Vehicle affordability
The 20/4/10 rule: at least 20% down, a term no longer than four years, and no more than 10% of gross income on everything the car costs. Applied in that order it produces a maximum sticker price, which is usually lower than a dealer will approve you for.
- 20% down, 4 years, 10%
- Maximum price
- New vs used
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The 10% test
| Gross monthly income | $7,000 |
|---|---|
| Transport budget at 10.0% | $700 |
| Insurance | ($165) |
| Fuel or charging | ($180) |
| Maintenance and tyres | ($85) |
| Left for the loan payment | $270 |
What the budget buys
- Financed$11,277
- Down payment$9,000
- HST 13%$2,333
| Maximum sticker price | $17,945 |
|---|---|
| HST 13% | $2,333 |
| Out the door | $20,277 |
| Less your down payment | ($9,000) |
| Amount financed | $11,277 |
| Share of take-home pay$5,165 net a month after tax, CPP and EI | 13.6% |
Sensitivity to the loan rate
Why four years, not seven
| 4-year termThe rule — the car is still worth more than the loan throughout | $17,945 |
|---|---|
| 5-year term$2,090 more car, and years of negative equity | $20,034 |
| 6-year term$4,039 more car, and years of negative equity | $21,983 |
| 7-year term$5,856 more car, and years of negative equity | $23,801 |
| 8-year term$7,552 more car, and years of negative equity | $25,497 |
The rule is applied as a budget, not a score. Ten percent of gross monthly income sets the ceiling for everything the vehicle costs; insurance, fuel, maintenance and any other vehicle payment come off first; whatever remains is the loan payment, which is back-solved into a principal over 4 years at your rate with monthly compounding.
Sales tax is then removed from the out-the-door total to give a sticker price, using your province’s combined rate (HST 13%). Licensing, registration and dealer administration fees are not included and add a few hundred dollars.
Depreciation assumes roughly 20% in the first year on a new vehicle and 11% on a three-year-old one — the flatter part of the curve is the entire financial case for buying used.
These results are illustrative estimates based on published 2026 rates and typical lender rules. They are not financial, tax, or legal advice, and they are not a mortgage or credit approval. See the methodology and disclaimer.
Finance, lease or pay cash — with provincial sales tax and real running costs.
Payments, total cost, and whether consolidation actually helps.
Build a budget from take-home pay, not gross, with savings-rate targets.
Take-home pay with federal and provincial tax, CPP, EI, and RRSP impact.