December 5, 2022

Buying a vehicle is among the most substantial life investments you could ever make. Therefore, it is essential to make sound financial decisions while purchasing a car to ensure that your other expenses are not inconvenienced. In this light, you could seek financial advice from an expert at a cost. Alternatively, you can exploit the 20/4/10 Thumb Rule while making decisions regarding your car purchase.

What Does the 20/4/10 Rule of Thumb for Car Purchase Stipulate?

The premise requires paying at least 20% of the car’s value as the down payment, limiting the duration of paying the car loan to four years and below, and spending 10% of your gross monthly salary on the vehicle’s expenses.

Why Are the Proposed Amounts Viable?

Below is a precise explanation of how the proposed values help you.

20% Down Payment

You influence two key factors by paying a down payment of 20% of the vehicle’s value. 

• Lowering loan amount: Paying 20% means lowering the amount of money you will be borrowing to complete the purchase. The move results in a lesser interest for the loan, which frees up a more significant proportion of your budget. You could use the saved funds to invest in other enterprises or increase your savings.

• Boosts loan viability: Putting down at least 20% of the vehicle’s value creates a good image of your finances. As a result, you are more likely to qualify for a loan for the remaining funds.

Four-Year Loan Length

Four years is an average period for loan payment. This period allows your car to retain its value beyond the payment deadline. Having a more extended deadline could make the value of your car depreciate even before you have completed paying for it. Also, you may not sell or exchange the vehicle without losing money on it if you take too long to pay the loan. 

10% Outgoings for Vehicle Expenses

All expenses linked to the vehicle should comprise 10% of your gross income. These expenses include petrol, insurance cover, loan payments, and road tax. Sometimes, the expenses may surpass the limit, but you are not supposed to regularly surpass the limit because you may not have enough money for savings and other investments.

Key Notes

The above thumb rule may not always work because of unforeseen inconveniences like abrupt changes in the price of commodities and services linked with vehicle usage. However, the changes should not be far from the amount insinuated by the Rule. Therefore, you should use the 20/4/10 Rule as a guide to set your limits and tell when your usage is badly off to maintain a balance. 

Final Remarks

It is crucial to have a guide for your car purchase process, to help you limit your spending and not inconvenience your savings or investments. The 20/4/10 Thumb Rule is an essential guide in making the right financial moves when buying a vehicle.

Explore the stipulations of the 20/4/10 Rule to make the right financial decisions for your car purchase.