How Much Should You Spend on a Car?

A car is one of the biggest budget-wreckers there is — a depreciating asset many people overspend on. Here's a simple rule to keep it from derailing your finances.

The 20/4/10 rule

• 20% down — put at least 20% down to avoid being "underwater" (owing more than the car is worth).
• 4-year loan max — finance for no more than 4 years. If you can't afford it in 48 months, it's too much car.
• 10% of income — keep total car costs (payment + insurance + gas + maintenance) under 10% of your gross income.

Check a specific car's monthly payment against these limits on the car loan calculator.

Why cars quietly cost so much

The sticker price is only part of it. A new car loses a big chunk of its value the moment you drive off the lot, and then there's insurance, fuel, registration and repairs. Stretching to a 72- or 84-month loan to afford a pricier car means paying more interest and staying underwater for years.

The real cost: opportunity

Spending $15,000 less on a car and investing that difference could grow into a serious sum over time — see what on the compound interest calculator. Buying a reliable, modest car is one of the quietest wealth-building moves there is.

Smart-buying tips

• Consider gently-used — let someone else eat the first year of depreciation.
• Get pre-approved by a bank or credit union before the dealer, so you control the financing.
• Negotiate the total price, not the monthly payment — dealers can lower the payment by stretching the term.
• Don't forget insurance quotes before you buy — they vary a lot by model.

Run the numbers