How Realistic Is The 20/4/10 Rule For Buying A New Car In 2026?

Life is full of handy financial reminders like pay yourself first and keep an emergency fund. One guideline that's particularly relevant today but perhaps less well-known is the 20/4/10 Rule. It's a simple calculation: car buyers should make a 20% down payment, finance for no more than four years, and not exceed 10% of their gross income on everything car-related (monthly payment, insurance, upkeep, gas). The whole point is not to get in over your head with a car purchase.

However, with the typical new car costing over $50,000, per Kelley Blue Book (KBB), and the corresponding monthly loan payment averaging $772, according to Edmunds, it's reasonable to question whether the 20/4/10 Rule still applies. That 20% of new car loans in 2025 had monthly payments of $1,000 or more makes this sage advice even more doubtful.

The answer isn't so simple and depends on what you buy, how much you make, and how today's car prices and ownership costs stack up against the rule itself. High-income earners who shop conservatively won't have much trouble following the formula. On the other hand, someone making $63,128 (the median annual salary in the United States) isn't going to be able to stay within these guidelines if they want an $80,000 car. Determining if the 20/4/10 Rule works for middle-ground buyers requires some number crunching around fixed ownership costs, upkeep, and financing.

Let's explain the rationale behind the 20/4/10 maxim. The typical new car depreciates about 20% in its first year and roughly 40% after three years, per CarEdge. Sure, some vehicles do better or worse, but we're talking averages. A 20% down payment helps prevent a buyer from being upside down on the car (where the loan balance exceeds the vehicle's value). By the end of 2025, almost 30% of trade-ins on new cars involved negative equity, with the underwater amount averaging $7,214, a record high according to Edmunds. Rolling over negative equity from a previous car loan just keeps the cycle going, leading to higher monthly payments and an increased risk of becoming upside down again.

At the same time, a four-year loan is all about keeping the interest a borrower pays to a minimum. In 2025, the average new car loan was around $42,300 (via Bankrate). At a 6.5% interest rate, financing this amount for four years results in a monthly payment of $1,003 and a total interest cost of over $5,850, according to KBB. A six-year loan drops the monthly payment to $711, a 29% decrease. However, the financing cost increases to $8,896. In this situation, the borrower pays an additional $3,046 in exchange for lower monthly payments. Still, seven-year loans are becoming normal.

Keeping total car-related expenses in check (a maximum of 10% of gross pay) ensures there's money left over for housing, food, and other essentials. Turning to AAA-supplied averages, that means total annual on-the-road costs of $5,747 for insurance ($1,694), fuel ($1,752), registration and taxes ($813), and maintenance, repairs, and tires ($1,488). Adding these expenses and the yearly sum of the monthly payments on a four-year loan ($1,003 multiplied by 12) brings the total to $17,783 per year.

Using the above averages, someone financing a $42,300 car loan would need to earn $177,830 per year to follow the 20/4/10 Rule. The challenge is that most Americans (about 88%) make less than $150,000 per year, according to the U.S. Census Bureau.

Let's take a different approach by looking at how much car someone could afford (based on the 20/4/10 Rule) for more moderate incomes. With an annual salary of $120,000, a car shopper can spend $12,000 each year on all car-related expenses. Deduct the AAA-estimated yearly outlays of $5,747 for all costs (except financing), leaving $6,253 (or about $521 per month) for loan payments. Using a four-year loan at a 6.5% interest rate results in a loan amount of $22,000 on a $27,500 car (after the 20% down payment and before sales tax and dealer charges). You can pick from five cheap new cars recommended by Consumer Reports or opt for something used.

A new car isn't in the picture for someone earning $75,000 annually. The $7,500 or 10% total car expense set-aside is reduced to $1,753 or $146 per month after deducting the AAA-projected costs. On a four-year loan at 9.65% (used cars often carry higher interest rates than new ones), that works out to a financed amount of $5,800 for a $7,250 car after a 20% down payment. Admittedly, a used car may be cheaper to insure, but the risk of increased upkeep costs could offset any savings. A lower interest rate may also stretch payments. Regardless, someone earning closer to the median U.S. salary will have to decide between driving a cheap car, using public transportation, or breaking the 20/4/10 Rule.