Buying a car is exciting. You get to test drive and decide which vehicle you want to drive for the next few years. But buying a car can be expensive, too. So, how much should you be spending on yours? It really depends on your income situation.
How Much Should You Spend on a Car?
When it comes to buying a car, in most cases, you don’t want the total cost of financing to exceed 10 percent of your gross (pre-tax) monthly income. The reason why is because you don’t want the vehicle to become a financial burden. Although this may limit the type of car you can afford, you end up better off from a financial standpoint if you stay within the 10-percent range. Remember: you have other bills to pay, too, so you don't want your auto loan to throw your budget off.
What is the 20/4/10 Rule?
When financing a major purchase like a vehicle, you may have heard of the 20/4/10 rule. Although this rule isn’t universal for all car buyers, it’s a good starting point when thinking about how much you should spend. The rule states that you should:
- Make a down payment of at least 20 percent of the vehicle’s value,
- Finance for four years at most, and
- Don’t let your total car-related expenses (including the monthly payment, insurance, fuel, and maintenance) exceed 10 percent of your monthly pre-tax income.
Let’s look at an example of how the 20/4/10 rule works if you have a monthly income of $3,000 and spend $100 a month on car insurance and are trying to figure out how much vehicle you can afford:
- Monthly payment amount: $200 ($300 recommended maximum, 10 percent, minus $100 for auto insurance)
- Car loan term: 48 months
- Car loan amount: $8,771
- Down payment: $1,760 (slightly over 20 percent of the loan amount)
- Taxes and fees: $634
- Interest rate: 4.5 percent
- Estimated vehicle purchase price: $9,897
When you have bad credit or are struggling financially, the 20/4/10 rule may not work perfectly for you. Remember this “rule” is just a suggestion when financing a car, and what’s best for you may not fit the 20/4/10 rule. If you want to see how much it might cost to finance a vehicle, you can use our Car Loan Estimator Calculator.
Ready to Finance a Car?
If you’ve crunched the numbers and are ready to buy a vehicle, but worry your credit is in the way, let Auto Credit Express help you find financing. We work with a nationwide network of dealerships who have the lending resources available to help people in all kinds of credit situations. Let us connect you to a dealer in your area. Start by filling out our no-obligation auto loan request form.