How Much Car Can I Afford?

Considerably less than a lender will approve you for. Loan approval is a judgement about your likelihood of repaying, not about whether the purchase is sensible. Those are different questions, and only one of them is being asked when you’re pre-approved.

The number you actually need is your total monthly cost of the car — payment, insurance, fuel or charging, maintenance, and depreciation — measured against take-home pay, not gross.

Why the payment is the smallest useful number

The loan payment is the most visible cost and often not the largest. The full set:

The loan payment. Visible, fixed, easy to plan around. Fine.

Insurance. Varies enormously by vehicle, driver, and location, and the same budget can buy two cars whose insurance costs differ substantially. It’s also the cost most often discovered after purchase, which is backwards — get quotes on the specific vehicles you’re considering before you commit, not after.

Fuel or electricity. Straightforward to estimate from your actual annual mileage and the vehicle’s consumption figures. Do use your real mileage; people consistently underestimate it.

Maintenance and tyres. Scales with vehicle complexity and tyre size more than with purchase price. A used premium vehicle can have running costs matched to its original price rather than what you paid.

Depreciation. The largest cost of owning most new cars and the one that never appears on a statement. You pay it when you sell, all at once, and it’s easy to ignore right up until then.

Fixed costs — registration, tax, inspections, parking or permits where applicable.

Budgeting only the payment routinely understates the real monthly figure by a wide margin. That gap is where “I can afford this car” turns into “this car is tight every month.”

Percentage rules, and their limits

You’ll see rules of thumb expressed as a share of income — a maximum share of take-home pay for total transport costs, a maximum loan term, a minimum deposit. They’re a reasonable starting sanity check and they share one flaw: they ignore the rest of your situation.

A rule that works for someone with no housing costs and no dependants is wrong for someone with a large mortgage, and vice versa. Use a percentage rule as a ceiling test — if you’re over it, that’s a real signal — but don’t treat passing it as approval.

The better test is a cash-flow test: take your actual monthly surplus after everything else, and see whether the total car cost fits inside it with room left. If the car consumes your entire surplus, an unexpected repair becomes debt.

The loan term trap

Longer terms reduce the monthly payment and increase the total cost, which is arithmetic, not opinion. Two further effects matter more than the extra interest:

Negative equity. Cars depreciate fastest early. On a long term, the amount owed can exceed the car’s value for a substantial stretch. If you need to sell — job change, family change, an accident write-off — you owe money on a car you no longer have. This is the mechanism by which people end up rolling a shortfall into their next car loan, which compounds the problem.

Commitment length. A long term binds you to a vehicle choice for years, across which your needs may change.

A useful test that costs nothing: if you can’t afford the payment on a shorter term, you’re looking at too much car. Not necessarily a reason to take the shorter term — but a clear signal about the price bracket.

New, used, and the middle ground

The steepest depreciation happens early, so a car a few years old has had its largest cost absorbed by someone else. That’s the standard argument for used and it’s sound.

The counterweights are real too: less or no remaining factory warranty, unknown maintenance history, and financing that is typically offered on less favourable terms for older vehicles. Manufacturer-approved used programmes sit between the two, adding an inspection and a limited warranty at a price premium.

There’s no universal answer. The relevant question is which risk you’re better placed to absorb: the certain, front-loaded cost of depreciation, or the uncertain cost of a repair on a car with no warranty.

Using AI to work this out

This is one of the better uses for an AI assistant, because it’s arithmetic and structure rather than current data. Reasonable asks:

• “List every recurring cost of car ownership I should budget for” — it’ll produce a thorough checklist, and completeness is most of the battle.
• “Help me build a total-cost-of-ownership comparison between two vehicles” — it can lay out the structure for you to fill in.
• “Explain how negative equity arises on a long car loan” — solid conceptual explanations.

Don’t ask it for insurance costs, fuel prices, depreciation rates, or current loan rates. Those are exactly the confident-and-wrong category. Get insurance figures from actual quotes, fuel costs from your own mileage, and rates from a pre-approval.

What to actually do

1. Work out your genuine monthly surplus after all existing commitments.
2. Get real insurance quotes on the specific vehicles you’re shortlisting, before you buy.
3. Estimate fuel from last year’s actual mileage.
4. Add a monthly allowance for maintenance and tyres.
5. Add the payment last. If the total doesn’t fit comfortably inside your surplus, reduce the price bracket rather than extending the term.
6. Sanity-check against the shorter-term test above.

Then go and get the price right — see how to negotiate a car price — or decide whether renting the depreciation makes more sense in lease vs. buy.