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What's a desirable amount for a car loan?
I’m shopping around for a car, but I’m not exactly sure how much to borrow for a car loan. Is there a formula or rule for determining your budget? What’s a typical car loan amount?
Eric Schad · Updated on
Reviewed by Shannon Martin, Licensed Insurance Agent.
If you’re wondering how much
car loan
you can afford, most financial experts suggest the 20/4/10 rule. The 20/4/10 rule states that the car you buy should meet these criteria:
- You’re able to comfortably make a down payment of 20%
- Your loan length is no longer than four years or 48 months
- You aren’t spending more than 10% of your pre-tax income on payments in a year
Here’s an example: If you make $60,000 per year pre-tax, your yearly payments should add up to no more than $6,000, or $500 a month, with a 48-month loan.
Let’s also assume that you qualify for a 48-month loan with 3.88% APR. If you put all of that information together, you can probably afford to borrow right around $30,000, assuming you put 20%, or $6,000, toward your down payment.
If you want to see how much a lender is willing to give you, shop around and get preapproved for a car loan.
Preapproval will show you how much your monthly payments will be and how much the lender is willing to let you borrow. Remember that you don’t have to spend every last dime that the bank offers!
View full answer
- Gregory R.
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