Dream Car, Debt Nightmare? Avoid Loan Regrets With 20/4/10 Formula - Details
20/4/10 Formula: The 20/4/10 rule is a financial guideline to help car buyers manage their finances when buying a car.
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20/4/10 Formula For Car Buyers: The 20/4/10 rule is a financial guideline to help car buyers manage their finances when buying a car. It advises the buyers about down payment and loan tenure according to their income, which eventually helps them choose a vehicle that perfectly fits their budget.
What 20/4/10 Says?
20% Down Payment: It directs buyers to pay at least 20% of the car's on-road price upfront as a down payment. This reduces the loan amount you need for the vehicle and helps to lower the EMI.
4-Year Loan Term: This formula says loan tenure should be more than 4 years, which is 48 months. It reduces the interest amount paid over the tenure. It helps to ensure you don’t end up owing more on the loan than the car is worth.
10% Of Monthly Income: It advises you the total monthly car expense (including loan payment, insurance, and maintenance) should be under 10% of your monthly gross income. This ensures that your car expenses will not put extra stress on your overall budget.
Let's Take An Example
Suppose you want to buy a car that costs you Rs 10,00,000, on-road. Here's how you would apply the 20/4/10 rule:
Down Payment (20%): 20% of Rs 10,00,000 = Rs 2,00,000 (Must be paid as a down payment)
Loan Tenure (4 Years): Finance the remaining Rs 8,00,000 for a maximum period of 4 years (48 months).
Monthly Income (10%): Suppose your monthly gross income is Rs 1,00,000. In that case, 10% of Rs 1,00,000 = Rs 10,000 (Total monthly car expenses should not exceed this).
Breakdown
Assuming an interest rate of 9%, a 4-year loan of Rs 8,00,000 would have an EMI of approximately Rs 19,912 (excluding all other expenses).
If insurance and maintenance are estimated to be Rs 2,000/month, your total monthly car expenses would be Rs 21,912 (Rs 19,912 + Rs 2,000), which exceeds 10% of your gross monthly income, indicating that the car might be too expensive for you based on the rule.
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