Are You Spending Too Much On Your Car Payments?
Don’t finance or lease a car until you read this post! If you’re thinking about buying a car then make sure it falls under the 20/4/10 car rule. Use this rule to calculate what price range is acceptable for your current income.
The 20/4/10 car rule recommends individuals to make a 20% down payment for a term of 4 years or less while paying their monthly expenses at about 10% of their monthly income. These rules will help you manage your budget by placing a cap on how much you can spend on your car payments.
It’s not a good idea to be paying more than 10% of your income on car payments; even if you can afford it. Just because you can make the monthly payments, doesn’t mean it’s a good idea. Don’t fall into this money trap and certainly don’t buy an expensive vehicle just to show-off to your friends and family.
Like what you’re reading? Check out my other blog posts that can help you with your finances!
- Is Buying A Car Worth It? (5 Questions To Help You Make Your Big Purchase)
- Don’t Fall Into The Car Payment Money Trap (Read this first)!
- Paying Too Much Interest On Your Credit Card? This is how your interest is calculated
First Things First, The 20% Down Payment
The first rule is to make a 20% down payment in order to lower the amount of interest that you will have to pay throughout the term. Don’t purchase a vehicle without making a downpayment, otherwise the amount of interest you will pay will knock your socks off!
Example: We will use the 2019 Lexus 300 as an example! Most companies should have a lease/finance calculator provided on their website so you can calculate roughly what your budget is (keep in mind these are never 100% accurate). The value of this car with the F-Sport Series is $44,850. Why F-Sport? Because they’re nicer okay!?
With the 20/4/10 car rule, you need to make a 20% down payment of $8970 ($44,850*.20) on the purchase price of this vehicle. For simplicity, we will ignore any warranty, tax, or other charges and fees.
I am not sponsored by Lexus, I wish…
Don’t Tie Yourself Down For More Than 4 Years
The length of the term should be no more than 4 years under the 20/4/10 car rule. The interest percentage is generally a lot higher on longer terms compared to the shorter terms. Don’t commit more than 4 years to a vehicle; that’s way too long to be tied down to vehicle payments.
Example: Using the Lexus lease calculator provided on the website, the interest rate for 48 months is 1.90% while a 60-month term is 2.90%. The length of the term is longer with will also result in the interest rate being higher.
The 10% Monthly Payments of The 20/4/10 Car Rule
Your monthly expense consists of car payments, interest, insurance, gas, parking fee, modifications, repairs, and maintenance, etc. The total monthly expenses should not exceed more than 10% of your monthly income.
Example: If your income is $60,000 per year, That is $5000 per month. 10% of your monthly income is $500. You should not be spending more than $500 per month on your car payments.
Using the Lexus calculator on the IS300 once again, with an $8970 down payment and a 4-year term, your monthly payment would be $755.20. No Bueno.
What if you didn’t make a down payment at all? Then your monthly payments would be $949.42 which is worse!
Wondering what kind of car you can afford? Use this car payment calculator from interest.com!
Can You Afford This Car? The 20/4/10 Car Rule Conclusion
The 20/4/10 car rule is a good start when deciding to purchase a new vehicle, but what do I think about it? I honestly think there is another method that is better than the 20/4/10 car rule.
If you want to purchase a car without the massive headache then pay in full with cash! No interest payments needed. I could’ve mentioned this from the start, but then I wouldn’t need to make a blog post on the 20/4/10 car rule!
I hope you found this blog post useful and let me know down in the comment section below what you think! Does the 20/4/10 car rule seem like a good rule to follow when purchasing a vehicle? Or do you have a better alternative?