How the 20/4/10 rule works

The 20/4/10 rule is a widely cited, conservative guideline for car budgets. It is meant to keep borrowing modest, help the loan balance stay closer to the car's value, and leave room in a budget for other goals. It is a starting point for planning, not a standard every buyer must meet.

The three tests

• 20 — Down payment ÷ Price ≥ 20%
• 4 — Loan term ≤ 48 months
• 10 — (Payment + Insurance + Fuel + Other) ÷ Gross monthly income ≤ 10%

The payment uses the standard amortization formula P × r ÷ (1 − (1 + r)^−n). The suggested maximum price reverses the 10% test: Max price = PV(10% income − running costs, APR, 48) ÷ 0.8.

Worked example

With $85,000 gross income, the 10% budget is about $708/month. A $32,000 car with $6,400 down (20%) at 7% for 48 months costs about $613/month, plus $150 insurance and $140 fuel — $903 in total, or 12.7% of income. That meets 2 of 3 tests; the rule's maximum price for this income is roughly $21,837.

What the result means

Passing all three tests means the plan is at least as conservative as this heuristic. Missing a test shows which lever — down payment, term or price — moves the plan furthest from it. Your own savings, debts and housing costs may justify a stricter or looser budget.

Limitations

• Sales tax, fees and trade-ins are not modeled; use the car payment calculator for a fuller payment estimate.
• The rule ignores depreciation, maintenance and other debts. The car affordability calculator adds housing and debt-to-income guidelines, and the true cost of ownership calculator covers depreciation and upkeep.
• Not sure what to enter for fuel? Estimate it with the fuel cost calculator.