How to Budget for a Car Loan
Buying a car is stressful if you are on a tight budget. How do you know which vehicle you can afford? Luckily, there is a way to calculate your budget based on your income. Here, we describe how to finance for a car with the 20/4/10 rule.
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What Does the 20/4/10 Rule Mean?
Each number in the 20/4/10 rule stands for something important. The 20 means that you should put down at least a 20% down payment on the cost of your next car. The 4 states that you should not finance for longer than four years. Finally, the 10 means that the total monthly vehicle expensive should not exceed 10% of your income. This includes the principal, interest, and insurance costs.
How to Calculate your Budget Based on the 20/4/10 Rule
Let’s say you make $60,000 in annual gross income each year. Divide that number by 12 to get your monthly gross income, which is $5,000 in this case. Now, take 10% of this number. For our calculation, someone that makes $60,000 a year can afford to spend $500 a month on their car. Again, this includes insurance. If you pay $80 in insurance, then you’d only be able to afford $420 in monthly car payments towards your loan.
The best way to understand if you can afford a car is to understand your spending habits. Are you a heavy spender or a conservative saver? Those that spend most of their income each month will have a hard time making payments.
A way that we recommend for you to prepare for a car loan is to pay yourself. If you make $60,000, put aside $500 a month into savings. Do you find yourself having to pull from that $500 to pay other bills?
We hope this information has proven useful to you. If you need help determining what you can afford, don’t hesitate to contact us.