Car loan
How does LendingTree get paid?
LendingTree is compensated by companies on this site, and this compensation may affect how and where offers appear on this site (such as ordering). LendingTree does not include all lenders, savings products or lending options available on the Marketplace.
How does LendingTree get paid?
LendingTree is compensated by companies on this site, and this compensation may affect how and where offers appear on this site (such as ordering). LendingTree does not include all lenders, savings products or lending options available on the Marketplace.
Katie Lowery
Katie Lowery is a former deputy editor at LendingTree, covering personal finance and auto lending.
More from the editors
Xiomara Martinez-Hvid
Xiomara Martinez-White is a copy editor at LendingTree and its affiliates. She is a graduate of the CUNY Graduate School of Journalism.
More from the editors
Published on:
19 mei 2023
The content was correct at the time of publication.
We're committed to providing accurate content that helps you make informed decisions about your money. Our partners have not commissioned or approved this content. Read our information At LendingTree, we strive to provide accurate and actionable content that helps you make informed decisions about your money. Our team of writers and editors follow these important guidelines:Editorial Guidelines
It can be all too easy to buy a car that you can't actually afford because you're lured by the smell of a new car. One way to ensure you make a good financial decision when buying a car is to use the 4/20/10 rule.
The 4/20/10 rule helps you determine the ideal amount to spend on a car by indicating how much down payment you need to make, the length of the loan, and the percentage of your income you spend on car-related expenses. expenses must be spent. . By following this rule, you can buy a car that you can afford and that you will enjoy for years to come.
Buying a car is a big decision, but it doesn't have to be stressful. The 4/20/10 rule can help car buyers decide if they are in a financial positionbuy a new car. To apply this rule of thumb, budget for the following:
- A 20% deposit
- Repayment terms of four years or less
- Spend less than 10% of your monthly income on transportation costs
By offering a significant down payment, limiting the term of your loan, and keeping your car costs low, you can ensure you don't overspend on a depreciated asset.
How does the 20/4/10 rule work?
While it may take some extra planning on your part, the 4/20/10 rule for buying a car is quite simple.
20% deposit
INdown payment on a caris money you pay upfront to reduce the amount you need to borrow when you buy a car. The 4/20/10 rule encourages consumers to do the samereduce at least 20% of the total price of their vehicle, which reduces the total amount you borrow and the interest you pay over the course of the loan. While therecar loan without money, not making a payout could cost you more in the long run.
An important reason to put money down is to reduce the chance of owing more on the car than it is worth, also known asup and down on your car loan. You can also get a higher oneannual percentage(APR) if you don't make a down payment because your lender considers the loan to be higher risk. Your APR measures how much your loan will cost, including interest and fees.
LeningTree'scar loan calculatorcan help you calculate how much you can borrow.
Choose a term of four years or less
Your loan term determines how long you have to pay off your debt. The 4/20/10 rule suggests that you strive for itfinance your car for up to four yearsor 48 months.
If you borrow oneshort term car loan, your monthly costs are higher, but you pay less interest. On the other hand, if you have along term car loan, vanmonthly paymentswill be less, but you will likely pay more in interest. By limiting the length of your loan term, you avoid having to pay more interest in the long term and you own your car sooner.
Keep transport costs below 10%
The last paragraph of the 4/20/10 rule concerns the percentage of your gross monthly income that you should spend on car costs. Between youcar loan, car insurance costs, fuel and repairs, owning a car can quickly become expensive. American households spent an average of $10,961 on transportation in 2021, according to the latest data from the Department of Transportation.
When you consider all the money you need to invest in a new car, try to keep yourstotal transportation costsup to 10% of your monthly income or less. This way you can keep up with payments and still cover unexpected costs.
The 4/20/10 rule can provide financially sound guidelines when it comes to budgeting for a car loan, but it's not a hard and fast rule that will work for everyone.
Benefit | Cons |
---|---|
Because you're making a large down payment and agreeing to short repayment terms, this rule can help you save money on your car loan. It can help you learn itgood financial habits, such as saving and budgeting for a major purchase. A large down payment and a short repayment period can help you with thispay off your car loan faster. | The rule doesn't take yours into accountcreditworthiness, which may affect the APRs that lenders offer you; This can make it difficult to qualify for a loan if you do have onebad credit, even if you have a 20% deposit. It doesn't take into account factors like inflation, which can make buying a car much more difficult. Some consumers may be on a tight budget and cannot afford to save for a 20% down payment or take out a short-term loan. |
- Buy a used car instead of a new one.While new cars generally have better financing options,buying a used carcan save you money because they are usually cheaper. This way you will have to make a smaller down payment of 20%.
- Save for a larger down payment.Making a down payment of more than 20% will lower your minimum monthly car loan payments and make it easier to keep your carrying costs under 10%.
- Stick to a basic model.While upgraded car models come with a lot of bells and whistles, a basic model will cost you less and make it easier to pay upfront.
- Compare loan offers.It's important to get multiple car loan quotes because it allows you to compare terms and interest rates from different lenders. This can help you find the best possible deal and save you money on interest in the long run.
Frequently Asked Questions
The 4/20/10 rule may not work for you if you are on a budget and need a car ASAP. In these cases it may not be reasonable to pay a 20% deposit and you may need to look for asmaller car loan.
Buying a car with cashyou can save money on interest and fees. However, if you want to use cash to buy a car, you may need to choose a cheaper used car, as new cars can cost more than most people have saved. According to Kelley Blue Book, the average price of a new car in March 2023 was $48,008.
INpre-approved car loanis a fixed quote from a lender that can give you a good idea of how much a new or used car will cost you. To find the offer that suits you best, compare multiple pre-approvals from loan providers.
Receive car loan offers from up to 5 lenders in minutes
Auto sources
Best car loan prices
Automatic Refinancing Rates
Automatic payment calculator
Car price calculator
On this page
- What is the 4/20/10 rule?
- How does the rule work?
- Pros and cons
- How to keep your budget
- Frequently Asked Questions
Recommended reading
Questions to ask when buying a car
Updated July 28, 2022
There's more to buying a car than kicking the tires and taking the first price that comes along. Here are some questions to ask when buying a used car or a new car.
READ MORE
Basics of car buying: what is the suggested retail price?
Updated November 18, 2022
Buying a new car can be exciting but confusing. In this article we explain what MSRP means and what it means for your wallet.
READ MORE
Dealer costs you should pay attention to when buying a car
Updated March 29, 2024
When you buy a car, there are some dealer fees involved. The good news, however, is that many of these fees are negotiable.
READ MORE