Overextending your bank account when buying a new car can leave you in a lurch if a financial crisis strikes before it’s paid off. Be sure to use the simple 20/4/10 rule to avoid taking on a bigger car loan than you can comfortably absorb within your budget.
Image: Digital Storm (Shutterstock).
Michael Kling at Wise Bread shares the easy-to-remember rule:
- Put down at least 20 per cent
- Finance the vehicle for no more than four years
- Keep total monthly vehicle expense — including principal, interest and insurance – under 10 per cent of gross income
Having at least 20 per cent saved up beforehand lets you pay off the car sooner, and with more manageable payments. Keeping your financing term short limits the amount of interest you’ll pay, and allows you to drop costly comprehensive insurance coverage sooner. Finally, keeping your monthly expenses at less than 10 per cent of your income gives you a little more flexibility if you’re hit with an unexpected bill or lose your job.
This is a simple rule, but it’s very easy to keep in the back of your mind when you’re starting your car search.
How Much Should You Spend on a New Car? [Wise Bread]