How the calculator works it out
It uses the standard fixed-rate loan formula that U.S. auto lenders use, the same one as our car loan calculator. To go from a budget to a price, it runs the formula backwards: your payment pays off a loan of a certain size, and that loan, plus your cash and trade-in, has to cover the price, the sales tax and the fees.
Loan you can afford = payment × (1 − (1 + r)−n) ÷ r, r = APR ÷ 12, n = months
At 0% APR: loan = payment × n
Trade-in equity = trade-in value − what you still owe
Price + sales tax = loan + cash down + trade-in equity − fees
Sales tax = tax rate × (price − trade-in value), or × the full price
Worked example
You can pay $500 a month at 7% APR for 60 months. That pays off a loan of about $25,251. You have $3,000 in cash and a trade-in worth $5,000 that is paid off. Your state charges 6% tax on the price after the trade-in, and fees are $600.
The deal can absorb 25,251 + 3,000 + 5,000 − 600 = $32,651 for the price and the tax. Solving price + 6% × (price − 5,000) = 32,651 gives a price of $31,086. Tax is 6% of $26,086 = $1,565.16, and you borrow $25,251.16. Over five years you pay $4,749.06 in interest.
If you still owed $8,000 on that trade-in, your equity would be −$3,000 and the same $500 would buy only a $23,538 car. At 0% APR, $500 for 60 months borrows $30,000 with no interest, so you could afford about $35,566.
The 20/4/10 rule
This is a common rule of thumb, not a law or a lender requirement. Capital One’s car-buying guide describes it as three tests:
- 20: a down payment of at least 20% of the price. This calculator counts your cash plus your trade-in equity.
- 4: a loan of four years (48 months) or less.
- 10: total car costs, not just the loan payment, under 10% of your monthly income.
The same guide notes the rule does not say whether to use income before or after tax. In the example, a $75,000 salary gives a limit of $625 a month. The $500 payment plus $537 of insurance, fuel and upkeep is $1,037, so that deal misses the 10% test, and the 60-month term misses the 4-year test.
The $537 default comes from AAA’s Your Driving Costs 2026 averages for a new car: $2,098 a year for full-coverage insurance, 17.3 cents a mile for fuel and 11.7 cents a mile for maintenance, repair and tires, at 15,000 miles a year. Your costs will differ, so enter your own.
Before you shop
- Get a loan preapproval so you know your real APR before you visit a dealer. The Consumer Financial Protection Bureau’s auto loan guide explains how to compare offers.
- Shop by the out-the-door price, not the monthly payment. A longer term makes almost any car look affordable.
- See what the car will be worth later, and what it costs to run, with the car depreciation calculator.
Questions people ask
How much car can I afford on $500 a month?
It depends on the rate, the term and what you bring to the deal. At 7% APR for 60 months, with $3,000 down, a $5,000 trade-in, 6% sales tax on the price after the trade-in and $600 of fees, $500 a month buys about a $31,086 car. Stretch that to 72 months and the price goes up, but so does the interest. Cut it to 48 months and the price drops to about $26,962.
What is the 20/4/10 rule?
A common rule of thumb for buying a car: put at least 20% down, borrow for no more than 4 years (48 months), and keep total car costs, including the payment, insurance and running costs, under 10% of your monthly income. It is a guideline, not a lender requirement. Capital One’s guide notes that the rule does not say whether to use income before or after tax; using take-home pay is the stricter test.
What if I owe more on my trade-in than it is worth?
That is negative equity. Enter the trade-in offer and what you still owe as separate numbers. The difference is added to the new loan, so the same monthly budget buys less car. In the example above, owing $8,000 on a $5,000 trade-in drops the price you can afford from $31,086 to $23,538.
Does the calculator include sales tax and fees?
Yes. They come out of the budget before the car price. The calculator treats them as part of the loan. If you pay them at signing instead, from your down payment, the answer is the same, because each cash dollar covers a dollar of either.
Is a 0% APR offer handled correctly?
Yes. At 0% the loan is simply the payment times the number of months, so $500 for 60 months borrows exactly $30,000. Dealers sometimes offer 0% only in place of a cash rebate, so compare both deals.
Why is the price a whole-dollar figure?
Car prices are quoted in dollars, so the calculator shows the highest whole-dollar price whose payment, rounded to the cent as lenders do, still fits your budget.