All Tools VerseUnder the 20/4/10 rule, you put at least 20% down, borrow for 4 years or less, and keep the payment plus insurance under 10% of gross monthly income. On a $75,000 salary that is $625 a month for payment and insurance. With $150 for insurance and a 7% loan over 48 months, the payment budget of $475 buys a car of about $24,800.
This guide is general information, not financial advice. All examples assume a 7% APR, $150 a month for insurance and no sales tax unless noted. Your own quote will differ, so plug in real numbers before you shop.
In this guide
The three parts of 20/4/10
- 20% down. A bigger down payment means a smaller loan, less interest, and less risk of owing more than the car is worth once it loses value.
- 4 years (48 months) at most. Longer loans lower the payment but raise the total interest, and you keep paying long after the new-car value is gone.
- 10% of gross monthly income. This cap covers the loan payment and insurance. Some versions of the rule also squeeze fuel and maintenance into the 10%, which is stricter. Pick one version and use it the same way each time.
The rule is deliberately cautious. Many buyers now sign 72-month loans, which is why 20/4/10 can feel tight. It is still a good test of whether a car fits your budget or only fits a lender’s.
How much car by income
Here is the 20/4/10 limit for three salaries, using the standard loan formula. The maximum price is the loan plus a down payment equal to 20% of the price.
| Gross salary | 10% per month | Payment budget (after $150 insurance) | Max loan (48 mo, 7%) | Down payment (20%) | Max car price |
|---|---|---|---|---|---|
| $50,000 | $416.67 | $266.67 | $11,136 | $2,784 | $13,920 |
| $75,000 | $625.00 | $475.00 | $19,836 | $4,959 | $24,795 |
| $100,000 | $833.33 | $683.33 | $28,536 | $7,134 | $35,670 |
The math behind the max loan is the amortization formula run in reverse:
Payment = Loan × r / (1 − (1 + r)^−n) Loan = Payment × (1 − (1 + r)^−n) / r r = APR / 12, n = number of months
The car affordability calculator does this for you. Enter the payment you are comfortable with, your down payment, the APR, the term and your sales tax, and it returns the sticker price you can afford.
Worked example: a $30,000 car
Say you put $6,000 down (20%) on a $30,000 car and borrow $24,000 at 7%. Here is what the term does to the payment and the interest.
| Term | Monthly payment | Total interest | Total paid on the loan |
|---|---|---|---|
| 36 months | $741.05 | $2,677.81 | $26,677.81 |
| 48 months | $574.71 | $3,586.07 | $27,586.07 |
| 60 months | $475.23 | $4,513.73 | $28,513.73 |
| 72 months | $409.18 | $5,460.68 | $29,460.68 |
| 84 months | $362.22 | $6,426.84 | $30,426.84 |
Under 20/4/10, the 48-month payment of $574.71 plus $150 insurance is $724.71 a month. That must be 10% or less of gross income, so this car needs a gross salary of about $86,965 a year.
Sales tax moves the number more than people expect. With 7% tax ($2,100) added to the loan, you borrow $26,100 and the 48-month payment rises to $625.00. The affordability calculator includes tax for this reason. To see the full payment schedule for any loan, use the auto loan calculator.
How the interest rate changes the payment
Same $24,000 loan, same 48 months, four different rates:
| APR | Monthly payment | Total interest |
|---|---|---|
| 5% | $552.70 | $2,529.75 |
| 7% | $574.71 | $3,586.07 |
| 9% | $597.24 | $4,667.57 |
| 12% | $632.01 | $6,336.58 |
Going from 5% to 12% adds $79.31 a month and $3,806.83 in interest. Get a rate quote from your bank or credit union before you visit a dealer, so you have a number to compare against.
Common mistakes
- Shopping by monthly payment. A dealer can hit almost any payment by stretching the term. With 10% down and 72 months, the same $30,000 car costs $460.32 a month, which looks cheaper than $574.71. The interest is $6,143.27 instead of $3,586.07.
- Rolling old debt into the new loan. If you owe more on your trade-in than it is worth, that gap gets added to the new loan. You start out owing more than the new car is worth.
- Forgetting the running costs. Fuel, maintenance, parking, tolls and registration are on top of the payment. Add them to your monthly plan in the budget calculator to see what is left for everything else.
- Using take-home pay with the 10% cap. The rule uses gross income. If you prefer to work from take-home pay, a lower cap is safer, because take-home pay is the money you actually have.
For other loan and savings tools, see our guide to the best free financial calculators.
Frequently asked questions
Is the 20/4/10 rule realistic?
For new cars on an average salary, it is strict. That is the point. If a new car fails the test, a used car or a cheaper trim often passes, and you avoid years of high payments.
What if I cannot put 20% down?
You can still follow the other two parts. Keep the term at 48 months and the payment plus insurance under 10% of gross pay. The car price you can afford will be lower, which is the trade-off.
Does the 10% include insurance?
In the most common version, yes: payment plus insurance. Stricter versions also include fuel and maintenance. Use the version that matches how you want to plan.
How much car can I afford on $60,000 a year?
The 10% cap is $500 a month. After $150 insurance, $350 goes to the payment. At 7% over 48 months that supports a loan of about $14,616 and a car price of about $18,270 with 20% down.