The 20/4/10 rule is a car-buying guideline suggesting you make a 20% down payment, finance the car for no more than 4 years (48 months), and keep your total monthly vehicle expenses (payment, insurance, gas, maintenance) to under 10% of your gross monthly income to avoid financial strain. It helps ensure affordability by limiting debt and total costs relative to your earnings, though some find it challenging with today's high car prices.
The main goal is to determine the down payment, monthly car payments time frames, and transportation costs to optimize them. The rule recommends making a 20% down payment on the car, taking four years to return the money to the lender, and keeping transportation costs at no more than 10% of your monthly income.
Remember, this “rule” is actually a rule of thumb — it relies heavily on your own unique financial situation. Still, when determining the amount of money for your down payment, the length of your loan (and interest rate), and how much you can afford to spend on monthly payments, it does serve as a great guide.
For years, dealerships have been using a tactic called a “four square”—a sheet of paper divided into four boxes where the salesperson will write down your trade value, the purchase price of the vehicle you're buying, your down payment, and your monthly payment.
5 Tips on How to Beat the Car Salesman
Our 20/3/8 rule includes putting at least 20% down on any car you buy, paying it off in 3 years or less, and keeping your total car payment(s) to 8% of your gross income or less.
There is no minimum credit score required to buy a car, but most lenders have minimum requirements for financing. Most borrowers need a FICO score of at least 661 to get a competitive rate on an auto loan.
Dave Ramsey's core car buying rule is to pay cash and avoid car debt entirely, as vehicles are depreciating assets. If financing, his guidelines suggest the total value of all your vehicles shouldn't exceed 50% of your annual income, but ideally, you should buy a reliable used car outright with cash, get a thorough mechanic's inspection, and never buy a new car unless you're a millionaire.
Beyond the monthly payment, you'll also face years of variable expenses like car insurance, gas, maintenance and taxes, which can spike without warning. By considering these costs before buying a new or used car, you'll be better prepared for the financial ups and downs of hidden car ownership costs.
Let's look at some things to keep under your hat while you explore the lot.
The term “ghost car dealership” is used to describe establishments that have been rumored to deal in vehicles with mysterious backgrounds or unexplained phenomena. Often, these places are linked to stories of sales gone wrong, vehicles with inexplicable defects, or even ghostly apparitions that haunt the premises.
The FTC Red Flags Rule requires auto dealerships to have a written Identity Theft Prevention Program (ITPP) to detect, prevent, and mitigate identity theft, especially in financing/leasing, by spotting signs like suspicious documents (altered IDs, mismatched photos), inconsistent application info, or unusual account activity, with consequences for non-compliance including hefty FTC penalties and lawsuits, notes the Federal Trade Commission. Key steps involve identifying vulnerable accounts, spotting specific "red flags," creating detection/response plans, training staff, and regular audits, with a senior manager overseeing the whole program, say Dealertrack and Total Dealer Compliance.
Be sure to look at repair deductibles, and the process for getting a claim approved. Despite any pressure they may apply, you don't have to buy an extended warranty at the same time you buy the car. You also don't have to purchase an extended car warranty from the dealership, unless it's the brand's own program.
"I personally think you should never, ever ever ever, lease a car, do you hear me?" she tells CNBC Make It. That's because when you lease, you're pouring in money each month with nothing to show for it at the end of the day. "If you rent a car, you're going to rent a car year in and year out," Orman says.
The 11-word phrase often cited to stop debt collectors is "Please cease and desist all calls and contact with me, immediately," which leverages your rights under the Fair Debt Collection Practices Act (FDCPA) to halt most communication, though it must be sent in writing via certified mail to be legally binding, and collectors can still notify you of lawsuits.