The 20/3/8 car buying rule says you should put 20% down, pay off your car loan in three years (36 months), and spend no more than 8% of your pretax income on car payments. As we go into depth to determine how realistic this rule is, you may consider whether it can actually help you budget for your next car.
A person making $60,000 per year can afford about a $40,000 car based on calculating 15% of their monthly take-home pay and a 20% down payment on the car of $7,900. However, every person's finances are different and you might find that a car payment of approximately $600 per month is not affordable for you.
In general, you should strive to make a down payment of at least 20% of a new car's purchase price. For used cars, try for at least 10% down. If you can't afford the recommended amount, put down as much as you can without draining your savings or emergency funds.
Pros: Lower monthly payments: Many choose to get a 72-month loan because the monthly payments are lower. And, borrowers may be able to get a more expensive used or new car and still stay within their budget.
Down payment on a new car
A high down payment of 20 percent or more can help protect you from that loss of value by making sure you have more equity in the car than what you owe. However, just because you can pay more cash upfront doesn't mean you should sign off on a vehicle that you cannot truly afford.
A $30,000 auto loan balance with an average interest rate of 5.0% paid over a 5 year term will have a monthly payment of $566. In total, the loan will cost $33,968 with $3,968 in interest.
As a general rule, you should pay 20 percent of the price of the vehicle as a down payment. That's because vehicles lose value, or depreciate, rapidly.
What Are the Disadvantages of a Large Down Payment? Providing more money down doesn't guarantee a lower interest rate, and it can cut into your savings. Depending on the vehicle you choose to buy, 50% can be a lot of money to put down on an auto loan.
There's no perfect formula for how much you can afford, but our short answer is that your new-car payment should be no more than 15% of your monthly take-home pay. If you're leasing or buying used, it should be no more than 10%.
If you take a loan for five years and your interest rate is 4%, your monthly payment for a $40,000 loan will be $737.
Can I refinance my car with the same lender? Yes, many lenders will allow you to refinance your existing car loan. Keep in mind that lenders may not offer refinancing as an option. Especially if your vehicle is in poor condition, has low value, or you have few payments remaining on your existing loan.
To give yourself time to react, avoid last minute moves and hazards, always keep your eyes moving and scan the road at least 10 seconds ahead of your vehicle.
The 20/4/10 rule encourages you to put down at least 20% of the total price of your vehicle, which will lower the overall amount you borrow and reduce the interest you'll pay over the life of the loan. While there are no-money-down car loans, not providing a down payment can cost you more in the long run.
Limit your loan shopping to 14-45 days – Keeping your shopping within this time span generally means that any requests from lenders to check your credit will count as one credit inquiry.
There isn't one specific score that's required to buy a car because lenders have different standards. However, the vast majority of borrowers have scores of 661 or higher.
Financial experts recommend a down payment of at least 20 percent when financing a new or used vehicle. This amount is steep for many, especially with the recent spike in new and used car prices. For example, a 20 percent down payment on a $40,000 vehicle is $8,000.
The monthly payment on a $5,000 loan ranges from $68 to $502, depending on the APR and how long the loan lasts. For example, if you take out a $5,000 loan for one year with an APR of 36%, your monthly payment will be $502.
It's good practice to make a down payment of at least 20% on a new car (10% for used). A larger down payment can also help you nab a better interest rate. But how much a down payment should be for a car isn't black and white. If you can't afford 10% or 20%, the best down payment is the one you can afford.
Depending on your initial loan amount, interest rate and how quickly and much your car depreciates, the amount you still owe on a 72-month auto loan might come to exceed the car's resale value. This is what's known as being “underwater” or “upside down” on the loan, or having negative equity.
Putting down a larger down payment will increase your equity because you won't need to finance as much through a lender. Cars are a depreciating asset. As the value of your vehicle decreases, you're more likely to go upside down on your loan — when you owe more than your car is worth.
An increase in your monthly payment will reduce the amount of interest charges you will pay over the repayment period and may even shorten the number of months it will take to pay off the loan.