The 20/4/10 auto loan rule has been under attack ever since it was introduced to the industry. Its opponents do not buy the idea of financing a car purchase following the reason that cars depreciate fast and much. However, reality shows that most car buyers cannot bring bags of cash to the dealership when they want to purchase a car.
The 20/4/10 rule teaches how car buyers can be smart, instead of worried and fearful, about taking out auto loans.
The rule simply states that car buyers should pay at least 20 percent down payment for the car, finance it for up to 4 years only and keep total monthly car expenses at less than 10 percent of the gross monthly income.
It discourages car buyers to take car shopping as the first step. Rather, car buyers are advised to start by looking at their present financial condition.
Car buyers applying the 20/4/10 approach should take a thorough look at their monthly cash flow, gross income and cash in hand. They should make sure they have money to put down—at least 20 percent as the rule says—for the car.
The rule claims that by finding out how much cash is available for the down payment using the 20-percent rule, car buyers can already estimate how much car they can more or less afford.
Proponents of the 20/4/10 rule admit that the approach is not foolproof. However, such a simple rule can always come in handy especially while shopping for cars.