What you can afford, and why money down matters
The question at the dealer is “what payment can you handle?” The better question is what the car will cost you every month, all in, and whether that leaves room for the rest of your life. This lesson gives you a starting point and the costs people forget.
The 20/4/10 rule of thumb
It is a guideline that personal finance writers use, not a law and not a lender’s rule. A common version goes like this:
- 20: put at least 20% of the price down.
- 4: borrow for no more than 4 years.
- 10: keep the car payment and insurance under 10% of your monthly income before tax. Some versions count fuel and repairs in the 10% too, which is stricter.
Plenty of people cannot hit all three, especially on a tight income. Treat it as a way to see how far a deal is from comfortable, not as a pass or fail test.
Worked example
What 20/4/10 points to on one income
- Household income before tax
- $60,000 a year, $5,000 a month
- 10% of the monthly income
- $500.00
- Car insurance, for example
- $150.00
- Room left for the payment
- $350.00
- Most you can borrow at that payment, over 48 months at 7% for example
- $14,616.07
- Price that loan covers with 20% down
- $18,270.09
- The 20% down payment
- $3,654.02
Sales tax and fees are left out to keep it simple. In real life they come on top, so leave room for them.
Rates, prices and values here are for example only. Payments use the standard loan formula, rounded to the cent.
The cost of owning, not just the payment
- Insurance. It can change a lot from one car to another. Get quotes on the exact car before you buy it.
- Fuel. The EPA rates fuel economy for most cars sold in the US, and our car pages show it.
- Repairs and upkeep. Tires, brakes, oil and the surprises. Set money aside every month, and more for an older car. Owner complaints by part on our car pages show where a model tends to have trouble.
- Registration, taxes and inspections, plus parking and tolls if you pay them.
Swipe the table sideways to see every column.
| Miles per gallon | Fuel a year | Fuel a month |
|---|---|---|
| 25 mpg | $1,680.00 | $140.00 |
| 32 mpg | $1,312.50 | $109.38 |
Why the down payment is your best defence
Money down does three things at once. It shrinks the loan, so the payment is smaller. It cuts the interest, because you borrow less for the same time. And it gives you a cushion against the car losing value, which is what keeps you from being upside down.
Worked example
The same car with and without money down
Swipe the table sideways to see every column.
| Nothing down | $5,000 down | |
|---|---|---|
| Amount borrowed | $25,000 | $20,000 |
| Monthly payment | $450.64 | $360.51 |
| Total interest | $7,446.08 | $5,956.72 |
| Owed after 1 year | $21,708.75 | $17,367.04 |
| Where you stand | Upside down by $1,708.75 | Ahead by $2,632.96 |
Rates, prices and values here are for example only. Payments use the standard loan formula, rounded to the cent.
If the cash is not there for a big down payment, a cheaper car with some money down is usually a safer loan than a pricier car with none. Keep some savings back for repairs, though. Emptying your account for the down payment and then putting the first repair on a credit card undoes a lot of the good.
What to do next
- Add up your monthly income before tax and take 10% of it as a starting line.
- Get insurance quotes on the cars you are looking at.
- Look up fuel economy and owner complaints for those cars on WhipWorthy.
- Work out the payment that fits, and from it the loan and the price. Plan a down payment that covers at least tax and fees.
- Check the result in the payment calculator, and read about long loans before stretching the term to make it fit.
Sources
Try your own numbers
Payment calculator
Your payment, the total, and how long you would be upside down.
Dealer offer X ray
The real APR, the lines you can say no to, and money the sheet hides.
Out the door price
Every fee and tax in one total, and up to three dealers side by side.
Education, not financial or mechanical advice. Have any used car checked by a mechanic you trust before you buy.