Blue toy car on a one-hundred dollar bill with the text "What is the 20/4/10 rule?"

How to Budget for a New or Used Vehicle

20/4/10 Rule for Car Financing

Regardless if you are buying new or used, you should have a clear understanding of your budget. However, it’s not always obvious how much you can afford without jeopardizing your credit. With the 20/4/10 rule, you can calculate a budget that fits your income.

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What Does the 20/4/10 Rule Mean?

Each number in this rule has a specific meaning. First, the 20 means that your down payment should be at least 20% of the value of the vehicle you are buying. The 4 means that your loan should not be longer than 4 years. Finally, the 10 means that your monthly payment should not exceed 10% of your gross income.

Sample Calculation

Of course, you will need to figure out just how much you can afford based on your income. How do you calculate what you can afford? Let’s say you make $60,000 a year. Take this amount and take 10% to find the amount you can afford to spend on a car. In this case, that number is $6,000.

Now, you should calculate the down payment you should make. Multiply this value by 0.2 to find the 20% down payment amount. For someone buying a $6,000 car, their down payment should be at least $1,200. Next, take away this down payment from the value of the vehicle to find your loan amount. This person would need to loan $4,800.

Piggy bank sitting on the dashboard of a vehicleLet’s assume you decide to loan for four years or 48 months. Divide the loan amount ($4,800) by the number of months you plan to pay it off (48) to get your monthly payment ($100). Remember, you will also need to pay interest on top of the number you calculate. The amount of interest you pay depends on the interest rate of the loan you have.

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Need help financing for a vehicle? One of our representatives here at Sheehy Auto Outlet can help you calculate your budget and find a vehicle that is affordable to you. To contact us, simply message us on our website, give us a call, or stop by our location in Manassas, VA.