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So, you’re in the market for a new car, or perhaps you’ve already made a purchase and are wondering if it was a sound financial decision. While you can’t change the past, you can certainly learn from your mistakes to make better choices in the future. In this article, we’ll explore some of the most widely recognized car financing guidelines, illustrate them with real-income examples, and discuss the common shortcomings in these guidelines, among other things. Let’s dive into the world of car buying!
The first guideline of car buying we’ll look at is called the 20/4/10 guideline. This guideline seems to be the most popular guideline among financial experts. This guideline says you can afford a car if you meet the following 3 requirements:
- Your can put 20% of the purchase price as a downpayment.
- You finance the car for no more than 4 years.
- Your monthly expenses for the vehicle — including loan payment, insurance, gas, maintenance, registration, and annual emissions check) are less than 10% of your gross monthly income.
💡The 20/4/10 guideline is most suitable if you have a good downpayment and are comfortable with manageable car debt for up to 4 years.
It’s essential to note that determining the exact car you can afford based solely on your income is a complex task due to variables like your down payment and interest rate. However, let’s walk through a couple examples.
If you bring home $50,000 a year, according to this guideline, if you put down $5,000 at an 8.5% interest rate with good credit (a score between 700–779), with average monthly insurance at $150, and average maintenance at $100 — you can afford a car worth just over $11,000. In this scenario, your monthly payment would be $416 dollars ($166 for loan payment, the rest taxes and insurance) — exactly 10% of your gross monthly income. For individuals with an annual income of $100,000 and the same down payment, interest rate, credit score, insurance, and maintenance costs, the affordable car value increases to just under $27,000.
As you can see, these are not high numbers at all. Given the fact that the median income is a little over…
