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The 20:4:10 rule that applies to car loan eligibility?

The 20:4:10 rule that applies to car loan eligibility?
If you are keen on knowing your eligibility for car loan i.e. the amount that you will be able to service out of your monthly income without defaulting then you can resort to this rule of 20:4:10. Though, it is the financial or lending institutions that determine your car loan eligibility on the basis of your income tax return and other assets, you on your part can compute the same using the rule arrived at by experts.

So how the 20:4:10 rule be used to find your eligibility for car loan?

20:4:10 rule is a widely accepted measure that shall rarely fail to determine your eligibility for car loan correctly. So how it is interpreted and hence used?

Each of the number compiling the entire rule holds significance.

20 i.e. the first figure of the rule signifies the percentage amount you should give as down-payment for the loan so that you don't end up taking huge loan. Further with a sizeable down-payment towards the loan, it is ensured that the loan value and hence the eventual total cost of loan for you is reduced considerably.

4 is indicative of the tenure for which the car loan should be opted. It is presumed that the car loan holds good if serviced within the tenure of four years. However, seeking the downturn and in order to prove the deal to be lucrative for car loan borrowers, several banks have extended the tenure to service the car loan in many cases to 7 years. But, extension of tenure indeed means higher total cost of loan for borrowers.

10 is the ideal % amount of your total salary that can be safely paid towards the payment of car loan EMI. If it is lower than it is even better, however an opt of any amount higher amount that results in more EMI than the computed figure on the basis of this 10 number is a cause of concern for you.


So, if you are to buy a car taking finance, you can surely take the golden rule for determining your loan eligibility into consideration.

Story first published: Friday, November 29, 2013, 11:02 [IST]
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