Loans Car Loans 20/4/10 Rule of Thumb for Car Buying Use this rule to determine the right car budget for you By LaToya Irby LaToya Irby Facebook Twitter LaToya Irby is a credit expert who has been covering credit and debt management for The Balance for more than a dozen years. She's been quoted in USA Today, The Chicago Tribune, and the Associated Press, and her work has been cited in several books. learn about our editorial policies Updated on April 3, 2022 Reviewed by Andy Smith Reviewed by Andy Smith Andy Smith is a Certified Financial Planner (CFP), licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career. learn about our financial review board Fact checked by Aaron Johnson Fact checked by Aaron Johnson Aaron Johnson is a researcher and qualitative data/media analyst with over five years of experience obtaining, parsing, and communicating data to various audiences. He received a Master of Science in Social Anthropology from The University of Edinburgh, one of the top-20 universities in the world, where he focused on the study of emerging media. learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article 20/4/10 Rule of Thumb for Car Buying Why the 20/4/10 Rule of Thumb Generally Works Grain of Salt Frequently Asked Questions (FAQs) Photo: Joyce Chan / The Balance Buying a car is a major financial commitment and often one of the biggest purchases many people will make in their lives. Figuring out the best way to fit a car purchase into your budget is key to making sure you buy an affordable set of wheels. The 20/4/10 rule of thumb for car buying is one way to quickly narrow down your vehicle options when you’re preparing to finance a new car. Here’s how the rule works so you can figure out how to apply it to your own finances, plus some insight on when it might make sense to bend the rules to fit your circumstances. How Does the 20/4/10 Rule of Thumb for Car Buying Work? The 20/4/10 rule uses straightforward math to help car shoppers figure out their budget. According to the formula, you should make a 20% down payment on a car with a four-year car loan and then spend no more than 10% of your monthly income on transportation expenses. That 10% spent on monthly transportation includes your auto loan payment, maintenance, gas, and car insurance. For instance, under the 20/4/10 rule, a person making the 2020 U.S. median annual income of $67,521 should aim to spend less than $675 per month on transportation costs. Note You can decide whether to use gross or net income to calculate the 10% amount. Using your gross income allows you to spend more on your vehicle, while using your net income provides a more conservative number. When you calculate 10% of your own monthly income, you can then use your budget to figure out whether you can afford that monthly payment. For example, if your annual income is $67,521, your monthly budget should show you whether you have a surplus of $675 to dedicate to an auto loan payment, plus other transportation expenses. Why the 20/4/10 Rule of Thumb Generally Works For most people, the 20/4/10 rule is a simple enough guide to stick to for car shopping. Understanding your budget in advance gives you more negotiating power when you're shopping around. Using our example from earlier, someone who makes $67,521 a year and sets aside 10% of their monthly income—$675—for transportation costs could aim to use no more than 20% of that for auto insurance, maintenance, and gas. That would then leave $540 for a car loan payment. As auto loan interest rates—and therefore, your monthly payment—hinge on your credit score, they also impact your car loan amount. For example, a car buyer with a very good or excellent credit score of 720 to over 800, could qualify for a low 4.18% annual percentage rate (APR), according to FICO. On the other end of the spectrum, a car buyer with a low credit score, between 500 and 589, may qualify for a 16.71% APR. Here's how credit scores translate to your car-buying decision. Sticking to a monthly car payment of no more than $540 means a person with an excellent credit score could borrow $24,000 and manage a total vehicle purchase price of $30,000 (including the 20% down payment). On the other hand, buying with a low credit score could limit you to a loan of $20,000 and a total vehicle price of $25,000. Furthermore, the car buyer with the low credit score could ultimately pay over $6,000 in interest on a four-year loan, while the buyer with the excellent credit score could pay around $1,600 in interest over the same term on a more expensive vehicle. Note You can use a car loan calculator to plug in your own numbers including your credit score to determine your potential interest rate and monthly car loan payment. Grain of Salt The 20/4/10 rule of thumb doesn't work for all car-buying situations. While the rule does allow you to spend up to 10% of your monthly income on transportation costs, your other monthly expenses may not allow you to spend quite that much. In addition, you may be able to spread your payments over five or six years instead of four to lower your monthly payment. Note Be careful extending your car loan beyond four years, especially if you have a bad credit score. Your monthly payment may be lower, but you'll pay more interest in the long run. Considering the average cost of a new car in January 2021 was about $40,857, according to vehicle valuation and information source Kelley Blue Book, you would need a monthly income of $9,086.88, which is an annual income of $109,042.50, to stick to the 20/4/10 rule and spend $726.95 per month on the car loan payment, even if you have excellent credit. Adjusting your budget is another option for affording the monthly payment on a new car, if your other monthly expenses are low. If this is the case, you can increase the 10% part of the rule, allowing you to afford a car with a higher price tag. 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. Frequently Asked Questions (FAQs) How can I stick to my budget when buying a car? If you decide to use the 20/4/10 rule, get preapproved for a car loan that fits into that budget before you shop for a car. When you go shopping, be sure to let the seller know that you'll be sticking to your budget, and only consider cars that fall into that price category. How much should I budget for a car if I want to pay cash? Another car-buying rule of thumb says that you shouldn't spend more than 35% of your yearly income on a car. So, if you make $100,000, you shouldn't spend more than $35,000 on a car. Should I buy a new or used car? While the average cost of a new car is over $40,000, the average cost of a used car was around $28,000 at the end of 2021. You may have an easier time sticking to your budget it you go the used route. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Census Bureau. "Income and Poverty in the United States: 2020." myFICO. "What Is a FICO Score?" myFICO. "What Credit Score Do You Need to Buy a Car?" Kelley Blue Book. "Average New-Vehicle Prices Continue to Surpass $40,000, Up More Than 5% in January 2021, According to Kelley Blue Book." KBB. "Average Used Car Price Now Over $28,000."