No matter where you live in Canada, having a vehicle makes commuting a lot easier. While Canadian terrain is beautiful, it isn’t always the kindest on our vehicles (and wallets). If you find yourself starting the search for a newer vehicle, you should ask yourself this really important question: how much car can I afford?
We’ll break down the major considerations you should have when buying a new vehicle, from recommended car payments based on salary all the way to budgeting for extra maintenance. You’ll have a better idea of all the aspects you need to consider before purchasing a new vehicle you can realistically afford.
Key takeaways
In this blog, we’ll explore the following principles and considerations that can guide you in your car buying process:
- First things first: what is “affordability”?
- The 20/4/10 rule
- How much car can I afford through the 10% to 15% rule?
- Which car can I afford with my current salary?
- Other expenses to consider
- Calculating the highest car price you can afford
- Birchwood Credit’s Car Loan Calculator and how it works
- Increasing your car buying power
- Finding a car loan that’s right for you
First things first: what is “affordability”?
We’d all love to have a vehicle with all the bells, whistles and luxurious features but it doesn’t always agree with our wallets. The most important thing when buying a new car is being able to afford your monthly payments, though there are ways you can have both!
Many people think of affordability in one of two ways when it comes to car-buying.
Scenario 1: I should purchase a new vehicle so I won’t have to worry about maintenance and other problems for a while.
Scenario 2: I should purchase a used vehicle to save more money upfront.
While these are valuable considerations, affordability unfortunately can’t be narrowed down into two simple options. Regardless of whether you buy new or used, you’ll have to budget for maintenance, insurance and other costs and ensure they all fit into your monthly income. You can use our car affordability calculator for Canadians to help you budget for vehicle costs.
When it comes to what you can afford, here are some factors that will affect the cost of your vehicle and its impact on your budget:
- Your credit score. Is it poor or very high? The higher your credit score, the better interest rate you’ll be offered and the more money you can save.
- How much you have saved for a down payment. The more you can pay upfront, the less your monthly payments will be, or, the shorter your loan term.
- Your loan term. Typically the faster you pay off your loan, the larger your monthly payments will be. There’s no “right” way to do it – you decide what timeline works best for you.
- The sales tax in your province. In Manitoba, it’s 8% but it changes from province to province. Sales tax will affect how much you can afford.
- The interest rate you qualify for. The lower your interest rate, the less you’ll spend and ideally, the more car you can afford.
The 20/4/10 rule
Ratehub, a Canadian financial comparison platform, is one of the many finance experts that outline and follow the 20/4/10 rule. Let’s look at the breakdown and how you can use this framework to determine how much car you can afford.
20% down payment
The reason experts recommend putting at least 20% down is because your car depreciates the moment you drive it off the lot. According to CARFAX, your car’s value will depreciate by at least 10% within the first month of driving and at least 20% in the first year.
If you put less than 20% down and have a long loan term, you could end up paying more than the car is worth given the rate of depreciation. However, if you can put more money upfront, your car payments will be lower and you’ll be closer to paying off your car.
4 year term
You pay interest on each car payment you make, so the longer your loan term, the more interest you’ll pay. The faster you can pay off your loan, the less interest you’ll pay. 4 years is a good benchmark to budget for.
Another thing to consider is some lenders may require you to pay a higher insurance premium while you’re paying your vehicle off (as a means of protecting what they’re lending). You’d likely have a higher monthly charge and it would be an added cost to budget for. This varies by lender so it’s always a good idea to ask.
10% of your monthly pre-tax income on car expenses
To get the best car loan you can realistically afford given your monthly income, we recommend your monthly car payment should be around 10% of your earnings after taxes (your net, or take-home pay). If you don’t know this number off hand, you can calculate it using neuvoo’s Canadian income tax calculator.
How much car can I afford through the 10% to 15% rule
Another effective approach to determine how much car you can afford involves calculating what fits comfortably within 10-15% of your net income. This percentage ensures that your car payments remain manageable without straining your budget. Use this rule to set a realistic car budget for your monthly payments.
Which car can I afford with my current salary?
Understanding the right car loan for your monthly income can help you avoid financial strain. Here’s how to gauge what car fits within your budget based on the 10%-15% rule and different income levels.
What car can I afford with a $40k a year salary?
If you earn a $40,000 annual salary, your take-home pay after taxes likely falls around $30,486. Applying the 10-15% rule, your monthly car payment should be between $254 and $381.
With a $70k a year salary?
Making $70k a year? Based on the 10-15% rule, you should budget between $418 and $752 per month for your car payment. This is assuming that your net pay, after taxes and other deductions, is around $50,192 per year.
With a $100k a year salary?
If you earn a $100,000 salary, your take-home pay is likely around $71,914 each year. Following the 10-15% rule, your monthly car payment can range from $600 to $900.
*Values calculated using neuvoo’s Canadian income tax calculator in Canadian dollars.
Keep in mind that this calculation is simplified, and doesn’t take into account your down payment, trade-in value or the duration of your car loan.
Other expenses to consider
Once you approximate what car loan you can afford based on your salary, it’s important to sit down and list the other costs that come with owning a vehicle. If you can budget your vehicle costs along with your other costs of living (rent, groceries, savings, etc), it’ll help you plan a well-rounded budget and give you a full picture of what is realistic for your lifestyle.
Here are some additional costs to keep in mind as you create your car budget:
Additional fees
Oftentimes, the vehicle that’s advertised is the base model with basic features. If you want a custom paint job or specialty features, you’re probably looking at a price increase. Make sure you clarify if the vehicle you want is the base model.
Modifications and add-ons
Some vehicles already have specialty features pre-installed, like command start, expensive tires or an alarm system. You can always ask the car dealership if there are any modifications that can be removed so the price is lowered.
Warranty costs
Some finance managers at other dealers may try to sell you extended warranties or unnecessary add-on features, which will bump up the price. If you purchase a vehicle with us, that won’t happen. We’re committed to transparency and sharing how certain options can benefit you, without any obligation to upgrade.
Gas
This cost is a given but it’s often overlooked. Don’t forget to incorporate gas costs into your car budget. Do your best to estimate how often you travel a month and how often you have to fill your tank. If you have to commute often, this is an expense you’ll have to account for.
Repairs and maintenance
If you’re able, it’s a great idea to put some money away for emergency repairs. Even if it’s a small amount per month, over time your savings will add up and you’ll feel good knowing you’re covered for the unexpected.
Calculating the highest car price you can afford
To find out the maximum car loan you can afford, consider these essential steps. Calculating your budget accurately will help you make an informed decision and avoid financial strain.
Figure out your monthly budget
Start by determining how much you can comfortably allocate for car payments each month based on the 10-15% rule.
Calculate how much you can borrow
Assess your loan term, options and interest rates to figure out how much you can borrow within your budget.
Calculate the vehicle’s price
With your monthly income and borrowing capacity, estimate the maximum vehicle price you can afford. This will guide your search for a car loan that fits your financial situation.
Birchwood Credit’s Car Loan Calculator and how it works
Our team at Birchwood Credit created one of the best car payment calculators in Manitoba that will help you budget for a vehicle that fits your lifestyle. If you’d like a better estimate of your car payments, you can take advantage of our calculator to create a car budget that works for you. This tool will help you estimate your bi-weekly or weekly payments based on vehicle cost, loan term and your credit score.
When it comes to car loans, three important numbers are taken into consideration:
- The principal, or the total cost of the vehicle including taxes, loan administration fees and add-ons/special features.
- The loan term, or the length of time payments will be made on your loan. Terms typically range from 36 to 72 months.
- The interest rate, which is the percentage the lender charges you to borrow money.
These three numbers are represented in our Car Loan Calculator to give you estimated payments so you can budget for the car you want (and can afford).
Increasing your car buying power
You can boost your car buying power by improving your credit score, saving for a larger down payment, and negotiating a more favourable loan term. If those steps seem daunting right now, don’t fret—you’ve come to the right place.
Finding a car loan that’s right for you
At Birchwood Credit, we look beyond your credit score and take into account your entire financial history to facilitate your car purchase. Our in-house auto financing and zero down payment options helps Manitobans get into reliable vehicles they love at fair rates.
Our offices have reopened, though if you’d prefer to shop from the comfort of your home, you can with our Buy From Home program. Your entire buying experience will be 100% contactless from the loan approval and vehicle shopping to the test drive and delivery. You’ll even get a $1000 rebate and other added benefits. Visit our Buy From Home page for details.
