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A simple financial rule and a budgeting plan can help you buy your dream car without a debt burden.
Following the 20/10/4 rule ensures that you are not spending outside your means.
Want to buy your dream car but wondering about how to manage the finances? Purchasing a car is still one of the most significant financial decisions for many people. It requires a substantial amount to buy your first car.
The excitement of owning a new vehicle definitely brings goose bumps, but it can also lead to financial stress if you rely solely on a loan to buy a new vehicle. It’s advisable to plan your budget before buying a car. It should include down payment, loan EMIs, insurance and other associated costs.
Financial advisors often suggest the 20/4/10 rule for buying your car. This simple rule is a financial guideline suggesting that you should aim for a 20 per cent down payment, a 4-year loan term and keep total car expenses under 10 per cent of your monthly income.
This rule helps ensure you can afford the car without spending too much money or falling into a debt trap.
Here’s a breakdown of each component:
20% Down Payment: Always try to pay at least 20 per cent of the car’s purchase price upfront. This brings down the total loan amount, leading to reduced monthly payments and lower interest charges.
4-Year Loan Term: Keep the loan term to four years (48 months) or lower. Shorter loan tenure results in lower interest outgo. A longer repayment period may bring down your EMIs, but the overall loan cost will increase.
10% of Monthly Income: Your total monthly car-related expenses should not exceed 10 per cent of your income. While budgeting, you should take into account all costs like EMIs, insurance premiums, fuel and maintenance charges.
Benefits Of 20/4/10 Car Rule
· At least 20 per cent down payment or a higher amount reduces your overall loan burden. As your EMIs are expected to remain lower due to a smaller loan amount, you can convenient clear the debt.
· Buying a car that is tight on your budget can cause a lot of stress. But a financial plan can help you avoid any debt burden or loan defaults in the future.
· Budgeting helps to keep your car-related expenses in control.
· With a financial plan in place, you can easily repay your car loan without compromising your savings and other expenses.
The 20/10/4 rule ensures that you are not spending an exorbitant amount to buy and maintain your car. However, it may not be a one-size-fits-all financial principle. You should carefully evaluate your financial position, monthly expenses and earnings before buying a new car.
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Delhi, India, India
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