Most of the people making the wrong decision while buying a car, because they don’t even know which car should I buy which car is best for my budget. This 20/4/10 rule will help you
Buying a car is a huge investment. The average life expectancy of a car is about 7-8 years or 150,000 miles. That’s a long period of time, before buying a car make a mindset that I have to buy a car on my own
1. What is the 20/4/10 rule?
The 20/4/10 rule is simply a budgeting rule while buying a vehicle like car
The 20% is down payment of the car in this (20/4/10 rule)
The 4 is number of years you payoff car loan In this (20/4/10 rule)
The 10% of your income you took to payoff loan in this (20/4/10 rule)
2. What is the meaning of 20 in this rule?
The 20 in 20/4/10 rule is the 20% down payment of the car. You have to pay first while buying the car. If the value of the car is $50000
you would pay at least $10000 down payment. You can pay even more percentage depending upon your own budget or condition of that bank or dealer which you pay.
Some banks take a down payment of 20% some banks take a down payment of 25% even some banks take a down payment of 30%even some banks take a 35% down payment.
So you have to tackle it to your own
3. What is 4 in this rule?
The 4 in 20/4/10 rule is the number of years you pay for that car loan. You should bound your timings within four years.
I have to pay for my car loan. If You have the ability to pay it within 4 years that’s good. Similarly, If you have the ability to pay it within 3 years that’s also good
If you have the ability to pay it within 2 years that’s great. It only depends on your budgeting, affordability, and price of the car.
4. What is the meaning of the 10 in 20/4/10 rule?
Now Let’s talk about the meaning of 10 in this 20/4/10 rule. The meaning of the 10 in this 20/4/10 rule is the 10% of your income goes to the Installments and EMI of your car
You can calculate your monthly car payment on 20/4/10 rule calculator
5. The importance of 20% (down payment) in this 20/4/10 rule
The first and most important benefit of this 20% down payment is when you pay 20% you can pay less as compared to that car which you pay no down payment
For Example: If the price of the car is $50000 and Let suppose you pay 20% down payment and if the interest rate is 7% means the interest applied on that car is $5976 and if you don’t pay any down payment and the interest rate is same
Then the interest applied on that car is $7470, and if you pay 30% of the down payment and the interest rate is the same then the interest applied on that car is $5229
Now you can see the difference between not paying down payment and paying 30% down payment means there is a difference of $2241 that’s a huge amount, I mean with that $2241 you can buy a new iPhone and might other things which you want to buy
That’s why this is the reason why paying more down payment is more beneficial
6. The importance of the number of years in this 20/4/10 rule
The importance of the number of years is as important as the importance of down payment, why am I saying this?
Let me tell you, Here the number of years means time. Time is the most precious thing in the world, If you are wasting your time Time will waste you.
Now Let me give you an example if the price of the car is $50000 and you pay 20% down payment means $10000 down payment and the interest rate is 7% and if you buy the car for 4 year EMI The interest would be $5229
If the price of the car is the same and if the interest rate is also the same and the down payment is also the same but the number of years is 3 years What changed?
The amount of interest will be changed. The interest rate would be $3905 and if the interest rate remains same and if the down payment also remains same and if the price of the car is also same and you choose the number of years is 2 years then the interest would be $2608
Now you can see the difference between if you choose 4 years and if you choose 2 years
The difference is $2621. Now I have told you the truth now it is in your hand which option you choose depending upon your monthly income and your budget
That’s why number of years are so important
In a number of years. There is another important thing which you have to keep in mind and that is if you compare 4 year and 2-year plan the monthly payment also makes a difference
7. Why is it important to make a budget before buying a car?
Why is it important to make a budget before buying a car because it is one of the biggest decisions you have to make in your life
because buying a car takes a lot of money, If you are making the wrong decision while buying a car. It can ruin all of your savings and a little mistake can cause you to go into debt
Many people make this mistake by not making a budget while buying a car. I know that having a car makes one confident
But be sure that your confidence will be drained out after knowing that due to this car. I went into a lot of debt and debt is a plaque
The debt also affects on your health and gives you some serious problem like stress, blood pressure, depression and much more
If you want to buy a car and don’t look at yourself and your affordability and your budget, you are making one of the huge mistakes in your life This 20/4/10 is one of the simple and effective way to finance your car
Now Let’s talk about the conclusion of this 20/4/10 rule
Meaning of this rule
1. First of all make a mindset that I have to buy a car
2. Then apply the rule of 20/4/10 before going to buy a car
3. Then the meaning of 20 is simply the percent of down payment which you have to pay while buying a car
4. Then 4 is the number of years which have to decide how much time I should pay all of my car loan?
5. Then meaning of 10 is percentage or amount of your income which you have to pay in order to pay off the loan
The importance of points in this rule
6. Then the importance of 20% down payment which says if you increase the percentage of down payment you will pay less amount of interest and if you decrease the percentage of down payment you will pay more amount of interest
7. Then the importance of 4(Number of years) in this 20/4/10 rule which says if you decrease the number of years in paying off the loan you will pay less amount of interest and less amount of monthly and if you increase the number of years in paying off the loan you will pay more amount of interest and also more amount monthly payments
8. Then the importance of making a budget before making a decision of buying a car which says that if you are making a decision of buying a car,
That’s great It does not mean that you are making a silly decision it means you are making a big decision in your life, but after making this big decision make sure you make a budget for buying a car
That budget decides your buying capacity because most people are making a mistake of not making a budget, so, Do not make this mistake while buying a car