We're a family of six who recently added a furry four legged friend to the mix and as such, we're going to need a bigger car.
Our daily driver is a Toyota Highlander. Before getting a dog, it was starting to get tight in the third row for our older kids. If you're driving around town, it's not a problem.
If you have to take a road trip of more than 4 hours, which we do about three or four times a year, it's uncomfortable bordering on impossible as the kids get taller.
Now that we've added a dog, the Highlander isn't cutting it. It's time to for a minivan!
We've been looking at a Toyota Sienna and that's when I stumbled onto the the 20-4-10 rule – a useful rule of thumb for helping you determine how much car you can afford.
The 20-4-10 Rule
The 20-4-10 rule is a simple one:
- Put 20% down
- Choose a repayment period of 4 years (or fewer)
- Spend less than 10% of your monthly pay on all transportation costs
20% down – 4 year loan – 10% of take home pay
This assumes you're taking out a loan to buy the car. If you can pay cash, do whatever you want! This isn't a rule for that.
Since this does involve a loan, how much you're able to afford will depend on your credit score. Your score will determine your interest rate, which impacts how much you can pay.
How Much Car Can I Afford?
The following table comes from Experian and while it's using numbers from 2023 and VantageScore (not FICO), they're effective enough for our examples below:
| Credit Score | Average New Car Rate | Average Used Car Rate |
|---|---|---|
| Deep subprine (579 or below) | 14.08% | 21.32% |
| Subprime (580 – 619) | 11.53% | 18.55% |
| Nonprime (620 – 659) | 8.86% | 13.28% |
| Prime (660 – 719) | 6.40% | 8.75% |
| Super prime (720 or above) | 5.18% | 6.79% |
Working backwards, we can calculate how much car we can afford based on the 20-4-10 rule.
Here are our assumptions:
- You take home $5,000 a month after taxes. Based on the rule, you can spend $500 a month minus your other transportation costs (insurance, gasoline, etc.).
- Your credit is Nonprime. This means on a new car, you'll pay 8.86% APR on a loan.
- You can use Calculator.net's Auto Loan Calculator to find out how much you can afford.
The calculator includes title, registration, and other fees based on your state (a nice feature of the calculator) so you know your all in cost.
When using the calculator, we set the down payment to $0 and then work backwards once the calculator tells us how much car we can afford.
According to Calculator.net with a $500 a month payment (which assumes ZERO other costs, which is not true), you can afford a car that costs about $20,000. Add in the 20% downpayment and that's, roughly, a $24,000 car on a monthly take home pay of $5,000.
For rough calculations, this is good enough.
To be more precise, if you want to follow this rule, you'll want to calculate how much you are spending in gas, insurance, and everything else to stay within the 10% limit.
“But I Can't Afford Anything Nice”
The rule isn't meant to find you a car that matches your taste. Or what you like in a car. Or what you think it says about you.
It is strictly math.
Your income may not support the type of car you want to drive but life is about tradeoffs. Sacrifice today for tomorrow. Sacrifice tomorrow for today. You choose.
There are plenty of used vehicles under $15,000 that are safe, reliable, but not something you think is worthy of “showing off.” But then again, would you rather show off with a vehicle today or show off on a vacation in retirement?
That's the the point of the rule.
It's to set expectations today so you can retire comfortably tomorrow.
It's Just a Rule, Not a Law
The reasoning behind the 20-4-10 rule is to help you understand how much car you can afford comfortably. It's not a law of man or a law of physics, you can do whatever you want.
Much like the 50-30-20 budget rule, it's a guideline to help you make a decision.
With the 50-30-20 budget, you're aiming to spend 50% of your take home pay on needs, 30% on things you want but don't need, and 20% on savings. A car would likely fall into the category of needs and if you follow the rule of thumb about housing (30% or less), you're left with just 20% for your other needs.
If you spend 10% on a car, that leaves 10% on all other needs. (or you dip into 30% for wants and 20% for savings)
It's all about allocating scarce resources (your income) and these rules can help you navigate them but they are not set in stone.
But like many rules, you can break it. You can buy more car than what the rule suggests, you just have to live with it!
I am not a fan of ever borrowing money to buy a depreciating asset of any kind. If you can’t afford to pay cash for a vehicle then in my opinion you just can’t afford that car. I’d get an old beater for cash and save up the cost of a newer vehicle for sometime in the future. At this point in my life I pay cash for everything, even for houses. And one reason I can afford to is I never had a car payment. It was something I learned from my parents who also never had a car… Read more »
If you can avoid a car payment, then that’s ideal but it’s difficult for most people. I’ve been fortunate not to have a car payment but I recognize I’m in the (happy) minority. That said, a lot of folks see a massive car payment as being “normal” or even expected. I’ve seen a ton of social media videos where people brag about having a $1,000 car payment as if it’s to be expected (it’s not! That’s huge!). I don’t know if it’s extreme but it sounds like you feel strongly about something and have structured your life to make it… Read more »