Car Affordability: The 20/4/10 Rule
Example: Gross monthly income: 6000 $ · Car price: 32000 $ · Down payment: 4000 $ · Loan term: 6 yrs · Loan APR: 7 % · Insurance/mo: 150 $
| Car price you can afford | $23,490 |
| Your down payment % | 12.50% |
| Total car cost/month | $627 |
| % of income on the car | 10.46% |
| Passes 20% down? (1/0) | 0 |
| Passes 4-yr term? (1/0) | 0 |
| Passes 10% income? (1/0) | 0 |
Worked example
On $6,000/month income, the rule caps car spending at $600/month. With $150 going to insurance, only $450 is left for the loan — which, on a 4-year term at 7%, supports about $18,800 of financing, or roughly $23,500 of car with 20% down. A $32,000 car at a 6-year term quietly breaks all three rules.
Frequently asked questions
Why cap the loan at four years?
Longer loans lower the payment but keep you underwater — owing more than the car is worth — for years, and they pile on interest. Four years or less keeps your equity ahead of the depreciation curve.
Is 10% of income realistic in high-cost areas?
It is a guideline, not a law. If housing eats a large share of your budget you may need to go lower, not higher. The 10% ceiling protects room for saving, emergencies, and everything else a car competes with.
What if I fail the rule?
Failing is useful information, not a verdict on you. The tool shows the price that would pass, so you can shop in a range that leaves your budget intact — or increase the down payment to bring a specific car into line.