Your finances are one of the first things you should consider when buying a vehicle.
Vehicles are typically bought and paid for in installments. Dealerships typically have finance plans that allow you to choose the initial downpayment, monthly bill, and loan duration. Figuring out the ideal payment plan for you can be challenging because you need to take into account your current and future finances.
Need some new vehicle buying tips? Financial experts have devised the 20/4/10 rule to help vehicle customers determine whether a vehicle’s finance plan is right for them. Let’s look into how this rule can help you pay for your vehicle while managing your finances in the long run.
The numbers are meant to prescribe criteria for the vehicle’s down payment, loan duration, and monthly transportation costs.
Paying for 20% of a vehicle is certainly more achievable than saving up for the entire vehicle. It’s not a hard rule, and you can exceed or go slightly below it.
If your vehicle’s financing has interest, consider paying as much of the vehicle upfront as you can comfortably afford to limit your loan and lessen interest rates. A larger downpayment means you’ll have smaller monthly payments, and you might even pay off the loan faster.
However, if your financing plan has 0% interest, then you have little incentive to muster a larger downpayment.
Paying your loan long-term might seem better because you’ll have lower monthly payments. However, this will make you spend more money in the long run, as your loan will incur interest.
As much as possible, try to pay off the vehicle in four years or less.
You’ll have a higher monthly payment, which will account for a greater proportion of your monthly expenses. However, the amount of money you’ll save from interest rates when you pay off your vehicle sooner will be worth it.
Transportation costs include fuel and maintenance costs, insurance, and your monthly car payment. The financially responsible thing to do is to keep these costs below 10% of your total income.
If you make $3,000 a month, then set aside $300 for gas, parking, insurance, maintenance, and the monthly payment for the vehicle.
That said, keeping these costs below 10% can be challenging because maintenance costs can be unpredictable. You might find yourself needing to replace a part if it wears out prematurely. Luckily, many automakers offer 3-year warranties on their vehicles, which can help you cut maintenance costs.
You can lessen transportation costs by purchasing smaller, more affordable, and more fuel-efficient vehicles. An EV or hybrid vehicle can also be cheaper to run because it consumes little to no fuel. At the same time, the electricity costs to power an EV are considerably cheaper than fuel.
However, EVs and hybrids tend to have a higher upfront cost, which is going to translate into higher monthly payments. That said, these options might still offer a good return on investment, as most households spend $130 to $200 monthly on fuel costs. That can add up to a lot of money over the years.
Remember that none of these are set rules. At the end of the day, each person’s circumstances are unique, and some of these guidelines might not be ideal for you.
If you’re financially established then consulting this rule might be a good way to continue being financially responsible. However, if you’re someone with a limited income, then using this rule can help you reconsider your vehicle choice.
There are a lot of other options, such as purchasing a vehicle’s base or lower trip options rather than getting an upgraded model. You can also get an older-generation vehicle, which is usually marked down.
The 20/4/10 rule is also good advice on buying a used car. Purchasing a used vehicle is great for those on a budget, as vehicles can depreciate quickly without accumulating many miles or age.
Moreover, following these guidelines can be tricky given that modern brand-new vehicle prices have increased 61% between 2010 and 2020 when people’s incomes have only increased by 37%.
Vehicles are incredibly alluring. That said, they can sometimes be just an objective of desire rather than a necessity. These rules are meant to prevent you from biting off more than you can chew when purchasing a vehicle.
There’s a difference between having the capability to buy something and being able to comfortably afford it. The last thing you want is to overextend yourself to fulfill your wants and then find yourself having financial difficulties down the line.
Any information provided on this Website is for informational purposes only and is not intended to replace consultation with a professional mechanic. The accuracy and timeliness of the information may change from the time of publication.