The 20/4/10 rule: how much car can you really afford?
On ₹1.5 lakh a month with ₹2 lakh saved, the 20/4/10 rule allows a ₹3.5 lakh car, not ₹10 lakh. See why, and what buying now vs saving up costs.
6 min read
You earn ₹1,50,000 a month, you've saved ₹2 L, and the ₹10 L car you like has an EMI that fits your budget. Most people would call that affordable.
The 20/4/10 rule disagrees, by a wide margin. Here's what it says, why it's so strict, and what it actually costs to ignore it, worked out with our car affordability calculator.
The three parts of 20/4/10
- 20% down. You start with real equity in the car, so you're never owing more than it's worth.
- 4 years at most. Longer loans shrink the EMI but add interest and outlast the car's best years.
- 10% of take-home. EMI plus fuel, insurance, service and parking. Here running costs alone are ₹8,000 a month.
Why the ₹10 L car fails the test
Buying today with ₹2 L down and a 5-year loan at 9.5% means an EMI of ₹16,801. Add ₹8,000 of running costs and the car takes 17% of your take-home, against the rule's 10%. The down payment passes (20%), the other two parts don't.
The 10% line is strict on purpose. A car is the one big purchase that loses value from day one, commonly 10–15% a year, so every rupee of EMI buys something worth less each month.
Buy now, or save up?
Figure 1 from the Car calculator
Net worth over 8 years: savings plus the car's value, minus the loan
- Save up, pay cash
- Buy today, 5-year loan
How to read it
- 1The cash buyer keeps saving and pays cab fares meanwhile, then buys after 2 yr 4 mo at a slightly higher price (₹10.96 L). From here their savings are a car, which starts losing value, so their line rises more slowly.
- 2The 5-year loan ends here. By then the loan buyer has paid ₹2.08 L in interest while the car lost value, so the cash buyer stays ahead to the end.
| Plan | Buys | Interest paid | Net worth after 8 yrs |
|---|---|---|---|
| Buy today on a 5-year loan | Today | ₹2.08 L | ₹23.49 L |
| Buy today on a 4-year loan | Today | ₹1.65 L | ₹23.66 L |
| Save up and pay cash | 2 yr 4 mo | ₹0 | ₹28.25 L |
Your price, savings and income are filled in. Watch the 20/4/10 check and the three ways to buy.
Making the rule work for you
- Buy a cheaper car now, within the rule, and upgrade later with cash.
- Save a bigger down payment. Each extra lakh down cuts the EMI and the interest.
- Treat the rule as a ceiling in your budget, not a law. A second income or low rent can justify going a little over. The budget calculator shows where the money would come from.
What this doesn't mean
- Car loan rates move with the RBI's repo rate.[1] Check your lender's current rate.
- Price rise and depreciation are estimates: 4% and 12% a year here.
- Some needs aren't about money. Young children, elderly parents or no public transport can make a car worth it sooner.
Savings earn 7% a year. Without a car, ₹6,000 a month goes on cabs; with one, ₹8,000 on running costs. Net worth counts the car at its depreciated value. For illustration only.
Sources
- [1]Monetary policy statements (opens in a new tab)Reserve Bank of India