According to the 20/4/10 rule of thumb, you should be able to pay 20% of the on-road price as the down payment. The loan tenure should be for a maximum of four years, and the equated monthly installment (EMI) should not be more than 10% of the monthly income.
First, it’s important to decide how much you are going to provide as a down payment. Experts say that car buyer 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.
The second part of the thumb rule suggests your car loan repayment tenure shouldn’t ideally exceed 4 years. Though lenders in the US usually offer a repayment tenure of up to 8 years, you need to factor in that a longer tenure might result in lower EMIs but would cost you a lot more in terms of total interest payment. For example, a car loan of Rs. 8 lakh at 10% p.a. for 4 years would mean a total interest payout of Rs. 1.74 lakh while it would increase to Rs. 3.15 lakh if the same loan is repaid over 7 years. The point being a car loan definitely helps us realize our dream of buying a vehicle, however, the interest payout needs to be kept under control because a car is a depreciating asset with regular maintenance expenses. So, the idea is to smartly use the loan to fulfill this significant life goal while not overburdening our finances with a long, expensive debt that can impact our other important financial commitments.
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. 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.
To make the most of your vehicle, use the age-old 20/4/10 personal finance rule. 20 stands for the minimum percentage you should pay as a down payment. This will decrease the overall cost of your loan.4 means you should finance a car for no more than four years. If you opt for a longer tenor, you will end up paying more in interest cost. The sooner you close the loan, the earlier you will become the owner of the car. Until then it will be hypothecated to the lender.
Buying a car is one of the biggest purchases you can make, but figuring out how much you can afford to spend on a car can be confusing. The 20/4/10 Rule helps simplify the budgeting process and takes some of the stress out of car shopping. Remember to make a 20% down payment; finance for 4 years or less; and don’t spend more than 10% of your income on monthly vehicle expenses. Four years is the maximum most personal finance experts recommend. If you can swing paying off your car in three years, that’s even better. If you feel you absolutely must stretch your payments further, you could get a five-year loan, but never longer.
According to 20/4/10, If you don’t have the cash for 20% down, and you can’t take the bus until you save some up, then put down less. If the only way to get your monthly payment down to 10% of your income is to extend the life of the loan, then do it. (But consider a cheaper car first!). The 20 4 10 is a common trick followed to make a wise investment in buying a new car. It is a rule recommended to be followed while financing your new car. If you are planning to buy a car, adhere to this rule to estimate the expenses and get an effective calculation.
A good way to secure a financial balance would be to follow the first part of the rule of thumb: To ensure you pay at least 20% of the car price upfront as the down payment. This would ensure your loan amount isn’t more than 80% of your car value. Meaning, if your chosen car costs Rs. 10 lakh, you should try to pay not less than Rs. 2 lakh as a down payment so that your loan amount doesn’t exceed Rs. 8 lakh. You can, of course, pay more in down payment to further lower your loan burden if it doesn’t impact your finances, but the key is to ensure you don’t go below the 20% mark.
There are other crucial expenses such as home loan EMIs, rent, insurance premiums, utilities, credit card repayments, investments, children’s education-related costs, so on and so forth. It is in this context that the third part of this thumb rule becomes significant: try not to spend more than 10% of your take-home income on your car loan EMIs. This, again, is a reference point to help you ensure that your finances are not overburdened with your car loan EMIs and all your financial commitments are met in full on time.
A vehicle is an expensive yet depreciating asset. Its value starts dropping the moment you drive it out of the showroom. And while the value of the car falls over time, the costs of owning the car continue to rise through spends on maintenance, insurance, and fuel costs. There’s also the cost of the loan, i.e., the processing fees and interest. Thus, it makes sense to assess the affordability of your car loan repayments in advance so that it doesn’t impact other financial requirements. To calculate and decide the best buy car for you, you should pay 20% of the car amount as the down payment. If you decide to take a loan on the leftover amount, you shouldn’t choose a loan duration of more than 4 years. To estimate the EMIs on your loan that should be inclusive of the principal amount, interest, and insurance, should not exceed 10 % of the gross income.
This rule has worked for many and thus has been set as a successful trick and has become popular. One way to determine if you can afford a car is the well-known 20/4/10 rule: pay 20 percent of a vehicle’s price as a down payment, never have the term of a loan go for more than four years (48 months) and avoid monthly transportation costs that surpass 10 percent of your gross monthly income. Car salespeople almost always want to talk about your monthly car payment. They can meet payment expectations and still increase what you pay in total simply by lengthening the loan. If you focus on totals instead of how long you’re borrowing in total, how much the car costs in total rather than payments, you’re much more likely to negotiate a good deal. If you can’t afford the monthly payment required to pay off the loan in four years or fewer, it’s probably outside of your budget.
According to this rule, you should keep your total transportation costs, car payment, insurance, gas, and maintenance under 10% of your monthly income. The simplest way to calculate this is off your monthly gross income. So, if you earn $5,000 per month, your total transportation costs shouldn’t cost more than $500. Yet if you want to be more conservative with your finances, you could calculate this off your net income.
In conclusion, while buying an expensive possession like a car, it’s critical that you set a comfortable budget and ensure you stick to it. Equally important is to factor in the affordability of your chosen car loan’s EMIs. You need to avoid any carelessness in this regard, just as you drive cautiously to avoid any accident. The “20-4-10” thumb rule may help you in striking the right financial balance.