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When shopping for a automotive, whether or not new or used, specialists say {that a} particular framework is usually a nice start line to maintain prices down.
The so-called “20-4-10” rule makes use of three elements that can assist you decide if a automotive buy is inexpensive: the best down cost, the utmost beneficial auto loan time period and the share of your earnings that specialists say ought to go to vehicle-related prices per 30 days.
Not solely does the framework assist you to keep inside your funds, however some facets may also preserve you from turning into “underwater” or “upside down” on a automotive, or owing extra on a automobile than what it is price.
Nevertheless, “there’s all the time wiggle room,” mentioned licensed monetary planner Chelsea Ransom-Cooper, co-founder and chief monetary planning officer of Zenith Wealth Companions in Philadelphia.
It may be tough to satisfy all parts of the rule: You may discover it difficult to provide you with a big down cost given excessive automotive costs, for instance, or want an extended mortgage time period to carry down month-to-month funds.
However take into account that more cash spent on a car payment can imply much less is left in your paycheck to deal with vital saving and investing objectives, akin to constructing an emergency fund or boosting your retirement contributions, specialists say.
“A automotive is a depreciating asset, so we need to guarantee that we’re placing extra money towards appreciating belongings,” mentioned Ransom-Cooper, a member of CNBC’s Financial Advisor Council.
Down cost
The primary piece of the 20-4-10 framework recommends drivers make a down cost equal to at the very least 20% of the automobile’s value.
Making a 20% down cost helps in numerous methods. First, you are finally decreasing the quantity you borrow, subsequently decreasing the month-to-month cost for the mortgage and reducing the curiosity you will pay over the lifetime of the mortgage, specialists say.
What’s extra, the down cost additionally “acts like a buffer” in opposition to depreciation since you achieve fairness within the automobile, according to Bankrate. Vehicles are depreciating belongings, which means they lose worth over time, a contributing issue to turning into underwater on a automotive mortgage.
“Placing down 20% on the entrance finish helps keep away from you ending up in that sort of scenario,” mentioned CFP Lee Baker, the founder, proprietor and president of Claris Monetary Advisors in Atlanta.
Automobile mortgage time period
The “4” within the framework stands for a four-year or 48-month auto mortgage. Whereas a shorter mortgage time period means you’ll have greater month-to-month funds, you find yourself paying off the automobile sooner with much less curiosity paid.
Nevertheless, it is commonplace to see drivers take the other way. Lengthening the time period of an auto mortgage is without doubt one of the few methods to decrease month-to-month auto prices, Ivan Drury, director of insights at Edmunds, recently informed CNBC.
We need to guarantee that we’re placing extra money in direction of appreciating belongings
Chelsea Ransom-Cooper
co-founder and the chief monetary planning officer of Zenith Wealth Companions in Philadelphia
Within the second quarter of 2025, 84-month auto loans comprised of 21.6% of latest auto loans, up from 19.2% the quarter prior, in line with Edmunds information supplied to CNBC.
If it’s good to give your self “extra respiration room,” finance the automobile for 5 years, however attempt to make the identical funds you’d have made in a four-year mortgage, mentioned Baker, who can also be a member of the CNBC Financial Advisor Council.
“Even in case you have a five-year mortgage, in case you pay the automotive off in three and a half or 4 years, it shrinks the quantity of curiosity you are going to pay,” he mentioned.
Automobile prices in your funds
The third element of the 20-4-10 rule signifies that you shouldn’t spend greater than 10% of your month-to-month earnings on vehicle-related prices, which should embody your automotive cost, auto insurance coverage, upkeep and gasoline.
Ransom-Cooper mentioned it is vital to keep away from going over that threshold and to attempt to preserve prices as little as doable.
For instance, in case you make $4,200 per 30 days after taxes and deductions, and calculate the ten% of that determine, you shouldn’t spend greater than $420 per 30 days on transportation prices, according to LendingTree.
“Making an attempt to remain as tight to that quantity as doable is a useful solution to just remember to do not get caught underwater,” Ransom-Cooper mentioned.
In observe, it may be tough to execute. Households spent on common $13,174 on transportation prices in 2023, the second largest expenditure class after housing, according to a 2024 report by the Division of Transportation. In that yr, transportation made up about 17% of whole expenditures.
“Of the transportation gadgets bought, the typical family devotes most of its transportation funds to buying, working and sustaining personal autos,” according to the report.
Use the 20-4-10 rule as a tenet to see how a lot you’ll be able to really afford, mentioned Ransom-Cooper.
For those who discover {that a} 20% down cost is simply too excessive and the brand new automobile is extra a “nice-to-have,” think about buying the automotive within the subsequent yr or two, she mentioned.
But when your automotive not too long ago broke down and also you really want a brand new automobile to go to work, think about paying a smaller down cost and chopping again on different areas in your life to make the brand new expense possible, akin to decreasing discretionary spending, mentioned Ransom-Cooper.
