The 20/3/8 Car-Buying Rule

May 4, 2023

Home > Managing Debt > Car Purchases

The value of a car drops like a rock as soon as you drive it off the lot – that’s why it’s important to make sure you buy a car the RIGHT way. If it isn’t possible to pay in cash, follow our 20/3/8 guidelines to keep your finances on-track.

Key Takeaways

  • Not everyone can pay cash up-front for a car – and that’s okay!
  • However, auto loans are dangerous liabilities on depreciating assets. We’ll show you how they can harm your financial life and how to do it the right way.
  • The Money Guy 20/3/8 Car-Buying Rule is a proven rule of thumb for getting a great, reliable car while staying inside your financial guardrails.

Money Guy InfoGraphic - the 20/3/8 rule for car affordability and paying off your auto loan

In This Article

    Do I Have to Pay Cash When Buying a Car?

    Paying for a car in cash is ideal. Unlike homes, cars are quickly depreciating assets, which means if you take out an auto loan you could become underwater on your purchase if you aren’t careful.

    However, not everyone has the ability to pay for a car in cash. Rather than driving a clunker off the lot and spending more in maintenance and repairs than a dependable car would cost, we believe it is often more cost-effective to take out an auto loan and drive a safer, more reliable vehicle.

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    What is the Money Guy 20/3/8 Car Buying Rule?

    Not everyone can afford to pay cash for a car – and often, the car you could afford to buy in cash is a clunker. That’s why we created the Money Guy 20/3/8 Car Buying Rule. This rule helps ensure you get a car that gets you where you need to go without damaging your own finances.

    Following the 20/3/8 rule means:

    • Putting 20% down
    • Financing for (or paying your car off in) no longer than 3 years
    • Keeping your total car payment(s) to no more than 8% of gross income

    If there are special financing deals for choosing a term longer than 3 years, it is okay to select a longer loan term. However, you must still pay off the car in 3 years or less! Your monthly loan payment, or payments if you have multiple vehicles with loans, should not exceed more than 8% of your gross income.

    Just because you followed 20/3/8 doesn’t mean you are done yet! We always want your monthly investments to exceed your monthly car payment(s). And if you buy a luxury vehicle, it should be paid for in cash or paid off completely in one year or less.

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    How Much Car Can You Afford with the 20/3/8 Car Buying Rule?

    Use the following table to help you determine how much car your family can afford. Remember, the maximum payment is for all vehicles, not each vehicle. The chart assumes you are following 20/3/8, putting 20% down, paying your car off in 3 years, and keeping your monthly payment at or below 8% of your gross income. The table assumes an interest rate of 5%, so if your interest rate is a little different, the car you are able to afford may be a little different, too.

    car affordability table scaled

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    How Strict is the 20/3/8 Rule for Financing a Car Purchase?

    The 20/3/8 car buying rule can help you buy a reliable car that fits in your budget, but it may not allow you to buy the car you want or even the car you need.

    If you are struggling to follow 20/3/8 and buy a reliable car, try the following before bending the 20/3/8 rule:

    • Put more down
      A higher down payment means you are paying less per month. It may take you longer to save for a car, but it might help you purchase a nicer, more reliable vehicle.
    • Shop around for better interest rates
      Car dealerships may not always offer the best interest rates on cars. Check with banks and credit unions to see if their rates are more competitive.
    • Sacrifice a little on your car
      If the vehicle of your choice doesn’t fit in your budget, look at models a year or two earlier, base models, or cars with a little more mileage.

    While the 20/3/8 rule may feel strict when purchasing a vehicle, in reality it allows you to spend more in other areas and meet your other financial goals, like investing for retirement, saving for a home, and more.

    If you can be “strict” about what you spend on a car, you can have more freedom in other areas!

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    How Does the 20/3/8 Rule Compare to the 20/4/10 Car-Buying Rule?

    Critics of the 20/3/8 rule say that it makes it impossible for many families to get a reliable car – and propose a more generous rule, such as 20/4/10.

    Here’s how the 20/3/8 rule stacks up to the 20/4/10 rule.

    Comparison Table: The 20/3/8 Rule vs. the 20/4/10 Rule for Car-Buying

    table comparing the 20/3/8 vs 20/4/10 car buying rules

    According to Experian, the average amount financed for a used vehicle in Q4 of 2022 was $27,768. After putting 20% down, an auto loan for 3 years at 5% interest would have a monthly payment of $665. This means the average household in the United States, earning $97,962 per year, would spend 8.1% on a car payment for the average used vehicle financed over 3 years.

    In many cases, for households looking to spend less than 8% of gross income or for households with income below the average, it is possible to get a reliable vehicle for much less than $27,768. Putting more than 20% down or getting a better interest rate will increase affordability as well, if a less expensive car isn’t an option.

    “Many people who live in expensive homes and drive luxury cars do not actually have much wealth.”

    Thomas J. Stanley, The Millionaire Next Door

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    Does the 20/3/8 Car-Buying Rule Help Me Negotiate a Good Deal at the Dealer?

    It’s no secret that car prices today are significantly higher than they were pre-pandemic, which means it’s important as ever to get a great deal at the dealership. Knowing your boundaries going into the dealer can help you get a better price than someone who is more willing to spend.

    We don’t believe you should even step foot in a car dealership unless you know exactly what you want and how much you are going to pay.

    Car Pricing & Affordability Chart 2015-2023 | MoneyGuy.com

    Both used and new car prices are still elevated from pre-pandemic levels, but prices are dropping pretty significantly from their highs. If you can wait longer to buy a car, it may be worth seeing if car prices continue to drop closer to pre-pandemic levels.

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    Car Affordability Calculator

    Use the calculator below to determine if you can afford the car you are considering under our 20/3/8 rule. Simply enter the price of the car you are interested in and your monthly gross income, and the calculator will determine your monthly payment and if it is an affordable option for you.

    20% Down Payment
    3 Yr Loan Amt
    Monthly Payments
    8% Of Your Monthly Gross

    20/3/8 Car-Buying Rule for First-Time Car Buyers

    First-time car buyers are more likely to need to take out a loan and not to have the ability to pay for a car in cash. This means it’s even more important to follow a guideline like our 20/3/8 rule to ensure your finances stay on-track AND you can get a reliable vehicle.

    We don’t believe your first car should be a clunker. Lemons cost more over time in repairs and maintenance. You don’t need to break the bank, or destroy your finances, to purchase a car if you follow 20/3/8.

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