How much car can I afford?

With files from Tyler Wade

This article was originally published on January 8, 2020 and was updated on April 30, 2025.

If you’ve ever searched for car-buying advice, you’ve probably come across the 20/4/10 rule — a tidy little formula that tells you to put 20% down, finance for no more than four years, and spend no more than 10% of your income on your car. Sounds reasonable, right?

But here’s the catch: cars are more expensive than ever, and life doesn’t always fit neatly into financial formulas. For most Canadians, especially those with families or long commutes, the 20/4/10 rule isn’t just outdated — it’s practically impossible.

Canadian car buying habits prove that to be true. A new study reveals that 24% of Canadian drivers own a car over 10 years old, while 52% own cars that are six years old or less. When it comes to buying new vehicles, 22% say they plan to keep their current car for the next year. This data tells us that many Canadians are choosing to hold onto their vehicles before opting for a big purchase, likely a response to increasing car prices and affordability. 

In this article, we’ll break down what the rule says, why it’s become unrealistic, and what a smarter, more flexible approach to car buying looks like today.

What is the 20/4/10 rule, and how does it work?

The 20/4/10 rule is an oft-quoted guideline that when buying a car, you should make a down payment of at least 0%, limit your loan to four years or less and spend no more than 10% of your income on the car.

Make at least a 20% down payment

The argument here is simple: cars depreciate quickly, and without a substantial down payment, you could find yourself owing more than the car is worth.

According to the 2024 Vehicle Depreciation Report by Black Book & Fitch Ratings, used vehicles depreciated at a rate of 20.4% per year in 2023. That means if you pay the average price of $65,219 (according to AutoTrader) for a new vehicle, your car will be worth just $51,914 by the time its birthday rolls around. Your 20% down payment helps you stay ahead of depreciation and prevents you from owing more than your car is worth.

A larger down payment will also take some pressure off your monthly payments. A $65,000 loan amortized over eight years at 3.99% APR requires a payment of $792 per month and will cost just over $11,000 in interest. Making a 20% down payment reduces your monthly payment by $158 per month, to $634 and reduces your total cost of borrowing by $2,206 to $8,826.

Limit your loan term to 4 years or fewer

Didn’t I just do a calculation using an eight-year loan? Yes, I did, because most car dealers will push for a longer term loan of up to 96 months. But the 20/4/10 rule argues that your loan should be no more than four years in total. The reason for this is that the longer you take to pay off a loan, the more you’ll pay in interest.

Consider our $65,000 purchase with a 20% down payment. The total cost of borrowing over eight years at 3.99% interest is a cringeworthy $8,826. By reducing the loan term to four years, you can cut the interest cost by more than half, to $4,346. On a $65,000 car, that’s over 6% off your lifetime cost of ownership.

Spend no more than 10% of your income on your car

According to Statistics Canada, the median income for a family with children is $113,700 after taxes. Following the 20/4/10 rule, that leaves a maximum of $11,370 per year – or just less than $950 per month – for vehicles. Assuming your family needs two cars (I know mine does), each car should cost no more than $474 per month.

The kicker for the 20/4/10 rule is that you should spend a maximum of 10% of your income on transportation as a whole – including the cost of your car loan, car insurance, fuel, maintenance and parking. According to our own estimate, the total cost of owning a car in Canada is now $1,370 per month, blowing the 10% rule out of the water for all but the wealthiest Canadians.

In that analysis, we figured an average cost of $203 per month for gas, $143 per month for insurance, and a per-household spending of $79 per month for maintenance and repairs. For a household with two vehicles, that’s $771 per month before a payment is ever made. That leaves just $177 for loan payments, which, working backwards and using the 20/4/10 rule, means you can only afford two clunkers worth roughly $4,900 each.

The 20/4/10 rule is dated and impractical. What can I do instead?

Following the 20/4/10 rule, you would need a household income of $374,251 to afford two average new cars worth $65,000. Since you and I don’t make that kind of cash, we need to look at things differently.

Instead of the 20/4/10 rule, try this: buy the cheapest car that meets your actual needs, and make sure the total cost of ownership fits comfortably within your budget and goals.

Buy the cheapest car that meets your actual needs

The vehicle you want and the car you need may look very different. You may want a full-size SUV with room for seven that comes with all the bells and whistles. But your needs may be met with a few-years-old compact sedan.

Ask yourself:

• How many people do I regularly drive?
• How much stuff do I haul?
• What kind of driving do I do?
• Do I need a new vehicle, or can I buy used?

It may turn out that the car you want is more suited to an idea than your actual needs. For example, if you want a larger SUV for your annual camping trip, it might be cheaper in the long run to rent one each year than to own one on an ongoing basis.

Also read: Should I buy a used or new car?

Focus on the total cost of ownership, not just the payment

A worthwhile takeaway from the 20/4/10 rule is that you need to budget for the total cost of owning a car, not just the monthly payment. 

While it’s true that stretching your car loan over a longer period of time can reduce your monthly payment, it can also increase your total cost of ownership over the long run. Ask yourself whether you want to be paying off this vehicle in eight years, or if you’d be happier spending more in the short term in exchange for being payment-free sooner.

In addition to the payment, don’t forget the cost of gas, insurance, maintenance, and other expenses. There are plenty of online tools you can use to get a sense of the total cost of ownership when car shopping, including tools like Ratehub.ca’s online comparison tool that lets you compare car insurance quotes from Canada’s top providers.

Fit the cost of your car(s) within your budget and goals

When budgeting for a car, ask yourself how much you can comfortably afford to spend on the total cost of ownership. Instead of limiting it to an arbitrary percentage of your paycheque, ask yourself questions like:

• How much do I have left after essentials, like housing and food?
• What am I giving up by owning a car? 
• Will this stretch my monthly cash flow, or can I easily absorb the cost?

After sitting with your budget, you’ll likely come up with a dollar figure of what you can afford. This will look different for everybody.

Ok, just tell me how much car I can afford

For most Canadians, a vehicle is a necessity, and the typical personal finance advice just doesn’t work. You need a reliable car that can get you where you need to go.

So, let’s assume you’re a typical consumer. You don’t want to make a down payment, and you’re willing to finance your car over eight years. You’ll plan to spend an average amount on gas and insurance. This chart shows the approximate vehicle purchase price you can afford based on what percentage of your income you want to spend.

 

 

Note that this chart assumes a single vehicle per household. For example, a family with a household income of $100,000 who wants to spend 20% of their income on vehicles can afford one vehicle worth $101,900 or two vehicles worth $50,950 each.

The bottom line

The 20/4/10 rule may have been a solid benchmark in a different era, but it no longer reflects the financial realities most Canadians face today. With vehicle prices, insurance, and fuel costs continuing to climb, rigid guidelines like these can set unrealistic expectations and leave you feeling like you’re doing something wrong just for needing a reliable car.

Instead of sticking to outdated rules, focus on what works for your life. Start with your real needs, understand your total cost of ownership, and choose a car that fits comfortably within your budget. A practical, well-informed purchase beats a perfect financial formula every time.

It’s important to note that the same rules and sentiments apply to all Canadians across the country, whether you are a natural-born citizen or a newcomer, the process for buying a car remains the same. So make the smart and educated decision - buy within your means.

Also read:

• The dos and don’ts of buying a new car
• Buying a used car from a dealer vs. a private seller
• How to check insurance before buying a car