How car shopping rules work on 20-4-10

When buying a car, whether new or used, experts say certain frameworks can be a great starting point for keeping costs down.

The so-called “20-4-10” rule uses three components to help you determine whether a car purchase is affordable. The ideal down payment, maximum recommended car loan duration, and the percentage of income that professionals should spend on vehicle-related expenses per month.

Not only does this framework help you stay on budget, but some aspects can prevent your car from becoming “underwater” or “upside down.”

But Chelsea Ransom-Cooper, co-founder and chief financial planning officer at Zenith Wealth Partners in Philadelphia, said, “There’s always a wiggle room.”

It can be difficult to meet all the elements of the rule. For example, given the high prices of a car, it is difficult to pay a big down payment or require a long loan period to cut back on monthly payments.

But remember that more cash spent on car payments can mean lower salary. You can work on your pay to tackle important savings and investment goals, such as building emergency funds or increasing retirement contributions, experts say.

“Since cars are depreciable assets, I want to make sure they spend more money on valuing their assets.”

The first part of the 20-4-10 framework recommends that drivers make a down payment equivalent to at least 20% of the vehicle’s price.

Creating a 20% down payment can help you in many ways. First of all, experts say you will reduce your monthly loan payments and reduce the interest you pay over the life of the loan, in order to ultimately reduce the amount you borrow.

Additionally, according to bank rates, down payments can sometimes “act like a buffer” against depreciation to gain vehicle fairness. Autos are depreciating assets. In other words, it is a factor that will lose its value over time and become underwater on a car loan.

“We’re looking forward to seeing you in the process of doing things like this,” said CFP Lee Baker, founder, owner and president of Claris Financial Advisors in Atlanta.

The “4” in the framework represents a four-year or 48-month car loan. A shorter loan deadline means higher monthly payments, but ultimately, you will have less interest paid and you will pay your vehicle faster.

However, it’s not uncommon to see a driver heading in the opposite direction. Extending the term of a car loan is one of the few ways to reduce monthly car costs, Edmunds Insights Director Ivan Drury recently told CNBC.

According to Edmunds data provided to CNBC, in the second quarter of 2025, 21.6% of new car loans consisted of 21.6% of new car loans.

Baker, who is also a member of the CNBC Financial Advisor Council, said that if you need to give yourself “more breathing chambers,” he will fund the vehicle for five years, but try making the same payment on a four-year loan.

“Even if you have a five-year loan, if you pay off your car in three and a half years or four years, you’ll reduce the amount you’re paying,” he said.

The third component of the 20-4-10 rule indicates that you should not spend more than 10% of your monthly income on vehicle-related costs.

Ransom Cooper said it is important to ensure that the threshold is not exceeded and that costs are kept as low as possible.

For example, according to LendingTree, if you make $4,200 a month after taxes and deductions, calculate 10% of that number and calculate 10% of that number, you shouldn’t spend more than $420 on shipping costs.

“Trying to stay as securely as possible with that number is a useful way to keep it from catching underwater,” Ransom Cooper said.

In reality, it can be difficult to do. A 2024 report by the Department of Transportation found that households spent an average of $13,174 on transportation costs in 2023. That year, transportation accounted for about 17% of total expenditure.

“Of the transport items purchased, the average household devotes most of their transport budget to purchasing, operating and maintaining their own vehicles,” the report said.

Ransom Coopers should use the 20-4-10 rule as a guideline to see if they really have room.

If the 20% down payment is too high and you find your new vehicle is more “liked”, consider buying a car next year or two, she said.

But if your car has recently broken down and you really need a new vehicle to go to work, consider making new expenses viable, such as paying a smaller down payment, cutting back on other parts of your life and reducing discretionary spending, Ransom Cooper said.