How to Know If You Can Afford to Buy a Car

Updated: November 9, 2021

Having a car is convenient, especially if you have a mobile lifestyle. It becomes especially useful if you do a lot of fieldwork.

If you have kids, then having a car makes it easier to bring and fetch them at their school. But also, owning a car helps when you need to travel with your children.

Buying a car is a big-ticket purchase. Thus, it is necessary to plan your finances to know how much you can afford. Or if you can actually afford one in the first place.

It’s not enough to check if your salary can pay the monthly payments of an auto loan. Because once you have your car, your monthly expenses will definitely go up.

So how do you know?

The 20/4/10 Rule of Buying a Car

The 20/4/10 rule is a popular tool to check if you can afford to purchase a car. I’ve read about this on a lot of personal finance websites in the U.S. but I think it’s also applicable in the Philippines.

What’s this rule all about? It asks you to check if:

• You can make a minimum downpayment of at least 20 percent on the car loan
• You can afford the monthly payments of a 4-year term for the car loan
• And 10 percent of your monthly income can cover the cost of owning the car

If you’re good at all three criteria, then yes you can afford to buy that car.

Applying the 20/4/10 Rule

Let’s say that you want to buy a brand new car worth P950,000.

The rule then says that you should be able to make at least a 20% downpayment. So the first question is, do you have P190,000 in cash for the downpayment?

If not, then no, you cannot afford a car. But if you do, then you can proceed to the next criteria.

You inquired from several banks and the best deal you got for a 4-year or 48-months auto loan is one with 6.09% interest. And based on your salary, your monthly repayment will be P19,690 per month.

Can you afford to pay that much? If yes, then go on and check the last criteria.

Calculate how much you’ll spend per month when you get the car. Consider the expenses you’ll incur for gasoline, toll gates, parking, check-ups, and others. Let’s say the result is P5,600 per month.

Your current monthly salary is P60,000 which means 10% of that is P6,000. Therefore, because your projected monthly expenses for the car are less than this, then it’s safe to conclude that you can afford to buy the car that you want.

Here’s a faster way to check if you can afford a car

The 20/4/10 rule requires some research and several calculations. However, I personally apply another simple rule that’s quick and easy to do.

What is it?

I call it the 20/40 Rule, which simply asks if:

• You can make a minimum downpayment of at least 20 percent on the car loan
• And you are currently able to save 40 percent of your income every month

When you apply this rule to our example, then just like the 20/4/10 rule, you need to first have the cash to pay the 20% downpayment.

And second, since you’re earning P60,000 per month, then ask yourself if you are currently able to save at least 40% of that or P24,000 every month.

What’s the logic behind the second criteria?

For me, the 40% that you’re able to comfortably save each month will serve as your fund to pay for the car loan, plus the monthly expenses you’ll incur with owning the car.

Don’t you think this strategy is much simpler?

How to choose the right car to buy

How do you know if you’re buying the right car? Here are some quick tips:

• You love the brand and the model.
• The car will effectively serve the purpose that you intend to use it for.
• It has a reputation for durability.
• It has good fuel efficiency.
• Replacement parts are easy to find in case you need repairs.
• And it potentially has good resale value.

Any other considerations that I missed when it comes to choosing the right car? Please share them in the comments section.

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