Figuring out the best way to fit a car purchase into your budget is key to making sure you buy an affordable set of wheels. The 20/4/10 rule of thumb for car buying is one way to quickly narrow down your vehicle options when you’re preparing to finance a new car.
Here’s how the rule works so you can figure out how to apply it to your own finances, plus some insight on when it might make sense to bend the rules to fit your circ*mstances.
Key Takeaways
- The 20/4/10 rule of thumb for car buying helps you shop for a vehicle that will fit your budget.
- The rule is to make a 20% down payment on a four-year car loan and spend no more than 10% of your monthly income on transportation expenses.
- Because your credit score affects the size of your monthly payment, you may need to buy less car if you have a lower credit score.
- Some car buyers may need to adjust the numbers slightly to better fit their budgets.
How Does the 20/4/10 Rule of Thumb for Car Buying Work?
The 20/4/10 rule uses straightforward math to help car shoppers figure out their budget. According to the formula, you should make a 20% down payment on a car with a four-year car loan and then spend no more than 10% of your monthly income on transportation expenses. That 10% spent on monthly transportation includes your auto loan payment, maintenance, gas, and car insurance.
For instance, under the 20/4/10 rule, a person making $70,000should aim to spend less than $700 per month on transportation costs.
Note
You can decide whether to use gross or net income to calculate the 10% amount. Using your gross income allows you to spend more on your vehicle, while using your net income provides a more conservative number.
When you calculate 10% of your own monthly income, you can then use your budget to figure out whether you can afford that monthly payment. For example, if your annual income is $75,000, your monthly budget should show you whether you have a surplus of $750 to dedicate to an auto loan payment, plus other transportation expenses.
Why the 20/4/10 Rule of Thumb Generally Works
For most people, the 20/4/10 rule is a simple enough guide to stick to for car shopping. Understanding your budget in advance gives you more negotiating power when you're shopping around.
Using our example from earlier, someone who makes $75,000 a year and sets aside 10% of their monthly income—$750—for transportation costs.
As auto loan interest rates—and therefore, your monthly payment—hinge on your credit score, they also impact your car loan amount. For example, a car buyer with a very good or excellent credit score of 720 to over 800, could qualify for a low annual percentage rate (APR). On the other end of the spectrum, a car buyer with a low credit score, between 500 and 589, may qualify for an APR that's four times as high as someone with excellent credit.
Here's how credit scores translate to your car-buying decision. Sticking to a monthly car payment of no more than $540 means a person with an excellent credit score could borrow $24,000 and manage a total vehicle purchase price of $30,000 (including the 20% down payment). On the other hand, buying with a low credit score could limit you to a loan of around $20,000 and a total vehicle price of $25,000.
Furthermore, the car buyer with the low credit score could ultimately pay around four times the interest on a four-year loan as a buyer with excellent credit who purchases a more expensive vehicle with a four-year loan.
Note
You can use a car loan calculator to plug in your own numbers including your credit score to determine your potential interest rate and monthly car loan payment.
Grain of Salt
The 20/4/10 rule of thumb doesn't work for all car-buying situations. While the rule does allow you to spend up to 10% of your monthly income on transportation costs, your other monthly expenses may not allow you to spend quite that much. In addition, you may be able to spread your payments over five or six years instead of four to lower your monthly payment.
Note
Be careful extending your car loan beyond four years, especially if you have a bad credit score. Your monthly payment may be lower, but you'll pay more interest in the long run.
According to vehicle valuation and information source Kelley Blue Book, the average cost of a new car in October 2022 was around $48,000. Assuming your gas and insurance costs are $400 a month, you would need a monthly income of $12,540—or $150,480 per year—to stick to the 20/4/10 rule, even if you have excellent credit.
Adjusting your budget is another option for affording the monthly payment on a new car, if your other monthly expenses are low. If this is the case, you can increase the 10% part of the rule, allowing you to afford a car with a higher price tag.
Frequently Asked Questions (FAQs)
How can I stick to my budget when buying a car?
If you decide to use the 20/4/10 rule, get preapproved for a car loan that fits into that budget before you shop for a car. When you go shopping, be sure to let the seller know that you'll be sticking to your budget, and only consider cars that fall into that price category.
How much should I budget for a car if I want to pay cash?
Another car-buying rule of thumb says that you shouldn't spend more than 35% of your yearly income on a car. So, if you make $100,000, you shouldn't spend more than $35,000 on a car.
Should I buy a new or used car?
While the average cost of a new car was over $48,000 in late 2022, the average cost of a used car was around $28,000 in late 2022. You may have an easier time sticking to your budget if you go the used route.
FAQs
Basically, the rule goes that you provide a down payment of 20% of the balance, sign a loan for a four-year period, and pay no more than 10% of your monthly income on car expenses. These expenses include any money you put towards your new vehicle, including gas, insurance, and loan payments.
What is the 20/4-10 rule for buying a car? ›
It suggests that you should do the following: Make a down payment of at least 20% of the car's purchase price. Finance the car for no longer than four years. Ensure that your total car expenses, including loan payments, insurance and fuel, do not exceed 10% of your gross annual income.
What is the 20 3 8 rule for car loans? ›
It consists of three parts: a down payment of at least 20% of the car's price, limiting the loan term to three years, and ensuring that your car payment does not exceed 8% of your monthly income. This Rule is not just about numbers; it's a strategic approach to avoid financial strain due to an auto loan.
What is the rule of thumb for a car loan? ›
As a general rule of thumb, many experts suggest following the 20/4/10 rule, which holds that you should set aside 20% of a car's purchase price for a downpayment, take 4 years to repay your car loan, and ensure that your monthly transportation costs don't exceed 10% of your monthly income.
How much should I spend on a car if I make $100,000? ›
Starting with the 1/10th guideline, created and pushed by Financial Samurai, this guideline states: buy a car in cash that costs less than 1/10th your gross annual pay. If you make $50,000 you should buy a car in cash worth $5000. If you make $100,000, the car you buy should be worth no more than $10,000.
How much should I spend on a car if I make $60,000? ›
How much should I spend on a car if I make $60,000? If your gross salary is $60,000, your take-home monthly pay is probably around $3,750, assuming about 25% of your pay goes toward taxes and other expenses. Based on the 10-15% calculation, you should spend no more than $562.50 on a monthly car payment.
How much should I spend on a car if I make $200,000? ›
Financial experts answer this question by using a simple rule of thumb: Car buyers should spend no more than 10% of their take-home pay on a car loan payment and no more than 20% for total car expenses, which also includes things like gas, insurance, repairs and maintenance.
How to pay off a 7 year car loan in 3 years? ›
Below are the methods you should consider to pay off your car loan faster:
- Refinance your car loan.
- Split Your Bill Into Two Biweekly Payments.
- Make a large down payment.
- Round up your car payments.
- Review additional car expenses.
Bryan Auto Repair
For most cars, the recommended maintenance occurs for every 30,000 miles that a car is drive. 30,000, 60,000, and 90,000 mile services are important to ensure that your car continues to run and operate smoothly.
What is the 50 30 20 rule for car payments? ›
Balance Your Budget
50% for needs like housing, food, and transportation. In this case, the monthly car payment and other related auto expenses fit into this category. 30% for wants like entertainment, travel, and other nonessential items. 20% for savings, paying off credit cards, and meeting long-term financial goals.
Consider putting at least $6,000 down on a $30,000 car if you're buying it new or at least $3,000 if you're buying it used. This follows the guidelines of a 20% down payment for a new car or a 10% down payment for a used car.
How much should I spend on a car if I make 40k a year? ›
According to our research, you shouldn't spend more than 10% to 15% of your net monthly income on car payments. Your total vehicle costs, including loan payments and insurance, should total no more than 20%.
Is 5% bad for a car loan? ›
A 72-month loan for a car is a long-term loan, and long-term loans typically come with higher interest. While long-term loans translate to lower monthly payments, they result in more interest paid over the life of the loan. With that said, an interest rate of around 5% for a 72-month auto loan is considered ideal.
What car can you afford with a 120k salary? ›
You can comfortably afford a car that is roughly half of your salary, maybe even a little more if you have little other debt. So at 120k you can afford a car up to 60–70k. Honestly depends on your other expenses. If you live way below your means on everything else, you may even be able to afford a 100k car.
Is $1000 a month too much for a car? ›
For large luxury models, $1,000-plus payments are the norm. Even a handful of buyers with subcompact cars have four-figure payments, likely due to having shorter loan terms, poor credit, and still owing money on previous car loans, according to Edmunds analysts.
What car can I afford with a 50k salary? ›
If you make a $50,000 gross salary, after taxes (depending on where you live) your monthly take-home pay is roughly $3,230. Based on the 10% rule, you could afford, at most, a $323 monthly car payment. If you take out a 60 month (5 year) auto loan at 8% interest, you can afford a $17,000 car.
Does the 20/4-10 rule still apply? ›
Remember, this “rule” is actually a rule of thumb — it relies heavily on your own, unique financial situation. Still, when determining the amount of money for your down payment, the length of your loan (and interest rate), and how much you can afford to spend on monthly payments, it does serve as a great guide.
What is the 50 30 20 rule for car loans? ›
Set your car payment budget
50% for needs such as housing, food and transportation — which, in this case, is your monthly car payment and related auto expenses. 30% for wants such as entertainment, travel and other nonessential items. 20% for savings, paying off credit cards and meeting long-range financial goals.
