How the 20-4-10 car shopping rule works

When buying a car, whether new or used, experts say that a specific framework can be a great starting point to keep costs down. 

The so-called “20-4-10” rule uses three components to help you determine if a car purchase is affordable: the ideal down payment, the maximum recommended auto loan term and the share of your income that experts say should go to vehicle-related costs per month.

Not only does the framework help you stay within your budget, but some aspects can also keep you from becoming “underwater” or “upside down” on a car, or owing more on a vehicle than what it’s worth.

However, “there’s always wiggle room,” said certified financial planner Chelsea Ransom-Cooper, co-founder and chief financial planning officer of Zenith Wealth Partners in Philadelphia.

It can be difficult to meet all elements of the rule: You might find it challenging to come up with a large down payment given high car prices, for example, or need a longer loan term to bring down monthly payments.

But keep in mind that more cash spent on a car payment can mean less is left in your paycheck to tackle important saving and investing goals, such as building an emergency fund or boosting your retirement contributions, experts say.

“A car is a depreciating asset, so we want to make sure that we’re putting more money toward appreciating assets,” said Ransom-Cooper, a member of CNBC’s Financial Advisor Council.

The first piece of the 20-4-10 framework recommends drivers make a down payment equivalent to at least 20% of the vehicle’s price. 

Making a 20% down payment helps in a number of ways. First, you’re ultimately lowering the amount you borrow, therefore reducing the monthly payment for the loan and decreasing the interest you’ll pay over the life of the loan, experts say.

What’s more, the down payment also “acts like a buffer” against depreciation because you gain equity in the vehicle, according to Bankrate. Cars are depreciating assets, meaning they lose value over time, a contributing factor to becoming underwater on a car loan.

“Putting down 20% on the front end helps avoid you ending up in that kind of situation,” said CFP Lee Baker, the founder, owner and president of Claris Financial Advisors in Atlanta.

The “4” in the framework stands for a four-year or 48-month auto loan. While a shorter loan term means you will have higher monthly payments, you end up paying off the vehicle faster with less interest paid.

However, it’s not unusual to see drivers take the opposite direction. Lengthening the term of an auto loan is one of the few ways to lower monthly auto costs, Ivan Drury, director of insights at Edmunds, recently told CNBC.

In the second quarter of 2025, 84-month auto loans comprised of 21.6% of new auto loans, up from 19.2% the quarter prior, according to Edmunds data provided to CNBC.

If you need to give yourself “more breathing room,” finance the vehicle for five years, but try to make the same payments you would have made in a four-year loan, said Baker, who is also a member of the CNBC Financial Advisor Council.

“Even if you have a five-year loan, if you pay the car off in three and a half or four years, it shrinks the amount of interest you’re going to pay,” he said.

The third component of the 20-4-10 rule indicates that you should not spend more than 10% of your monthly income on vehicle-related costs, which must include your car payment, auto insurance, maintenance and fuel.

Ransom-Cooper said it’s important to avoid going over that threshold and to try to keep costs as low as possible.

For example, if you make $4,200 per month after taxes and deductions, and calculate the 10% of that figure, you should not spend more than $420 per month on transportation costs, according to LendingTree.

“Trying to stay as tight to that number as possible is a helpful way to make sure that you don’t get caught underwater,” Ransom-Cooper said.

In practice, it can be difficult to execute. Households spent on average $13,174 on transportation costs in 2023, the second largest expenditure category after housing, according to a 2024 report by the Department of Transportation. In that year, transportation made up about 17% of total expenditures.

“Of the transportation items purchased, the average household devotes most of its transportation budget to purchasing, operating and maintaining private vehicles,” according to the report.

Use the 20-4-10 rule as a guideline to see how much you can truly afford, said Ransom-Cooper.

If you find that a 20% down payment is too high and the new vehicle is more a “nice-to-have,” consider purchasing the car in the next year or two, she said. 

But if your car recently broke down and you truly need a new vehicle to go to work, consider paying a smaller down payment and cutting back on other areas in your life to make the new expense feasible, such as reducing discretionary spending, said Ransom-Cooper.