing lenders that you’re not desperate for a line of credit.
• Ask for a pay raise. Doing a great job at work and think you deserve a raise? Make a case as to why you deserve a pay increase. This extra bump will decrease your debt-to-income ratio and make you a more attractive borrower.
• Compare. Every lender may look at your ability to borrow differently. This is why it’s extremely important to get a few quotes and do your research before moving forward with a loan offer.
• Get a cosigner. A cosigner promises to take care of the loan if you default, increasing your borrowing power. Only ask someone to be a cosigner if you’re sure you’ll have no problem making payments on your loan.

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Promoted CarsFast Car Loans	Finder score 8.8 Great	3.90% - 29.90%	$500 - $75,000	12 - 96 months	Requirements: Min. income of $2,000 /month, 3+ months employed	CarsFast will connect you with a dealership near you to help you find the right financing.	Go to siteMore info Compare	loading Fetching your data...
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My Auto Approval Vehicle Loan	Finder score 9 Excellent	0% - 35.00%	$5,000 - $50,000	12 - 96 months	Requirements: Min. income of $1,800 /month, 3+ months employed	My Auto Approval is a loan search platform. Get matched with a suitable dealer based on your credit history and borrowing requirements.	Go to siteMore info Compare	loading Fetching your data...
Clutch Car Loans	Finder score 8.7 Great	From 8.99%	$7,500 - No max.	24 - 96 months	Requirements: 3+ months employed; maximum 1 bankruptcy; only available in Ontario, New Brunswick and Nova Scotia	Apply for financing with online dealer Clutch, who partners with some of Canada’s largest financial institutions to get you competitive interest rates.	Go to siteMore info Compare	loading Fetching your data...
Dealerhop Car Loans	Finder score 8.4 Great	6.99% - 29.99%	$7,000 - $50,000	12 - 96 months	Requirements: Min. income of $2,500 /month, 3+ months employed	Dealerhop matches you with a dealer partner to get you financing.	Go to siteMore info Compare	loading Fetching your data...

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Finder Score for car loans

To make comparing even easier, we came up with the Finder Score. Interest rates, fees and features across 10+ car loans are all weighted and scaled to produce a score out of 10. The higher the score the better the loan—simple.

Read the full methodology

How do I avoid overspending on a car loan?

1. Compare rates before visiting the dealership

One of the most common pieces of advice is to get preapproved for a car loan with two or three lenders before you visit a dealership. Not only will this allow you to see what types of rates you can expect, but you’ll also have another tool in your arsenal when it comes time to negotiate. Dealerships are notorious for marking up interest rates to earn a larger profit, so comparing rates will help you get the best deal.

2. Opt for a shorter loan term

The longer your loan term, the more you’ll pay in interest. While opting for a lengthy term will lower your monthly repayments, it can cause you to go upside down on your car loan. This means you owe the lender more than your car is actually worth.

Although there are 72- and 84-month terms available, try to go for a term no longer than 60 months or ideally no longer than 48 months, according to the 20/4/10 rule. If you’re buying a used car, try to keep your term even shorter. A 36- or 48-month term can save you thousands of dollars over the life of your loan.

3. Focus on the overall price of the car

With 84-month terms available on new cars, keep a strict rule about how much you’re willing to pay overall for the vehicle. Salespeople may tack on extras you don’t need to inflate the price of the car to meet the amount you’re willing to pay monthly. While your monthly payment amount is important, be sure to keep an eye on your total cost too.

4. Be on the lookout for fees

Make sure you understand any fees you might be charged on top of interest. Often, you’ll be charged an origination fee (often included in the APR) when you first take out a loan. Ask if you’ll face a prepayment penalty for making extra repayments or for paying off your car loan early.

Lenders may also charge a late fee, although there might be a short grace period. In addition to regular fees for borrowing, you’ll also be responsible for sales tax, registration costs and licensing fees. These vary depending on your province/territory, the car you buy and the dealership you choose.

When working with both the lender and dealership, ask for a breakdown of fees. You could negotiate these if you found a more competitive offer elsewhere. Check out our guide on the true cost of buying a car to learn more.

5. Review your terms before signing

You’re bound to any loan contract you sign. Before committing to anything, read through the contact carefully, making note of the interest rate, loan term, fees and monthly payment. Be on the lookout for any language that might be signs of a scam, like extra fees you don’t remember discussing. If your lender or salesperson can’t explain anything that doesn’t look right, you may want to hold off on your purchase until you can find a more reputable provider.

Bottom line

Remember to take into account all fees and taxes including the cost of the vehicle when determining how much car you can afford. Using strategies like the 20/4/10 rule or the 10%–15% rule can help you calculate exactly how much you can afford based on your salary. Now that you know what to expect from lenders and what kind of borrowing power you have, you’re ready to compare car loans.

Frequently asked questions about car affordability

• What are the typical fees I should expect when buying a car?

  While the exact fees you'll end up paying will vary based on your area and the car you buy, taking these into consideration can be a good starting point:

  • Sales tax. Typically, taxes may cost 5% to 15%, depending on your province.
  • Registration fees. You can estimate these by visiting your provincial service centre.
  • Processing fees. This commonly ranges from $100 to $400 but will vary by dealership and province.

• I have bad credit and want to buy a used car. Are there loans available for me?

  Yes, there are many bad credit car loan options in Canada. While you may have a harder time qualifying with banks if you have bad credit, there are many reputable online lenders who will be willing to finance your car purchase. You can check out our guide to buying a used car to explore your used car loan options.

• Do I need to be employed before applying for a car loan? How long do I need to be employed?

  Depending of the lender, you may need to be employed for anywhere from three months to two years before applying for a car loan. However, most lenders will be satisfied to see that you've steadily held down a job for at least six months. You may be able to get a car loan without a job as long as you can show some sort of savings, provide proof of any non-traditional income you may be getting (such as government payments, annuities or investment returns) and possibly make a large down payment on your car.

• How much car can I afford if I already have a car loan?

  If you already have a car loan, adjust the amount you borrow to account for the final payoff amount, not just the remaining balance. You can add this to the total amount you request for your car loan, but keep your budget in mind when you do this. If it pushes you beyond that 10% to 15% threshold, you may want to hold off on buying for now and wait until you've paid off a little more. In this case, you may want to consider refinancing your car loan instead.

• Is it cheaper to lease a car instead of buying one?

  That depends on whether you're focused on long-term or short-term costs. Leases generally have lower monthly payments than car loans, but you don't keep any equity in your car when you return it to the leasing company. This means leases are good for short-term budgets but are typically more expensive in the long run, since you'll never get to the point where you own the car and no longer have to make payments.

To make sure you get accurate and helpful information, this guide has been edited by Stacie Hurst as part of our fact-checking process.

Written by

Veronica Ott

Writer

Veronica Ott was a writer at Finder. She's written for numerous finance and business websites including Loans Canada, Borrowell and Fresh Start Finance. She previously worked as a professional chartered accountant in the private equity and advertising industries. See full bio

Co-written by

Chelsey Hurst

Publisher

Chelsey Hurst is a publisher at Finder, specializing in banking and investments. She loves empowering people to avoid financial pitfalls and make better decisions with their money. Chelsey has a Bachelor of Science from Redeemer University, a Master of Science from McMaster University, and has won multiple awards for research communication. In her spare time, Chelsey enjoys cooking and taking long walks in nature. See full bio