Budgeting for a Car Using the 20/4/10 Rule | OkCarz

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Tips for Determining Your Budget on a Vehicle

Aren’t sure whether you can afford a certain vehicle? Don’t know if your loan offer is good for your financial situation? With the 20/4/10 rule, budgeting for a car will feel easy. Here’s how you can use this popular rule.

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What the 20/4/10 Rule Means

Person calculating a budget on a calculator with a laptop and piggy bank nearby

To apply the 20/4/10 rule, you will need to know what these numbers mean and how to put it in practice. First, the 20 in the 20/4/10 rule equates to a 20% down payment. It’s highly recommended that you save enough money to put down at least 20% to reduce the amount of interest you pay as well as the amount of money you owe every month.

Next, the 4 in the 20/4/10 rule means 4 years. When shopping for a car loan, it’s a good idea to keep the length of the loan to 4 years or less. This will help you save money on interest in the long run, reduce your monthly payments, and help you own the vehicle quicker.

Finally, the 10 refers to the percentage you can afford with your monthly income. When calculating affordability, it’s recommended that you do not exceed 10% of your monthly gross income on your car. This includes the principal, interest, and insurance you pay on the vehicle. When you go over 10%, you may risk not having enough cash to make payments.

How Much Can I Afford?

Understanding the 20/4/10 rule is helpful, but not if you don’t know how to calculate your budget with it. Here’s an example calculation for a person making $45,000 a year.

  • $45,000 / 12 months = $3,750 monthly gross income
  • $3,750 * 0.10 = $375 (this is 10% of your monthly gross income)
  • Subtract insurance costs from $375 to determine the amount you can afford to pay each month
    • For example, let’s say your monthly car insurance costs $75. You will then have $300 leftover to make car payments with.

Of course, the 20/4/10 rule is only a recommendation. For instance, you may be in a situation where you must purchase the vehicle but can’t put down the full 20%. In this case, put down less if you are able.

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Need a reliable and affordable car? Browse our used vehicle inventory right on the OkCarz website. Have with financing for one of our vehicles? Our No Credit Finance Specialists will be happy to answer any questions at 863-286-3822.

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