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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 place to begin to maintain prices down.
The so-called “20-4-10” rule makes use of three elements that will help you decide if a automotive buy is inexpensive: the best down fee, the utmost really useful auto mortgage 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 keep inside your finances, however some elements also can preserve you from changing into “underwater” or “the other way up” on a automotive, or owing extra on a automobile than what it is price.
Nevertheless, “there’s all the time wiggle room,” stated licensed monetary planner Chelsea Ransom-Cooper, co-founder and chief monetary planning officer of Zenith Wealth Companions in Philadelphia.
It may be troublesome to satisfy all components of the rule: You would possibly discover it difficult to provide you with a big down fee given excessive automotive costs, for instance, or want an extended mortgage time period to convey down month-to-month funds.
However remember the fact that more money spent on a automotive fee can imply much less is left in your paycheck to deal with essential saving and investing objectives, equivalent to constructing an emergency fund or boosting your retirement contributions, specialists say.
“A automotive is a depreciating asset, so we wish to make it possible for we’re placing more cash towards appreciating property,” stated Ransom-Cooper, a member of CNBC’s Monetary Advisor Council.
Down fee
The primary piece of the 20-4-10 framework recommends drivers make a down fee equal to not less than 20% of the automobile’s worth.
Making a 20% down fee helps in various methods. First, you are in the end decreasing the quantity you borrow, subsequently decreasing the month-to-month fee for the mortgage and reducing the curiosity you may pay over the lifetime of the mortgage, specialists say.
What’s extra, the down fee additionally “acts like a buffer” in opposition to depreciation since you acquire fairness within the automobile, in accordance to Bankrate. Vehicles are depreciating property, that means they lose worth over time, a contributing issue to changing into underwater on a automotive mortgage.
“Placing down 20% on the entrance finish helps keep away from you ending up in that sort of state of affairs,” stated 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 should have larger 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 wrong 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, not too long ago informed CNBC.
We wish to make it possible for we’re placing more cash in direction of appreciating property
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 keeping with Edmunds knowledge offered to CNBC.
If it is advisable 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, stated Baker, who can also be a member of the CNBC Monetary Advisor Council.
“Even you probably have a five-year mortgage, when 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 stated.
Automobile prices in your finances
The third part 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 embrace your automotive fee, auto insurance coverage, upkeep and gas.
Ransom-Cooper stated it is essential to keep away from going over that threshold and to attempt to preserve prices as little as potential.
For instance, when 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, in accordance to LendingTree.
“Making an attempt to remain as tight to that quantity as potential is a useful option to just be sure you do not get caught underwater,” Ransom-Cooper stated.
In apply, it may be troublesome to execute. Households spent on common $13,174 on transportation prices in 2023, the second largest expenditure class after housing, in accordance to a 2024 report by the Division of Transportation. In that yr, transportation made up about 17% of complete expenditures.
“Of the transportation objects bought, the typical family devotes most of its transportation finances to buying, working and sustaining non-public autos,” in accordance to the report.
Use the 20-4-10 rule as a suggestion to see how a lot you possibly can really afford, stated Ransom-Cooper.
If you happen to discover {that a} 20% down fee is simply too excessive and the brand new automobile is extra a “nice-to-have,” take into account buying the automotive within the subsequent yr or two, she stated.
But when your automotive not too long ago broke down and also you really want a brand new automobile to go to work, take into account paying a smaller down fee and chopping again on different areas in your life to make the brand new expense possible, equivalent to decreasing discretionary spending, stated Ransom-Cooper.
