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Is It Affordable?

How Much Can I Afford to Spend on My Car?

It can be confusing to figure out how much to spend on a car, but not if you use the 20/4/10 rule. According to this rule, when buying a car you should put down at least 20 percent, finance the car for no more than 4 years, and keep the monthly car payment at or below 10 percent of your gross monthly income.

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Put at Least 20 Percent Down

A new car loses 9 percent of its value the second you drive it off the lot, and it loses 19 percent of its value by the end of the first year. If you put less than 20 percent down, you will owe more on the car than it's worth almost immediately. Plus, if you sell the car or total it before the loan is paid you will owe far more than if you put money down in the beginning.

Keep the Term of the Loan Shorter than Four Years

The longer the term of the loan, the more interest you will pay. By the end of four years your vehicle will have lost a lot of its value and you don't want to still be paying it off. Four years is the maximum most personal finance experts recommend.

Keep the Total Car Payment Under 10 Percent of Your Income

It's not worth it to have your dream car if it takes up your entire budget. If you stay below 10 percent you'll have more money to put toward other things. It also gives you some security should you take a pay cut or a job loss. However, this rule is just a guideline, so if having a more expensive vehicle makes you happy even if you have to cut back on other things, then go for it.

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