What Is the 20/4/10/ Rule for Car Buying?

Whenever someone decides on buying a car, a rule of thumb called 20/4/10 is always an important consideration before making the final purchase. This car financing rule is a simple yet powerful tool that streamlines the purchase decision and ensures financial stability.

By following this simple thumb rule, individuals benefit from informed decision-making flexibility and a better understanding of their finances, along with recognising the best way to utilise their funds to buy their dream car.

So what is this 20/4/10 rule? Let's find out.

This 20/4/10 car purchase rule of thumb consists of 3 key components, including down payment, monthly expenses and loan repayment tenure. Here is all you need to know about these three components.

Down Payments - According to the 20/4/10 rule, 20% of the total purchase price of your chosen car should be done via a down payment. This helps reduce the overall loan amount you will require, reducing the loan tenure period along with lower monthly payments towards the loan.

Loan Repayment Tenure - The loan tenure is the period or number of years you get as a loan taker to repay the entire loan amount in monthly instalments. As per the 20/4/10 rule, you should not take a loan for a tenure of more than 4 years for repayment. This allows reduced interest payments and better financial planning.

Monthly Expenses - Other than monthly loan instalments, the other car payments, like maintenance charges, car insurance premiums, etc, should be at most 10% of your total monthly income. With this calculation, you ensure there is sufficient money after this payment for day-to-day expenses.

To understand how this 20/4/10 rule works, let us look at an example below.

Before we dig deeper into the application of the 20/4/10 rule, it is essential to note that the car you wish to purchase should only cost a maximum of 50% of your annual income.

Example - Riya has an annual income of ₹24,00,000, with a monthly income of ₹2,00,000. She wants to buy a car worth ₹12,84,000. This is how she will apply this car financing rule.

20% Down Payment - According to the 20% down payment rule, she will need to pay a minimum of ₹2,56,800 as a down payment against the car purchase.

4-Year Loan - For the balance amount of ₹10,27,200, she will have to take a loan with a tenure period of 4 years or less, according to the 4-year tenure rule.

10% Monthly Expenses - Now, as per the 10% monthly expenses limit, the total cost of the car premium, maintenance, operations, and loan instalment should not be more than ₹20,000.

Assuming the loan is given at a 10% interest rate, the equated monthly instalment will be approximately ₹21,830 per month.

This does not meet the 10% component of the 20/4/10 rule.

Based on the above example, Riya should not purchase a car worth ₹12,84,000 as it does not fall under the affordable range as per her monthly income.

The primary goal of this car affordability rule is to help you make a wiser decision when it comes to car purchases. It allows you to choose the most affordable car that fits your budget without draining your finances.

Reduced Loan Amount - One of the key benefits of using this car financing tool is reduced loan amount. This is because you are required to pay a minimum of 20% of the total car price as a down payment. Thus, you are only required to seek a loan for the remaining 80%.

Better Budgeting - According to the 10% monthly expense component of this thumb rule, you will have to factor in different expenses related to car maintenance. This allows you to manage and control your car expenses, helping with better budget tracking.

Less Stress - Using this 20/4/10 rule, you are able to make an informed financial decision regarding your car purchase, giving you peace of mind and reduced stress as you are aligned with your budget.

Improved Financial Planning - Once you keep the monthly car instalments, inclusive of all car-related expenses, you also get a better idea regarding how much money is remaining to explore other hobbies and interests without exhausting your income.

Limited Choices - When you factor in this car buying rule, you limit your car options to only those that meet the 20/4/10 criteria. This limitation can lead to a reduced scope of customisation for your vehicle, along with additional compromise on necessary car features.

Load of Down Payment- Even though this rule recommends a minimum of 20% down payment, this 20% payment can be a significant burden for individuals of different income groups or limited savings. This can cause a delay in the purchase decision until another financing option is finalised.

Fluctuating Costs of Car Operations and Maintenance - Depending on the geographical location of individuals, the operational and maintenance costs for a car can vary. Suppose the fuel cost is higher in one city. In that case, the overall 10% monthly expenses bracket exceeds by a significant margin, forcing an individual to look at other car options or delay the purchase.

Limited Loan Period - The 4-year loan component of this rule is excellent as it reduces the extensive loan repayment period. However, with this 4-year limitation, the monthly instalment can be overwhelming for lower to medium-income earners.

When to Use It?

• If you have a stable income and a low debt-to-income ratio - This allows you to make an informed car purchase using the 20/4/10 rule without compromising your finances.

• If you track your expenses and maintain a budget - For anyone who is focused on prioritising their financial well-being by factoring in all expenses and keeping a constant check on budget limits. In that case, you will be able to incorporate the monthly expenses component of the 20/4/10 car buying rule with ease.

• If you believe in long-term investments with better returns - All car purchases require excessive planning and consideration. If you understand the difference between necessity and want and can make decisions solely based on needs, the 20/4/10 rule can help you stay put and meet your financial goals in the long run without much pressure.

• If you are buying your first car - For all first-time buyers, understanding how to use your finances the right way to get the best returns and value on your car purchase is key. By applying this rule, first-time buyers can make a more practical decision, keeping their financial ability as the key deciding factor.

When to Avoid It?

• If you have limited savings - The thumb rule starts with the 20% down payment component. If you have limited savings, making the 20% down payment might not be feasible. This is because it can also cause an immediate financial strain for the buyer.

• If your income is not stable - To make the most out of the 20/4/10 rule, you need to take into account your monthly income to plan your purchase. However, if you have a fluctuating income, you might not be able to accommodate the 10% monthly expense payment regularly.

• If you have a high number of debts to repay - Maintaining a stable monthly income is necessary to apply this car financing rule. If you are already burdened with numerous debt payments, contributing 10% of your monthly income towards car expenses might not be the best decision.

Consider Other Car Options - Instead of focusing on buying a brand-new car, you can explore other car options, like second-hand vehicles that meet your budget better. Used cars are usually more economical and serve the purpose of easier commutes without the heavy financial burden of a new purchase.

Increase the Down Payment Percentage - If you have the means to increase the down payment percentage from 20% to anything higher, you can benefit from a reduced loan amount and lower EMI payments. This will further allow you to stick to the 10% monthly expenses aspect without much hassle.

Plan to Increase Savings - Another way to get the best out of this car financial rule is by planning and collecting savings months prior to the final purchase date. This will help you make bigger down payments to reduce the monthly loan payments.

Choose a Base Model - If you are adamant about buying a new car only, you can opt for a base model instead of the latest one in the market as they are more economical and can better integrate with your budget constraints.

Research and Evaluate Different Loan Options - Instead of closing on one bank, you can research and evaluate different loan options from different banks to compare interest rates offered by each. This will help you choose the one that is better aligned with your financial goals.

The decision to buy a new car requires more than just choosing the model and colour. Factoring in the estimated purchase price of the vehicle and how it aligns with your current financial situation.

The 20/4/10 rule is not mandatory but allows one to plan better and make more favourable decisions when it comes to ensuring financial stability after the purchase.

Take your time, assess your needs, calculate the entire cost of your vehicle and compare it to the value you receive to make the most appropriate purchase decision.

Being financially conscious during the car purchase decision and process is an excellent way of ensuring financial security for present and future goals.

However, given the unpredictability of accidents and other incidents that can damage your four-wheeler, securing yourself from unforeseen financial burdens with four-wheeler insurance is necessary.

According to the Motor Vehicles Act, no vehicle can be taken on the road without valid third-party car insurance. However, third-party insurance does not protect your vehicle.

Tata AIG offers comprehensive four-wheeler insurance policies to help you with timely financial assistance in case of loss or damage to your vehicle. Moreover, we offer a wide range of add-ons to allow you to customise your plan as per specific needs and budget.

We focus on providing the best customer experience and thus allow you to compare car insurance plans online before making the final purchase to facilitate informed decision-making.

Moreover, you can also complete a timely car insurance renewal online from our website in a few quick steps to avoid penalties and other consequences.

What are some of the best cars under ₹15,00,000 in India?

The list includes Mahindra Scorpio, retailing at ₹13,59,000; Toyota Urban Cruiser Hyryder, retailing at ₹11,14,000; and Mahindra Thar, retailing at ₹11,25,000. Other than this, some other cars trending in India include Tata Punch, Mahindra XUV, etc. (Please note, these prices can vary based on the purchase date and other expenses. Always visit the showroom for the exact price range.)

Is car insurance mandatory in India?

Third-party car insurance policy is mandatory all over India. A vehicle can only be taken on the road with valid third-party insurance. If found guilty, heavy fines are imposed, and they can vary based on geographical location.