How to Calculate a Car Budget Based on Your Income

How Much Should You Spend While Buying a Car?

A commonly recommended approach is to limit your car expenditure to half of your annual income. For example, if your yearly income is 10 lakh rupees, allocating around 5 lakh rupees for your car purchase would be prudent. This approach ensures that buying a car does not strain your finances, allowing for sufficient room to manage other essential expenses and maintain a healthy savings plan.

The 20/4/10 rule is another helpful guideline to consider:

• 20% Down Payment: Aim to pay at least 20% of the car’s price upfront to reduce the loan amount.
   
• 4-Year Loan Term: Choose a loan term of no more than four years to minimise interest costs.
   
• 10% of Your Monthly Income: Ensure that your total car-related expenses, such as the loan payment, fuel, and maintenance, do not exceed 10%.

Factors Affecting a Car’s Affordability

When creating a car budget, your income is a crucial starting point, but it’s not the sole factor in determining what you can afford. It’s equally important to consider the overall cost and practicality of the vehicle. You can stay within your budget while ensuring that the car meets your safety, comfort, and long-term value needs.

Here’s a deeper look into the factors that affect how much you should spend on a car:

1. On-Road Price

The on-road price is the total amount you pay to drive your car home, including the ex-showroom price, registration, insurance, road tax, and other fees like logistics and handling. Many buyers focus only on the sticker price, which shows the ex-showroom cost, leading to unexpected expenses. To avoid surprises, always check the on-road price for your area using a reliable car calculator or directly from the dealership.

2. Loan Eligibility

Before setting your sights on a car, knowing how much you can borrow is crucial. Banks and NBFCs assess your credit score, income, job stability, and existing debts. A higher credit score can get you better interest rates, reducing overall costs. A car loan eligibility calculator can help you understand your borrowing limit, enabling you to set realistic goals and avoid loan rejection or financial strain from high EMIs.

3. Down Payment

A larger down payment can significantly ease your EMI payments and reduce interest costs. While many lenders allow a down payment of 10 to 15 per cent, putting down 40 to 50 per cent is ideal for minimising long-term financial stress. This helps you pay off your debt faster and improves your chances of securing a better interest rate.

4. Value at resale

When planning to sell or upgrade your car in a few years, its resale value becomes an important factor. Some brands retain their value better than others. Cars from brands like Maruti Suzuki, Toyota, and Honda are popular in the used car market due to their reliability and strong repair networks. Choosing a car with a high resale value can lower the long-term cost of ownership.

5. Depreciation

Over time, cars depreciate in value, with a new vehicle losing 10 to 15 per cent of its worth as soon as it leaves the showroom. After five years, its value may drop by nearly half. Understanding depreciation helps you gauge a car's true cost and enables smarter financial decisions. This knowledge is crucial when deciding how often to buy or sell a car.

How to Calculate a Car Budget?

Buying a car is a significant financial decision, and understanding how much you can afford is key to making a smart purchase. Whether you’re looking for a new or used car, it’s important to carefully balance your income, expenses, and debts when setting your car budget. Ready to crunch the numbers? This step-by-step guide will help you create a realistic car budget using both practical strategies and helpful digital tools.

Step 1: Calculate Your Monthly Income

Before setting a car budget, start by figuring out your actual monthly income and what lands in your bank account after taxes and deductions. This is your take-home pay, not your CTC, which includes perks like bonuses, provident fund, and gratuity. Use an in-hand salary or CTC calculator to get a clear picture. Your real monthly income helps you understand how much you can safely allocate toward a car without straining your other financial responsibilities.

Step 2: Apply the 50% Annual Income Rule

A commonly accepted rule is that the car’s on-road price should not exceed 50% of your net annual income. So, if you earn ₹8 lakhs a year, consider a car with an on-road cost of around ₹4 lakhs, including ex-showroom price, taxes, registration, insurance, and additional fees. This approach keeps your purchase financially sensible and prevents unnecessary strain on your budget. To make smarter choices, use tools like a car affordability calculator or a car calculator to determine what fits your income range before committing.

Step 3: Check Additional Costs

Many car buyers overlook the ongoing costs after the initial purchase. It's essential to account for expenses like fuel, regular maintenance, annual insurance premiums, road tax, and unexpected repairs. To get a clear picture of the actual cost of ownership, use tools like a car affordability calculator, an on-road price calculator, or a car price calculator. These tools help you estimate the upfront cost and the long-term financial commitment of owning a car.

Step 5: Use Digital Tools

Here’s how you can use online tools to make smarter car-buying decisions:

• Car Value Calculator: Check the current resale value of a used or older car to understand its true market worth.
  
   
• Car Loan Application Calculator: Estimate how much loan you can qualify for based on your income and financial profile.
  
   
• On-Road Price Calculator: Get a complete breakdown of the total cost, including taxes, insurance, and registration fees.
  
   
• Car Value Calculator and Running Cost Calculator: Plan your EMI payments and estimate the overall lifetime cost of owning the car.

Other Points to Consider When Buying a Car in India

Before finalising your car purchase, evaluating key factors beyond your income is crucial. Here's a breakdown to help you make a smarter, well-rounded decision:

Now that you have a solid understanding, it’s time to implement your knowledge and learn how to calculate your car budget based on your income to make a confident, well-informed decision.

Frequently Asked Questions