What Is the 20/4/10 Rule for Buying a Car?

When you’re car shopping, a lot of factors may influence your decision, like the type of car you need, its safety features and fuel efficiency. But one of the most important elements is the cost of the car.

It’s not always easy to find the right car for your budget, especially if money is tight. The 20/4/10 rule, which was created by financial experts to judge a car’s affordability, may help you judge whether a vehicle fits into your budget. However, it’s not always the right framework for every financial situation. Read on to learn what it is and whether it might be a helpful guideline for you.

What is the 20/4/10 rule?

When you’re buying a car, you may finance the purchase with an auto loan if you can’t buy it with cash. But when you’re breaking up the expense with a loan, it may be difficult to figure out exactly how much you can afford — that’s where the 20/4/10 rule comes in.

According to some financial experts, an auto loan fits into your budget if you can afford a 20% down payment, repay the loan in a four-year term or less and keep your monthly car costs (including gas, maintenance, insurance and the loan payment itself) at or below 10% of your monthly income.¹

Down payment

Your down payment is the amount you pay upfront for the car, which reduces the amount you have to borrow. A car’s value begins to go down as soon as you drive it off the lot at the dealership and may fall around 10% a year.² When you finance a car, you run the risk of spending more than the car will be worth after you’ve paid it off. According to Kelley Blue Book, a 20% down payment may reduce your chances of becoming “upside down” on your car loan, which means owing more than the car’s value.³

Loan term

Your loan term is the amount of time you have to repay your loan in full, including interest (the cost of borrowing). Many auto loans feature fixed, simple interest. This means the interest rate won't change, and the interest will not compound as it does when you carry a credit card balance. Generally, the longer your term, the lower your monthly payment. While smaller payments may seem more affordable, longer-term loans usually end up costing more over time because you typically pay more in interest.⁴ Car loan terms are trending longer, with six- and seven-year loans making up the majority of new auto loans in Q2 2025, according to Edmunds.⁵

Monthly car costs

Car ownership isn’t cheap, and the monthly cost of owning a car is more than just your auto loan payment. You also need to consider expenses like car insurance, maintenance and gas. These ownership costs can vary widely based on factors like how much you drive, the price of gas, the condition of your car and more.⁶

How to determine if the 20/4/10 rule is right for you

The 20/4/10 rule isn’t a strict requirement. The “rule” is more of a guideline that may help you avoid overspending on your car, depending on your financial circumstances.

The 20/4/10 rule may be a helpful framework for you if the following situations apply:

• You can comfortably afford a 20% down payment. If you have enough savings or income to cover 20% of your auto loan upfront without straining your budget, then you may reduce the amount you have to borrow.
• You can afford higher monthly payments. While paying your loan within four years may save you money in the long run, you’ll need enough monthly income to cover larger payments.
• You can keep your monthly car expenses at 10% of your income or less. Remember, your car expenses include not only your loan payment, but also things like fuel, maintenance and insurance costs.

While the 20/4/10 rule is a helpful tool, it’s not always the right fit. In some circumstances, you may want to take a different approach to buying a car if the following applies to you:

• You don’t have a strong credit history. If you have a less favorable credit score or limited credit history, you may only qualify for an auto loan with a relatively high APR, even with a 20% down payment.⁷ In that case, you might not be able to keep your monthly costs below 10% of your income.
• You have limited income. A smaller down payment or longer loan term may make the most sense for your budget if you can’t afford to spend a lot at once (although remember that a longer-term loan will likely cost more in the long run). Monthly car expenses that amount to less than 10% of your income may not be realistic for everyone.
• You plan to pay off the loan early. You may want to pay off your auto loan early to save on interest and own your vehicle outright sooner. To repay your loan early, you may have to make loan payments that exceed 10% of your income. Some lenders may charge a prepayment penalty, so it’s important to consult your lender about any guidelines or restrictions on paying your loan off early.

If the 20/4/10 rule doesn’t work for your financial situation or priorities, it doesn’t mean an auto loan is out of reach. What matters most is finding a strategy that makes an auto loan manageable for you. If you’re just getting started, a car-buying checklist may be a good place to begin. If you’re concerned about costs, a used car might be more accessible — and you might qualify for a used car loan. You could also look into leasing a car. There are many paths to getting an affordable car outside of the framework of the 20/4/10 rule.

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Drive your decision with confidence

Whether you follow the 20/4/10 rule perfectly, make a few adjustments, or take a different approach altogether, purchasing a new or used car will affect your finances. Take the time to research and consider your options carefully.

When it comes to buying a car, you’re in the driver’s seat. The right tools and information may help you move forward confidently.

Sources

1. https://www.jdpower.com/cars/shopping-guides/what-is-the-20-4-10-rule-of-buying-and-financing-a-car
2. https://www.bankrate.com/insurance/car/understanding-car-depreciation/
3. https://www.kbb.com/car-advice/what-is-the-best-down-payment/
4. https://www.nerdwallet.com/article/loans/auto-loans/average-car-loan-length
5. https://www.edmunds.com/car-loan/how-long-should-my-car-loan-be.html
6. https://www.experian.com/blogs/ask-experian/total-cost-of-owning-car/
7. http://www.bankrate.com/loans/auto-loans/car-loan-down-payment-benefits/