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What is the 20/4/10 rule of buying and financing a car?

I've heard people mention the “20/4/10 rule” when buying a car but I’ve never understood what it actually means. What’s the 20/4/10 rule?

avatar
Eric Schad · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
The 20/4/10 rule is a
car-buying
principle for finding the right deal. Specifically, the rule states that you should only buy a vehicle if you can meet the following criteria: 
  • You can afford a 20%
    down payment
    .
  • You’re financing the car for four years (48 months) or less.
  • The cost of owning the car (including insurance and your loan payment) is less than 10% of your gross monthly income.
In other words, the “20” is your 20% down payment, the “4” is for the length of the loan, and the “10” relates to percentage of income
While this isn’t a steadfast rule, it can be a useful guideline for new car buyers. Adhering to the 20/4/10 rule can help protect you from entering into a financial situation that could damage your credit or finances. 
Keep in mind: In more recent years, the 20/4/10 rule has debatably held less sway among car buyers, as it doesn't take into account the fact that wages haven't adjusted in tandem with inflation in the new car market.
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