What is 20/4/10 rule in car buying?

2 min read

Like the other big purchases, it’s good to buy a car with cash to avoid paying for the interest. However since not all cannot do that, paying in installment and through car loan are the alternative solutions. What do you think is the smart paying scheme, which allow you to optimize your car and let your pocket to breathe? You can follow the 20/4/10 rule in car buying according to the experts.

According to sought-after and award-winning financial blogger Tyrone Solee, the 20 in the figure is for your down payment and 4 is for the years you need to pay the balance. On the other hand, the 10 is for the percent you allot for the transportation cost. He added that this 10 percent may stop you to become impulsive car buyer or purchasing new one without plan.

“The first part of this rule (i.e. 20/4) prevents you from owing more than the car is worth as it eliminates the additional interest expense that you would incur had you not put down at least 20 percent and had you not financed for a maximum of 4 years as you are paying a depreciating asset,” Solee shared on his site the Millionaires Act.

Meantime, Financial Samurai (FS) explained why not spending more than 10 percent of gross on a car is a good idea. It will prevent you from stress, for wanting more, and the same time, let you invest in other ventures that will increase the value of your money. Furthermore, you don’t only save money to buy a car. You also keep something for its maintenance so your vehicle remains in perfect condition and work longer. On the other hand, stuff like parking tickets, traffic tickets, repair, and insurance are part of maintenance costs as per FS.

“Treat the 1/10th rule of car buying like a game. You will be surprised to find how many different type of cars you can buy with 1/10th your income if you make over $25,000 a year,” FS’ tip.