The festive season has begun and many automobile companies are offering attractive deals to customers looking to purchase cars. If you are planning to buy a new car, it's better if you can pay in cash. However, if you intend to take out a loan, it's essential to understand the 20/4/10 rule first. This formula will help you determine how much loan you should take as per the budget for your car. Let’s explore what the 20/4/10 rule entails.
Minimum down payment requirement
According to the 20/4/10 rule, when purchasing a car, one should make a down payment of at least 20 per cent or more of the total price. If you can meet this condition, you fulfill the first requirement of the rule.
Loan duration
The 20/4/10 rule states that customers should take a car loan for no more than 4 years. This means that the maximum loan duration should be 4 years, ensuring that you can pay off the loan within this period.
EMI and monthly salary considerations
The rule also specifies that your total transportation costs (including the car’s EMI) should be less than 10 per cent of your monthly salary. Transportation costs encompass not only the EMI but also fuel and maintenance expenses. Therefore, you should choose a car that allows you to meet all these three criteria effectively.
Some other key points:
- Make as large a down payment as possible.
- Instead of opting for an upgraded model, consider purchasing the base model of the car. This will save you money.
- Last year's leftover new car inventory is likely to be cheaper.
- Hold on to your current car for a longer time and save up for the new car.
- Instead of buying a new car, you could also consider purchasing a used car.
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