● Money & small business
How much car can I afford? The 20/4/10 rule by income, worked out
A common rule of thumb for buying a car is 20/4/10: put at least 20% down, finance for no more than 4 years, and keep monthly car costs under 10% of your gross income. Some versions count only the loan payment in the 10%, others include insurance (and sometimes fuel). Below, the rule is turned into a price for each income, both ways. Run your own numbers in the car affordability calculator, or compare financing with leasing in the car loan vs lease calculator.
Maximum price by income at 7%
20% down, 7% APR, 48 months; the price is the highest whole-dollar amount whose payment fits. Sales tax and fees are left out, so the price is before tax.
| Gross income | 10% a month | Payment only | With $150/month insurance |
|---|---|---|---|
| $40,000 | $333.33 | $17,400 | $9,570 |
| $60,000 | $500.00 | $26,100 | $18,270 |
| $80,000 | $666.67 | $34,800 | $26,970 |
| $100,000 | $833.33 | $43,500 | $35,670 |
| $150,000 | $1,250.00 | $65,250 | $57,420 |
Counting only the payment, the rule works out to a price of about 43.5% of a year's income at 7%. With insurance included, every income loses the same $7,830 of price, which hits lower incomes hardest: at $40,000, it's almost half the budget.
What a longer loan does
Same 20% down and 7%, payment only.
| Gross income | 48 months | 60 months | 72 months |
|---|---|---|---|
| $40,000 | $17,400 | $21,042 | $24,439 |
| $60,000 | $26,100 | $31,564 | $36,659 |
| $80,000 | $34,800 | $42,085 | $48,879 |
| $100,000 | $43,500 | $52,606 | $61,098 |
| $150,000 | $65,250 | $78,909 | $91,647 |
Stretching to 72 months lets the same payment buy a car about 40% more expensive, and it costs more: $500 a month for 48 months is $3,119.85 of interest; for 72 months, $6,672.77. Long loans also leave you owing more than the car is worth for longer, which is part of why the rule says 4 years.
What the interest rate does
The price a $500 payment buys with 20% down:
| APR | 48 months | 60 months | 72 months |
|---|---|---|---|
| 4% | $27,680 | $33,937 | $39,948 |
| 7% | $26,100 | $31,564 | $36,659 |
| 10% | $24,642 | $29,416 | $33,737 |
| 14% | $22,871 | $26,860 | $30,331 |
Going from 4% to 14% takes $4,809 off the price on a 4-year loan and $9,617 on a 6-year loan: the longer the loan, the more the rate matters.
Using the rule sensibly
- It's a ceiling, not a target. The rule doesn't know about your rent, other debts or savings goals.
- Fuel, maintenance and registration aren't in these numbers. If you include them in the 10%, the price drops further.
- The down payment is 20% of the price. A $26,100 car needs $5,220 down; the rule assumes you have it.
Every price was found by searching for the highest whole-dollar price whose cent-rounded payment fits the budget, and cross-checked against the closed-form loan formula (within $2 in every cell). Not financial advice. Payment tables for set loan amounts: car loan payment table.