Toy car on top of stacks of coins with a pen and car keys nearby

What is the 20/4/10 Rule for Buying a Car?

Recommended Budget Rule to Follow for Purchasing a Vehicle

Whether it’s your first car or fifth car, it’s important to always stay within a budget when shopping around for a vehicle. However, it’s not obvious how much you will be able to afford with a certain income. How do you figure that out? With the 20/4/10 rule, budgeting for a car will be easy. Below, we will describe this recommended budget rule in further detail so you have a full understanding of how you can create a budget for your next car purchase.

[ READ MORE: Tips for Online Car Shopping ]

20 For 20% Down

First, it’s important to decide how much you are going to provide as a down payment. Experts say that car buyers should pay at least 20% of the purchase value as a down payment at signing. Doing so will reduce the amount of interest you pay and the amount you owe every month. Many dealerships will require a down payment anyway, so it’s a good idea to start saving early. However, if you need a vehicle for emergency reasons and don’t have 20% saved, don’t worry. Work with the dealer and pay as much as you can.

4 For No More Than 4 Years

Another factor you need to consider is the length of the loan. Ideally, four years is the maximum loan term you should accept. The longer the loan, the more you end up paying in interest, even if the monthly payments are less. Try to limit the loan term as much as you can based on how much you can afford to pay every month.

10 For 10% of Income

Happy woman calculating a budget

Now, how do you figure out how much you can pay for a car every month? When calculating your budget, expenses on your car should not exceed 10% of your monthly income. So, if you make $4,000 a month, you should spend no more than $400 a month on your vehicle. This amount includes car insurance and interest, so be sure to factor in those costs as well.

[ Shop for a Vehicle at U.S. Auto Sales ]

Here at U.S. Auto Sales, we are proud to help drivers throughout the Southeast U.S. get on the road with a reliable and affordable vehicle. If you are interested in purchasing one of our cars and would like to learn about your financing options, please contact us online.