How much to spend on a car depends less on the sticker price than on what the car costs you every month, and the rules of thumb for car budgets are ways of tying that monthly cost to your income. This page explains the 20/4/10 rule and the other common guidelines, works out the car price the rule allows at different incomes, and lists every cost the monthly budget has to cover. It is part of our guide to buying a car in Canada, where the budget is the first decision.
The 20/4/10 rule
The 20/4/10 rule sets three limits on a car purchase:
| Number | What it limits |
|---|---|
| 20 | A down payment of at least 20% of the price |
| 4 | A loan of no more than 4 years (48 months) |
| 10 | Car costs of no more than 10% of your gross (pre-tax) monthly income |
The first two numbers keep the loan small and short, so less interest is paid and the loan balance falls faster than the car’s value. The third ties the purchase to your income.
The rule is quoted in two versions, and the difference matters:
- Strict version: the 10% covers every car cost: the loan payment, insurance, fuel, maintenance and parking.
- Payment-only version: the 10% covers the loan payment, and running costs come out of the rest of the budget.
The table below shows how far apart the two versions are at each income. Neither is a lending rule: lenders set their own limits on how much they will lend.
Other rules of thumb
- A cap on the price as a share of annual income. Some guidelines limit the purchase price, rather than the monthly cost, to a fraction of your yearly gross income. The fraction quoted varies from one source to another, and a price cap says nothing about the rate or the term, which together set the monthly payment.
- A share of take-home pay. Budgeting from net pay instead of gross pay counts tax and payroll deductions first, so the same percentage gives a smaller budget. Our budgeting guides show how a car payment fits alongside housing and savings.
- The total cost over the time you own the car. Comparing cars on everything you will pay while you own them, rather than on the monthly payment, is what the payment-based rules approximate. The cost of owning a car page adds up every category for a new and a used car.
Car price by income under the 20/4/10 rule
The table works the 20/4/10 rule forward from income to price. It assumes 10% of gross income for car costs, a down payment of 20% of the price, a loan of 48 months, an example interest rate of 7%, and, for the strict version, $400 a month of running costs (insurance, fuel and maintenance). The rate and the running costs are example assumptions, not current figures: your own insurance quote and loan offer replace them.
| Annual gross income | Monthly budget at 10% | Car price, payment-only version | Car price, strict version |
|---|---|---|---|
| $40,000 | $333 | $17,400 | $0 |
| $50,000 | $417 | $21,800 | $900 |
| $60,000 | $500 | $26,100 | $5,200 |
| $70,000 | $583 | $30,500 | $9,600 |
| $80,000 | $667 | $34,800 | $13,900 |
| $100,000 | $833 | $43,500 | $22,600 |
| $120,000 | $1,000 | $52,200 | $31,300 |
Prices are rounded to the nearest $100 and include the down payment. A $0 means the running costs use up the whole 10% budget at that income, leaving nothing for a loan payment.
How one row is worked out. At $70,000 a year, 10% of monthly income is $583.33. In the payment-only version, all of it goes to the loan payment: at 7% over 48 months, that payment repays a loan of $24,400, and since the loan is the other 80% of the price, the car can cost $30,500. In the strict version, $400 of running costs comes off first, leaving $183.33 for the payment and a price of $9,600.
The two columns are the same rule read two ways, and the gap between them is the running costs. Sales tax is part of what the down payment and the loan have to cover, so the sticker price that fits each budget is the figure above minus the tax; sales tax on a car gives the rate and rules in each province. A different rate or term moves every figure in the table: car loan rates by lender and credit score are compared on our debt pages.
To use your own income, rate, term and down payment, the car affordability calculator works out the price from a share of income you choose.
The full monthly cost to budget for
The loan payment is one line of the monthly cost. A car budget built on the strict version of the rule counts all of these:
| Cost | What sets it |
|---|---|
| Loan or lease payment | Price, down payment, rate and term |
| Insurance | Province, driver, car and claims history; see car insurance by province |
| Fuel or charging | Distance driven and the car’s efficiency; for an electric car, see EV charging costs |
| Maintenance and repairs | The car’s age and kilometres |
| Licence, registration and parking | Province and city |
| Depreciation | Not a monthly bill, but the value lost, which you pay when you sell or trade in |
Monthly and yearly figures for each category, for a new and a used sedan, are on the cost of owning a car page. Depreciation is covered in new vs used cars, since it is the main difference between the two.
Loan length and the down payment
The 4-year and 20% parts of the rule are about the loan. The Financial Consumer Agency of Canada describes long-term car loans as terms of 72 months (6 years) or more, and notes that a long-term loan adds to the total cost of the car through the interest paid over the term. A long loan or a small down payment can also leave you owing more than the car is worth, which matters when you sell it or trade it in; trading in vs selling privately covers what happens to that unpaid balance. Pre-approval, dealer financing and the choice between 0% financing and a cash rebate are in how to finance a car.
New, used or leased
A given budget buys more car used than new, because a used car’s price has already absorbed its early depreciation; new vs used cars compares the two by age. A lease typically has a smaller monthly payment than a loan on the same car but ends with no car to keep, and leasing vs buying a car compares the total cost of each.