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Two common sense rules for your next car loan

Two common sense rules for your next car loan

Posted by on Dec 17, 2020 - Archived under Car Loan

We don’t like rules very much but our industry is governed by them. There are also rules that make perfect sense. It’s the latter that we are considering today.

There are two rules we think are important when considering car loans. The 20/4/10 rule and the 35% rule. Both of which can help ensure your car loan is affordable and that more borrowing won’t leave you exposed.

The 20/4/10 rule

Some rules are worth following and the 20/4/10 rule is one of them. While we say ‘rule’ it’s more flexible than the usual rules and can adapt to different circumstances.

The 20/4/10 rule is specifically for car loans and says that you should aim for a 20% down payment over 4 years and payments that don’t exceed 10% of your income.

It’s a relatively flexible rule and it doesn’t matter if you exceed that a little but you should avoid going too far over it.

A 20% down payment is a luxury some cannot afford and that’s fine but if you can get close to that, your overall loan will be cheaper each month and much cheaper over the term.

Car loans used to be for 2 or 3 years but those terms slowly expanded alongside the price of cars. As cars, and our aspirations, become more expensive, you have two options. Pay more each month or go for a longer term loan.

Many will elect for a longer term as you can buy the car you want without compromising your monthly budget. However, these loans are more expensive so won’t work for everyone.

The 10% part simply means not spending over that amount in your monthly car loan payment. This again is flexible but a useful rule to bear in mind. With rents and mortgages eating a lot of our income, we don’t want to overburden ourselves with too many outgoings.

The 35% rule

The 35% rule says that you should not spend more than 35% of your income servicing debt. That debt should include all borrowing, credit cards, store cards, student debt, mortgage and anything else you might have.

This rule goes towards your debt to income ratio that we have spoken about before. The ‘ideal’ ratio is 30% but going over it a little won’t hurt your chances and should still be affordable.

It can be difficult in some territories and even some cities to include rent or mortgage in that amount but it is beneficial if you can make it happen. Housing is a part of that ratio and while rent is viewed differently to a mortgage, it’s still an essential outgoing each month.

While we call these two ‘rules’, you can clearly see they aren’t really rules in the traditional sense. They are more guidelines we can all use to make sure a car loan is affordable and won’t leave us in too much debt. They are too flexible to be true rules but should be borne in mind by anyone considering a new car loan.

If you want to discuss car loans, affordability, credit to income ratios or anything else, contact our team. We are happy to help!

Let’s get in touch! https://www.dixieautoloans.com/contact-us/

Dixie Auto Loans