How This Car Affordability Calculator Works

The 20/4/10 rule has three parts: a 20% down payment, a loan of no more than 4 years (48 months), and a monthly payment no larger than 10% of your gross monthly income. The payment cap is 10% of gross monthly income. The largest loan that fits the cap comes from the amortization formula run in reverse: max loan = payment × ((1 + r)48 − 1) ÷ (r × (1 + r)48), where r is the monthly APR. Max car price = max loan ÷ (1 − down payment %), because the loan covers only the part of the price you do not pay down.

Worked example: gross monthly income $6,000, so the payment cap is 10% = $600 a month. At 6% APR over 48 months, the largest loan with a $600 payment is $25,548.19. With 20% down, the loan covers 80% of the price, so max car price = $25,548.19 ÷ 0.80 = $31,935.24, with a down payment of $6,387.05. Feeding the $25,548.19 loan back through the standard amortization formula gives a $600.00 payment — the cap, exactly.

Practical tips

The 10% is of gross income, not take-home.

Gross is before tax, so the payment is actually a larger share of what lands in your account. If your take-home is much lower than gross, use your take-home figure for a stricter answer.

Four years, not seven.

Longer loans lower the payment but leave you owing more than the car is worth for years, and you pay far more interest. The 4-year cap is the part of the rule that protects you most.

Remember insurance, tax and fuel.

This calculator covers the loan payment only. Insurance on a newer car, sales tax, registration and fuel all add to the true monthly cost — budget for them separately.

A trade-in counts toward your down payment.

If your current car is worth $5,000 as a trade-in, that is part of your 20% down. Enter your total down payment percentage accordingly.