How this calculator works
Car affordability works backwards from the payment. Start with the monthly amount you can pay without straining the rest of your budget. Find the loan that payment supports at your rate and term, then add your cash down payment and any trade-in credit to get the total you can put towards the car. Sales tax is charged on the car price, and the tax is usually included in the amount financed, so the calculator divides the available total by one plus the tax rate to find the highest sticker price. The result is a ceiling, not a target. Insurance, fuel, maintenance, registration and tyres are running costs that do not appear in a car loan, and they can add hundreds of dollars a month. Leave room for them before deciding what payment you can afford. A longer term raises the affordable price but also raises the interest and keeps you in debt longer, and it can leave the car worth less than the loan for longer.
Formula
Loan = payment x (1 - (1 + i)^-n) / i, where i is the annual rate / 12 and n the number of months; at a zero rate, loan = payment x n. Maximum price = (loan + down payment + trade-in value) / (1 + sales tax rate). Sales tax = price x rate. Total interest = payment x n - loan.
Worked example
A $500 monthly payment at 7% over 60 months supports a loan of $25,251.00. With a $5,000 down payment and no trade-in and 13% sales tax, the maximum price is $25,251.00 + $5,000 = $30,251.00 divided by 1.13, or $26,770.79. Sales tax is $3,480.20 and total interest over the term is $4,749.00.
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Frequently asked questions
Should the trade-in be counted before or after tax?
Rules vary by province and state. In many places a trade-in reduces the taxable price, which makes it worth slightly more than its cash value. This calculator adds the trade-in to your funds before applying tax, which is the conservative treatment.
What monthly payment can I afford?
A common guide is to keep total transport costs below about 15% to 20% of take-home pay, including insurance, fuel and maintenance, not just the loan payment. Work from your budget rather than a lender maximum.
Why is a longer term risky?
Cars lose value quickly. With a long term and a small down payment, the loan balance can exceed the car's value for years, so selling or replacing it means paying the difference. A longer term also costs more in interest.
Does this include dealer fees and extras?
No. Documentation fees, delivery charges and extended warranties are on top. Reduce the maximum price by those costs, or add them to the loan amount before comparing with the price of the car.