Quote:
Originally Posted by TheMaxXHD
The most common by far you will find on the internet and what everyone hails as the "gold standard" is the 20/4/10 rule
1.) Atleast 20% down payment on car
2.) No more than 4 years car loan
3.) Total monthly cost of vehicle (payment, insurance, gas, and repairs) is no more than 10% of monthly income
It's not a bad rule if you are trying to be frugal and/or are already in a precarious situation financially, but after that, it kind of falls off.
The average latest US new car price sale is 48,000. The average latest US used car price sale is 33,000.
Those numbers say most Americans aren't giving a crap about the 20/4/10 rule, unless suddenly now everyone is making 200,000+, which most are not.
If everyone followed the 20/4/10 rule, or even a large minority, you'd see a LOT less fancy SUVs and trucks on the road and a LOT more Honda civics.
The rule tries to make a generic guideline based on assuming other expenses, assuming the need to prioritize retirement savings over buying a car, and to dissuade buying high price vehicles due to it being a depreciating asset.
It's not a bad rule, but it's not really a rule, it's a commonly suggested generic financial guidance, based on buying cars being really bad financial investments due to depreciation. Why this matters is many people don't have a big emergency savings, so if things go south, with car depreciation, it's REALLY easy to end up upside down on the car.
A guideline to consider, but not a rule if you know what you are doing.
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The hard part is how many of the old guidelines were written in the past so they can be hard to apply to the current times. Interest rates are an important factor to consider.
I committed a cardinal sin under conventional guidance by going for a 6 year loan on my 530e when I purchased it. A long loan is against this guidance, but interest rates were ~2%. Inflation has trended higher, but even prior to current high bumps in the inflation rate the target long-term inflation rate is 2% and raises are over 2% for me annually. Meaning, paying the loan with tomorrow's money is cheaper than yesterday's money. In such a low rate environment longer loan terms and lower downpayment make the most financial sense. The "savings" was pushed into my 401k.
But individual risk profiles also need to be factored in. If you have risk of income drops then the conventional risk can still make sense as you're less likely to be holding onto a depreciating asset that may be valued lower than you estimates when you need to dump it...