When shopping for a used car, a common question to ask yourself is, “How much can I afford for a used car loan?” It’s easy to let your eyes get big when you see a used car in Boise that you love that’s really nice, but also really expensive. Anytime my wife and I get into a rental car that’s considerably nicer than the car we currently drive, I make it a point to tell her, “Don’t go falling in love with this, because there’s no way we can actually afford it.” This is because I immediately go through one simple rule in my mind, which is to follow the 20/4/10 rule. This rule helps you to keep a realistic plan in mind when saving and shopping for your next car.

  • Save for a 20 percent down payment

  • Apply and budget for a 4-year car loan

  • Budget for car loan payment and operating costs at 10 percent of your monthly take-home income

down payment20% – Down Payment

A good amount to save for your down payment on your used car, truck, or SUV is 20 percent of the vehicle’s cost. Sometimes buying a new form of transportation is an emergency, so you probably don’t have that kind of money kicking around in your change jar. However, if you’ve been planning on buying a used car for a while, set 20 percent of the cost as a goal for your down payment. This not only helps reduce the cost of the vehicle by 20 percent, but helps you to understand the true value of the vehicle you’re buying. So, if you want to buy a used Ford F-150 that’s priced around $25,000, set $5,000 as your down payment goal.

4 – Years for Used Car Loan

Shoot to find a car that’s priced to fit your monthly budget with a car loan that has a 48-month term. As we know, it’s easy to spread the loan out over a longer term to lower the cost of the monthly payment. However, this only increases the amount of money you’ll pay in interest and skyrocket the end amount that you pay for the car. With a four-year loan as the ideal term for your loan, be sure to keep your monthly payment within the parameters you’ve set.

10% – Monthly Payment and Vehicle Operating Costs

An easy way to budget your monthly car payment, try to keep your monthly payment and operating costs under 10 percent of your monthly take-home income. Don’t budget this off your gross income, because you can end up “car poor,” which is when your car payment is sucking up your monthly income and you’ll have a hard time meeting the financial demands that come with operating your car beyond just the monthly loan payment. For example, if you bring home $4,000 per month, you can afford a car with a monthly payment and operating cost of $400 monthly. Use a free car loan calculator to get a quick estimate of what the loan will be for the used car you have your eye on.

It’s important to remember that there are other costs that come with owning and operating a car besides the monthly payment. You need to remember that you’ll have to insure your car, put gas in it, and change the oil every few months. Maintaining your car shouldn’t drain your savings account or consume your paycheck just to put gas in it. Keep in mind that high-end sports cars don’t run on fuel with an 89 octane rating or simple 10W-40 oil. If you’re in the market for a something like a used Chevrolet Camaro, you’re going to need to fit premium fuel and synthetic oil in your monthly budget.

Take these rules with you when planning for used car financing. You can easily find a used car within your budget and still live comfortably.