The 20/4/10 rule, step by step
The 20/4/10 rule is a rule of thumb, not a lending standard: 20% down, a loan of no more than 4 years, and total car costs (payment, insurance and fuel) under 10% of gross income. It keeps you from owing more than the car is worth, because a 20% down payment roughly covers the value a new car loses early on, and it keeps the payment small enough to survive a cut in income.
| Gross income | 10% budget | Car payment | Car price |
|---|---|---|---|
| $40,000 | $333 | $33 | $178,000,160 |
| $55,000 | $458 | $158 | $178,005,953 |
| $75,000 | $625 | $325 | $178,013,677 |
| $100,000 | $833 | $533 | $178,023,332 |
| $125,000 | $1,042 | $742 | $178,032,986 |
| $150,000 | $1,250 | $950 | $178,042,641 |
Lenders will often approve far more than this. They look at your debt-to-income ratio and credit, not at whether the car leaves room for savings, so an approval is not the same as affordability. Set your budget from the total cost first; as the CFPB notes, a shorter loan term reduces your total loan cost.[4]
Car payment calculator: check a specific car
Once you have a price in mind, check the monthly payment on that car, with tax, fees and your trade-in. The example is a $32,000 car with $4,000 down, 6% sales tax and $600 in fees, financed for 60 months at 7.54%: $612.14 a month and $6,208 of interest.
Car payment
Car loan calculator
Monthly payment, total interest and amortization
car loan estimateEstimate
| Car price | $32,000 |
|---|---|
| Sales tax (price minus trade-in × rate) | $1,920 |
| Title, registration and dealer fees | $600 |
| Out-the-door price | $34,520 |
| Down payment | −$4,000 |
| Trade-in equity | $0 |
| Amount financed | $30,520 |
| Year | Interest | Principal | Balance |
|---|---|---|---|
| Year 1 | $2,123 | $5,223 | $25,298 |
| Year 2 | $1,716 | $5,630 | $19,667 |
| Year 3 | $1,276 | $6,070 | $13,598 |
| Year 4 | $802 | $6,543 | $7,054 |
| Year 5 | $291 | $7,054 | $0 |
How it is calculated. Amount financed = price − down payment − (trade-in − amount owed) + sales tax + fees (when financed). Sales tax = (price − trade-in, in states that credit trade-ins) × rate. Payment = A × r ÷ (1 − (1 + r)−n), r = APR ÷ 12, n = months; each month's interest is rounded to the cent like a lender's schedule.
Longer loans: lower payment, more interest
Stretching the loan lowers the payment but raises total interest and the time you owe more than the car is worth. The same $325 payment buys more car over longer terms, but each extra year adds interest:
| Term | Loan amount | Car price | Total interest |
|---|---|---|---|
| 36 months | $10,442 | $15,889 | $1,258 |
| 48 months | $13,431 | $18,709 | $2,169 |
| 60 months | $16,204 | $21,324 | $3,296 |
| 72 months | $18,776 | $23,751 | $4,624 |
| 84 months | $21,162 | $26,001 | $6,138 |
The Federal Reserve's G.19 release put the average rate on 60-month new-car loans at commercial banks at 7.54% in Q3 2026, and 7.17% on 72-month loans.[1] Credit unions averaged 5.44% on 60-month new-car loans in Q4 2025, against 7.41% at banks in the same survey, so it pays to get a quote from a credit union too.[3] Americans owed $1.73 trillion on auto loans in Q3 2026, according to the New York Fed.[2]
Negative equity and the trade-in
If you owe more on your current auto loan than the vehicle is worth, you have negative equity, and it has to be paid off when you trade the car in.[4] A dealer may do that by adding it to the new loan, which raises the amount financed and can leave you owing more than the new car is worth for years. Enter the payoff in "Still owed on the trade-in" to see the effect.
New: deduction for car loan interestFor tax years 2025 through 2028, interest on a loan for a new, U.S.-assembled personal vehicle may be deductible, up to $10,000 a year, phasing out above $100,000 of modified AGI ($200,000 joint). The loan payment above shows $2,123 of interest in year 1.[5]
Count the whole cost, not just the payment
Insurance, fuel, maintenance, registration and depreciation cost more than the loan for most owners. AAA's Your Driving Costs study puts the average cost of owning and running a new vehicle at $12,863 a year.[6] Before you settle on a price, run it through the cost of owning a car calculator, look up your state's average with the car insurance calculator, and price the tax with the car sales tax calculator. If you are weighing a lease instead, the car lease calculator uses the same tax and fee inputs.
Frequently asked questions
How much car can I afford on my salary?
Under the 20/4/10 rule, total car costs should stay under 10% of gross income. On $75,000 that is $625 a month; after $160 insurance and $140 fuel, about $325 is left for the payment, which supports roughly a $18,709 car at 7.54% over 4 years with 20% down.
What is the 20/4/10 rule for buying a car?
Put at least 20% down, finance for no more than 4 years, and keep the payment, insurance and fuel under 10% of your gross monthly income. It is a guideline, not a lender requirement.
How is a car payment calculated?
Payment = A × r ÷ (1 − (1 + r)−n), where A is the amount financed, r the monthly rate and n the months. $30,000 at 7% for 60 months is $594.04 a month.
Is a 72-month car loan a bad idea?
It lowers the payment but adds interest and keeps you owing more than the car is worth for longer. In the table above, the same payment over 72 months instead of 48 adds $2,455 of interest.
Sources
- G.19 Consumer Credit: terms of credit (new car loans at commercial banks)
- Household Debt and Credit Report, Q3 2026
- Credit Union and Bank Rates, 2025 Q4
- Auto loan answers: key terms
- Working Families Tax Cuts: provisions for individuals and workers (no tax on car loan interest)
- AAA: New Vehicle Ownership Costs Hit $12,863 Annually (Your Driving Costs 2026)