How to Plan the Budget for a Car Loan | The 20/4/10 Rule

Here is the URL of the ClearTax Car Loan EMI Calculator.

Know more about how car loans work here.

Unsure if you should buy a new or used car? Check this page out.

If you wish to understand the tax implications of a car loan, watch this video.

00:00 Introduction
01:20 What is the 20/4/10 Rule?
01:45 Example
03:38 How ClearTax Car Loan EMI Calculator Can Help?
04:50 Conclusion

You know? My friend bought a luxury car through a car loan a few months ago. As much as I was happy for him, I was even worried about how he is going to repay the loan with his salary. But now, he is going through a hard time managing his other financial commitments, repaying the EMI, and handling the additional expense - the car!

Many of us aspire to own a car and take our families for a long drive in our own car. Instead of jumping to buy a car with a car loan blindly, it is necessary to plan the expenses and budget beforehand to avoid the after-effects. Further, you must also consider the fact that a car is a depreciating asset. It is only wise that you spend only on what is necessary and affordable.

One of the rules of thumb to estimate the budget you can afford to buy a car is the 20/4/10 rule. Here are all the details you need to know to plan your budget for a car purchase beforehand and stay worry-free throughout the repayment process.

What is the 20/4/10 Rule?
The 20/4/10 rule helps you figure out how much you can spend on purchasing a car based on your budget. The rule can be broken down as follows.
Make 20% downpayment on a four-year car loan.
Spend only up to 10% of your monthly income on transportation expenses. This 10% includes car loan EMI, maintenance, and fuel expenses.

How ClearTax Car Loan EMI Calculator Can Help?
Here’s how you can use the calculator.
Enter the loan amount you are looking for in the textbox.
Click on the circle below ‘Number of months’ label and drag the circle along the horizontal line to specify the loan tenure in months. The number will be displayed on the right end of the horizontal line.
If you are aware of the interest rate offered by your bank on car loans, mention the same by dragging the circle along the horizontal line. Otherwise, consider the average value of 8% p.a.
Your EMI will be displayed on the screen along with the total interest payable and the total cost of the loan.
Scroll down to find the amortisation table for more details.

Complying with the 20/4/10 rule while buying a car is an age-old strategy and is still valid to lead a worry-free life. My friend had to sell off his luxury car as the purchase was done without a proper plan. Now that I have suggested the 20/4/10 rule to him, he has now bought a car that is well within his budget.

I hope you liked the video and that you will be using this strategy while planning the purchase of a car. If yes, please like and share this video. Let us know comments section below if this strategy was of help for you.

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