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What Is The 20/4/10/ Rule For Buying A Car?

mahindra-finance-author

by Mahindra Finance

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April 17, 2024

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4 mins read

Introduction to the 20/4/10 rule

Buying a car is an exciting milestone in life, but it also comes with significant financial implications. To ensure sound financial well-being, it's crucial to understand and apply the 20/4/10 rule – a simple yet powerful tool that streamlines your car purchase decision. This is one of the best car-buying formulas in the world of finance. By following this rule, you gain flexibility in decision-making and a better understanding of your finances.So, what exactly is the 20/4/10 car buying rule? Let's dive in and explore its key components.

Down payments: Putting Your Money Where It Matters

According to the 20/4/10 rule, you should make a down payment of at least 20% of the total purchase price of your chosen car. This down payment helps reduce the overall loan amount you'll require, resulting in a shorter loan tenure period and lower monthly payments.

Loan repayment tenure: Balancing Time and Interest Payments

The second component of the 20/4/10 rule focuses on the loan repayment tenure. According to this rule, you should not take a loan for more than four years (or 48 months). By limiting the tenure, you can reduce interest payments and have better financial planning. Car EMI calculators can help you understand the proper breakup of your loan.

Monthly expenses: Striking the right balance

In addition to loan repayments, it's important to consider other monthly expenses related to your car. As per the 20/4/10 car buying rule, these expenses should not exceed 10% of your total monthly income. By setting this limit, you ensure that there is sufficient money left for day-to-day expenses. Make sure you know your EMI by using a car EMI calculator.

The benefits of the 20/4/10 rule

Adhering to the 20/4/10 rule offers several advantages:

  1. Reduced Loan Amount: By making a significant down payment, you minimise the loan amount required, resulting in lower monthly payments.
  2. Better Budgeting: Setting a limit on monthly car expenses allows for better financial management and tracking.
  3. Lower Stress Levels: Following this rule helps you make informed financial decisions, providing peace of mind and reducing stress.
  4. Improved Financial Planning: By considering all car-related expenses, you gain a clearer picture of available funds for other activities and goals.

Potential drawbacks of the 20/4/10 rule

While the 20/4/10 rule provides valuable guidance, it's essential to be aware of its limitations:

  1. Limited Choices: Adhering strictly to this rule may limit your options when selecting a car, potentially compromising on desired features or customisation.
  2. Burden of Down Payment: For individuals with limited savings or income, meeting the 20% down payment requirement can be challenging.
  3. Fluctuating Operational Costs: Operational costs such as fuel prices and maintenance expenses vary by location. High costs in one area may exceed the recommended 10% monthly expenses limit.
  4. Limited Loan Period: The four-year loan tenure may result in higher monthly instalments, especially for lower to medium-income earners. To accurately know your EMIs, use a car EMI calculator. 

Conclusion

The 20/4/10 rule is a valuable tool when it comes to making informed car purchase decisions. By following this rule, you can maintain financial stability, reduce loan amounts, and make better long-term financial plans. Take your time, assess your needs, calculate the total cost of ownership, and compare it to your budget. And remember, Mahindra Finance offers a range of financing solutions tailored to help you implement the 20/4/10 rule seamlessly within your financial journey. You can find the lowest car loan interest rates at Mahindra Finance. 

FAQs

Q: How can I calculate my car loan EMI?

A: You can use an online car EMI calculator by entering the loan amount, interest rate, and tenure. It will provide you with the monthly EMI amount based on these inputs.

Q: Where can I find the lowest car loan interest rates?

A: Different banks and financial institutions offer varying interest rates on car loans. It's advisable to research and compare rates from multiple sources to find the lowest one that suits your needs.

Q: Is the 20/4/10 rule applicable only to new cars?

A: The 20/4/10 rule applies to any car purchase, whether new or used. It helps ensure a balanced approach towards affordability regardless of the type of vehicle.

Q: Can I modify the 20/4/10 rule based on my specific financial situation?

A: The 20/4/10 rule serves as a general guideline; however, you can modify it based on your unique circumstances. Adjustments may be necessary to align with your income level or other significant factors influencing your finances.

Q: Are there any additional costs to consider beyond the 20/4/10 rule?

A: Yes, beyond the 20/4/10 rule, you should also factor in costs such as car insurance premiums, registration fees, and periodic maintenance expenses when budgeting for your car purchase.

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