20/4/10 Rule
A conservative car buying guideline: 20% down payment, 4-year maximum loan, monthly payment ≤10% of gross income.
What You Need to Know
The 20/4/10 rule is a conservative guideline for car buying that helps prevent financial overextension and ensures you can afford your vehicle comfortably.
The Three Components:
20% Down Payment:
- Reduces loan amount and monthly interest
- Prevents being "underwater" (owing more than car's worth)
- May qualify you for better interest rates
- Example: $25,000 car = $5,000 down payment
4-Year Maximum Loan:
- Minimizes total interest paid
- Builds equity faster
- Car paid off while still reliable
- Reality: Average loan is now 60+ months, but shorter is better
10% of Gross Income:
- Monthly payment ≤ 10% of gross monthly income
- Or: ≤ 15% of take-home pay
- Example: $60,000 salary = $5,000/month gross = $500 max payment
Why It Works: This rule keeps you from overextending while building equity quickly. It's conservative by design to provide a financial safety net.
Sources & References
This information is sourced from authoritative government and academic institutions:
- consumerfinance.gov
https://www.consumerfinance.gov/owning-a-car/
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