Car Loan Rules


What are the rules for car loans?

The most fun and exciting part of purchasing a new or used car is the time leading up to the buying as you ponder which vehicle you’ll want. You give lots of thought to the design, the aerodynamics, the color, roominess, and the horsepower. You’ll also think about other aspects of your next car like safety features and type of seats, etc. It’s a joyous time.

Then comes the numbers game revolving around how you will pay for your new wheels. This is the stressful part of getting a vehicle — figuring out if you can actually afford to purchase your dream car. 

These are some of the facets of the car buying process that you’ll need to think about:

  • Downpayment
  • Paying cash or taking out a loan
  • Interest rate for the loan
  • How long the duration of the loan should be

Figuring out how to make a car purchase fit into your budget can seem like an overwhelming and confusing process. You might be asking yourself if there are certain rules that apply to a vehicle purchase that you can use as a helpful guide.

Fortunately, there is one rule that will greatly help you determine how to finance your car. It is the 20/4/10 rule. This will be the ideal rule of thumb for you to quickly figure out which vehicle options to pursue when you’re preparing to finance your new automobile.

What is the 20/4/10 Rule? 

The 20/4/10 rule uses simple math to assist car shoppers in determining their budget for an upcoming car purchase.

By referring to the 20/4/10 rule, you will be able to find out in a short period of time if your new car is a reasonable purchase or something you need to reevaluate before moving forward with this particular vehicle.

This rule will tell you if you can afford a new car – by meeting the following three requirements:

1)     You’re able to make a downpayment of 20 percent or greater when you buy your automobile.

2)     You can take out a vehicle loan with a term that is four years or less.

3)     You can have your total transportation costs, not only your car loan, be less than

        10 percent of your monthly income.

As an example, adhering to the 20/4/10 rule, if you earn $80,000 annually, your goal is to spend less than $800 per month on transportation costs.

As you calculate 10 percent of your own monthly income, you’re able to use your budget to determine whether you can afford that monthly payment. For instance, if your yearly income is $65,000, your monthly budget should show you whether you have a surplus of $650 to allocate to a vehicle loan payment, in addition to other transportation costs. 

Examples of other relevant transportation costs include insurance, fuel, maintenance, etc. You may find it helpful to use a total cost of ownership calculator to effectively estimate some of these transportation costs.

Benefits of Using the 20/4/10 Rule

The 20/4/10 rule helps you in a few ways. First, it ensures that you’ll be able to comfortably make the downpayment on your new or used car. This is essential as new vehicles start to depreciate as soon as you drive them off the lot.

Also, a four-year loan can assist you in limiting the interest you pay because you would pay off the loan rather quickly. 

Finally, limiting your total transportation expenses to less than 10 percent of your monthly income will help to ensure that your vehicle payments don’t take over your budget and, instead, it allows room for paying other monthly expenses.

The 20/4/10 rule will serve you well when it comes to preventing you from overextending yourself financially after you buy your car. You’ll be able to reference clear, black-and-white numbers that will tell you exactly how your monthly expenses will look so you don’t encounter any surprises with your bank account. 

Your Credit Score Will Affect Your Vehicle Loan Payments

While the 20/4/10 rule will give you a reliable guide to ensure over time that you can afford your monthly payments, you also need to know what the interest rate for your car loan will be. And that will be based on your credit score.

For example, if you have an excellent credit score of anywhere from 720 to more than 800, you might qualify for a low annual percentage rate (APR). Conversely, if you as a car buyer have a low credit score, between 500 and 589, for instance, you will likely qualify for an APR that is four times as high as someone with superb credit. 

So, while you do the math with the aid of the 20/4/10 rule, be sure to examine your credit score so you know exactly what the monthly payment will be for your new or used car. This means you may have to postpone your vehicle purchase to give yourself some time to improve your credit score. You’ll find that the potentially substantial amount of money you’ll save will be worth the wait.

Look to California Community Credit Union to Set Up Your Next Auto Loan

At California Community Credit Union, we are known for our affordable auto loan rates. We are also experts at generating low-cost personal loans for our clients.

We offer these loans for people in Sacramento, Roseville, Modesto, and Elk Grove, all located in California. We at California Community Credit Union (CACCU) specialize in auto loans, as well as personal loans.

When you secure your auto loan with CACCU, you are assured of receiving the best – and lowest – rates that are available. We offer low rates and flexible terms on every vehicle loan, new and used.

You’ll also appreciate a car loan with CACCU, as our used car loans apply to 2004 through 2023 model years. Unlike most auto loans through other lenders and credit unions, if you have a vehicle that is more than 10 years old, it will not result in a higher interest rate with CACCU. 

If you’re ready to get started on your auto loan, we invite you to contact CACCU and we will get you set up with the best loan terms and conditions that enable you to drive away with major savings!


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