The simplest guideline for buying a car is the 20/4/10 rule:
- 20% down payment.
- A loan of no more than 4 years (48 months).
- Keep the monthly payment under 10% of your gross monthly income. Stricter versions count insurance inside that 10% as well.
The rule is conservative on purpose. Cars lose value quickly, and a budget that looks fine at the dealership can feel very different once insurance, gas and repairs arrive.
Car price by income
This chart uses the simpler version of the rule: the car payment alone is capped at 10% of gross monthly income, on a 48-month loan at 7% APR, with 20% down.
| Yearly income | 10% of monthly income | Loan you can carry | Car price with 20% down |
|---|---|---|---|
| $40,000 | $333/mo | $13,900 | $17,400 |
| $50,000 | $417/mo | $17,400 | $21,800 |
| $60,000 | $500/mo | $20,900 | $26,100 |
| $75,000 | $625/mo | $26,100 | $32,600 |
| $100,000 | $833/mo | $34,800 | $43,500 |
| $125,000 | $1,042/mo | $43,500 | $54,400 |
| $150,000 | $1,250/mo | $52,200 | $65,300 |
If you want insurance inside the 10%, subtract your monthly premium from the payment budget first. A $60,000 earner paying $150 a month for insurance would then aim for a $350 payment, which supports a loan of about $14,600 over 48 months at 7%.
The price includes everything you finance: taxes, title and dealer fees as well as the car itself.
Why the rule says four years
Longer loans lower the payment, which is exactly why dealers offer them. Here's the same $35,000 loan at 7% over different terms:
| Loan term | Monthly payment | Total interest |
|---|---|---|
| 48 months | $838 | $5,230 |
| 60 months | $693 | $6,583 |
| 72 months | $597 | $7,963 |
| 84 months | $528 | $9,372 |
Stretching to 84 months cuts the payment by $310 but costs over $4,000 more in interest, and in practice longer loans often carry higher rates too. The bigger risk is negative equity: new cars commonly lose a fifth or more of their value in the first year or two, so on a long loan you can owe more than the car is worth for years. If it's totaled or you need to sell, you pay the difference.
What the payment doesn't include
Insurance, gas or charging, maintenance, tires, registration and parking can easily add a few hundred dollars a month on top of the loan. Before you buy, get an insurance quote for the exact model. Sports cars and some popular models cost much more to insure than you might expect.
How to pay less for the same car
- Get preapproved by a bank or credit union before visiting the dealer. You'll know your rate and can compare the dealer's financing against it.
- Negotiate the total price, not the monthly payment. A salesperson can hit almost any payment by stretching the term.
- Compare offers by APR. It includes most fees, so it's the fairest way to compare.
- Consider a lightly used car. Letting someone else take the first years of depreciation is the biggest single saving in car buying.
- Make a bigger down payment if you can. It lowers the payment and protects you from negative equity.
Work out your own budget
The Loan Calculator has an affordability mode: enter the monthly payment you're comfortable with, plus the rate and term, and it tells you the most you can borrow. If a car and a home purchase overlap, check both with how much house you can afford. The debt limits in the two rules interact.
Frequently asked questions
How much car can I afford on $50,000 a year?
Is a 72-month car loan a bad idea?
Does the 20/4/10 rule apply to used cars?
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