How much car loan can I afford?
Start from a monthly payment you can live with and work backwards to the loan amount. Worked figures for 3 to 6 years, the total cost, and the costs beyond the loan.
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Tools for this job: Loan Calculator · EMI Calculator · Percentage Calculator
Dealers ask “what monthly payment are you comfortable with?” because a payment hides the price. A better approach is to decide the payment yourself, work out the loan it supports, and then shop for a car within that amount.
Step 1: set a monthly budget
A car costs more than its loan payment. Fuel or charging, insurance, servicing, tyres, parking and tax all come on top. A widely quoted rule of thumb is to keep total car costs, not just the loan, to around 10–15% of take-home pay. Start from that total and subtract your estimate of running costs. What is left is the loan payment you can afford.
Step 2: turn the payment into a loan amount
Here is what a payment of 400 a month supports at 7% interest:
| Term | Max loan | Interest |
|---|---|---|
| 3 years | 12,955 | 1,445 |
| 4 years | 16,704 | 2,496 |
| 5 years | 20,201 | 3,799 |
| 6 years | 23,462 | 5,338 |
Longer terms let the same payment buy more car, but the interest climbs quickly: six years costs nearly four times the interest of three. The figures scale with the payment, so 800 a month supports twice these amounts.
To do this for your own numbers, open the Loan Calculator or EMI Calculator, enter the rate and term, and adjust the loan amount until the payment matches your budget.
Step 3: add the deposit
The car you can afford is the loan plus your deposit, or the trade-in value of your current car. A deposit of 10–20% is common and keeps you from owing more than the car is worth in the first years, when depreciation is fastest.
Keep the term short
Cars lose value quickly, often a large share in the first three years. On a long loan, the balance falls more slowly than the car's value, which leaves you in negative equity: if you need to sell, the sale does not cover the loan. A common guideline is to finance for no more than four or five years, and only stretch further if the rate is very low.
Compare offers properly
- Total amount payable is the clearest comparison: monthly payment × months + deposit + fees.
- APR includes fees as well as interest; see APR vs interest rate.
- Flat rates in some dealer finance look lower than they are; see flat vs reducing balance interest.
- Balloon payments lower the monthly figure by leaving a large sum due at the end. Include it in the total.
Running costs to estimate
- Insurance: get a real quote for the specific model before committing.
- Fuel or electricity: annual distance × consumption × price. For electric cars, see how much it costs to charge an electric car.
- Servicing, tyres and repairs: higher for older and premium cars.
- Parking, tolls and annual road tax where they apply.