Thump Rule for Buying Car OR When should you Buy your First Car ?

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20/4/10 Rule of Thumb for Car Buying

Purchasing a car is a significant financial commitment and is sometimes one of the largest expenditures that many individuals will make in their lives. Finding the best approach to fit a car purchase into your budget is critical to ensuring you acquire an affordable set of wheels. When preparing to finance a new car, the 20/4/10 rule of thumb can help you swiftly narrow down your vehicle selections.

Here's how the rule works so you can apply it to your personal money, as well as some insight into when it would make sense to change the guidelines to match your circumstances.

How Does the 20/4/10 Rule of Thumb
 for Car Buying Work?
The 20/4/10 rule employs simple algebra to assist car buyers in determining their budget. According to the method, you should put down 20% on a car and finance it for four years, spending no more than 10% of your monthly salary on transportation. The 10% you spend on transportation each month comprises your auto loan payment, maintenance, gas, and car insurance.

As an example, According to Rule Suppose your annual income is Rs12 lakh  and you are buying car of 5 lakh you should offer Rs1 lakh as a down payment, and the EMI should be around Rs9,672. In this case, you will need to take a loan of ₹4.8 lakh for four years. At present, most lenders are offering car loan starting at 7.5-8%.

Note : The idea is to spend based on your affordability rather than stretching the budget only because a loan is available.

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.

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