What is the 20/4/10 Rule?
The 20/4/10 rule is a set of financial guidelines to help you make a sensible car purchase. It suggests:
- Make a down payment of at least 20% of the car's on-road price.
- Finance the car for no more than 4 years (48 months).
- Keep your total monthly car expenses (including EMI, fuel, insurance, and maintenance) under 10% of your gross monthly income. Some interpret this 10% specifically for the EMI.
Adhering to this rule can help prevent your car from becoming a financial burden and ensure you have enough funds for other financial goals.
Breaking Down the Rule
The 20% Down Payment
A larger down payment reduces your loan amount, leading to lower EMIs and less interest paid over the loan tenure. It also helps mitigate negative equity (owing more than the car is worth), especially in the early years when depreciation is highest.
The 4-Year Loan Term
While longer loan terms (5-7 years) offer lower EMIs, you'll pay significantly more interest. A shorter loan term ensures you pay off the car faster and own it outright sooner, minimizing interest costs.
The 10% Monthly Expense Limit
This is crucial for overall financial health. If your car EMI alone (or total car expenses) exceeds 10% of your gross income, it might strain your budget and hinder your ability to save and invest for other important goals.
Example: If your gross monthly income is ₹1,00,000, your car EMI should ideally be under ₹10,000.
Understanding the True Cost of Owning a Car
Beyond the EMI, remember to factor in these additional costs:
- Fuel: Depends on mileage and usage.
- Insurance: Annual premium for comprehensive coverage.
- Maintenance: Regular servicing, unexpected repairs, tire replacements.
- Parking: If applicable, monthly or annual parking charges.
- Tolls & Taxes: Road tax (one-time), tolls for highway usage.
- Depreciation: Cars lose value over time, which is an implicit cost.
The 10% rule, when applied to total car expenses, helps account for these ongoing costs.
When is Renting or Using Alternatives Better?
Consider alternatives to buying if:
- Your usage is infrequent.
- You live in a city with excellent public transport.
- The total cost of ownership significantly strains your budget.
- You prefer not to deal with maintenance and resale hassles.
- Your job requires frequent relocation.
Options like ride-hailing services (Ola, Uber), self-drive car rentals (Zoomcar, Revv), or car subscriptions can be more economical for occasional use.