How much car can I afford on my salary?

Start from take-home pay, not salary

Almost every affordability rule you will read online is quoted against gross salary, which is money you never see. Between federal and state tax, payroll tax and any retirement or health deductions, a large share of a salary is gone before the payment leaves your account. Budget against gross pay and the shortfall shows up as a missed payment, not as a rounding error.

So the first number you need is monthly net pay. If you are not sure what yours is, estimate it with the take-home pay calculator and use the monthly figure it returns as the input to everything below.

The 15% all-in ceiling, and why it is all-in

A common and reasonably conservative guideline is to keep total transportation cost at or under about 15% of monthly take-home pay, with 20% as the point where the budget starts to feel tight. The important word is total. The loan payment is often only about half of what a vehicle costs each month.

This is the step most buyers skip, and it is why a $675 budget does not buy a $675 payment.

Turning a payment into a purchase price

Once you know the payment you can carry, the price follows from the APR and the term. Using $335 a month at 7.5% APR:

Add your down payment and trade-in equity to the financed amount to get the sticker price you can shop to, then subtract sales tax and fees, which are usually financed too. On a 7% tax rate, a $20,000 vehicle carries roughly $1,400 of tax before any documentation or registration fee — money that increases the loan without increasing the car.

Stretching the term to 72 or 84 months raises the price you can finance, but it also keeps you in negative equity for longer. Longer terms buy a bigger car, not a cheaper one.

Existing debt moves the answer more than APR does

If you already pay $250 a month on a card or a student loan, that money is not available for a car, and lenders will also count it against you. In the example above, clearing $250 of monthly debt nearly doubles the payment available and lifts the financeable amount by roughly $12,000 at the same rate and term — a far larger swing than shaving a point off the APR.

That is worth testing before you shop. The extra-payment payoff calculator shows how quickly a balance clears if you push more at it, and the budget allocation calculator shows where a payment fits against the rest of the month.

A full worked example

1. 1Monthly take-home pay: $4,500.
2. 215% ceiling for all vehicle costs: $675.
3. 3Running costs (insurance, fuel, maintenance reserve): $340.
4. 4Payment available: $335.
5. 5At 7.5% APR over 60 months that finances about $16,700.
6. 6With $3,000 down and no trade-in, the shopping budget is roughly $19,700 including tax and fees — call it an $18,000 vehicle.

Change any one of those inputs and the answer moves. That is the point of running it yourself rather than using a rule of thumb: the reverse solve in the vehicle affordability calculator does this arithmetic against your own numbers and names which input is holding the price down.