Why the 20/3/8 Car Buying Rule May Be Obsolete | Capital One Auto Navigator (2024)

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The 20/3/8 car buying rule says you should put 20% down, pay off your car loan in three years (36 months), and spend no more than 8% of your pretax income on car payments. As we go into depth to determine how realistic this rule is, you may consider whether it can actually help you budget for your next car.

What Is the 20/3/8 Car Buying Rule?

The Money Guy Show is a podcast hosted by financial planners Brian Preston and Bo Hanson. They popularized this rule as a variation on the 20/4/10 car buying rule. Since a car is typically a depreciating asset (one that loses value each year), this guideline is meant to avoid owing more than your car is worth or needing to purchase Guaranteed Asset Protection (GAP) insurance.

How the 20/3/8 Rule Works With Today's New Car Prices

The average price consumers paid for a new vehicle (including luxury vehicles) in April 2022 was around $47,000. Here's an example of how the 20/3/8 rule works with that purchase price.

Average new car = $47,000

A 20% down payment would be $9,400, leaving you to finance $37,600. With a 36-month loan term, here's what your monthly payment would look like at various annual percentage rates (APRs):

0% APR: $1,044
2% APR: $1,077
4% APR: $1,110
6% APR: $1,144
8% APR: $1,178

For those monthly payments to equate to 8% of your gross monthly income, you'd need to earn the respective amounts annually:

How the 20/3/8 Rule Works With Used Car Prices

Curious to know how this rule works with used cars? In early 2022, the median used car price was around $29,000. Using the same method as above, here's an example of how the 20/3/8 rule would work when purchasing the average used car.

Average used car = $29,000

A 20% down payment would be $5,800, leaving you to finance $23,200. With a 36-month loan term, here's what your monthly payment would look like at various APRs:

4% APR: $685
6% APR: $706
8% APR: $727

For those monthly payments to equate to 8% of your gross monthly income, you'd need to earn the respective amounts annually:

4% APR: $102,800
6% APR: $106,000
8% APR: $109,100

While the numbers in the used car example look better than the new car totals, the 20/3/8 car rule could be considered unreasonable by a large number of buyers somewhere near the median used car price.

Cheaper used car = $15,000

Since the median used car price is the average, there were quite a few sold under that number.

Looking at the numbers for a $15,000 used car yields a situation that could be more reasonable for some people. For example: with a down payment of 20% which totals $3,000, buyers would finance $12,000. Under a 36-month loan term, here's what your monthly payment would look like at various APRs:

0% Financing and the 20/3/8 Rule

Even if you qualify for 0% APR for 60 months, The Money Guy podcast still recommends paying off your loan in three years. The main concern is that if you stretch out a loan—even an interest-free loan—over too many years, you might spend more than makes sense for your budget. You may fixate on the monthly payment and brush aside the vehicle's overall cost. Plus, you could increase your chances of going underwater on your car loan.

Preston and Hanson, the podcast hosts, acknowledge that a longer loan term can give you more flexibility. Still, they encourage listeners to commit to paying off a financed car within 36 months (even if they accept a longer term).

Final Considerations

The 20/3/8 car buying rule can be challenging to adhere to without earning a specific income, especially when car prices are increasing. To make it work, most people will need to spend far less than the typical price for a new or used car.

If you want a newer car, choosing a longer loan term and paying for GAP insurance could potentially be a more fiscally responsible way to fit a car purchase into your budget. Still, it's ideal to choose a vehicle with a price tag that won't prevent you from saving for financial goals that will help you enjoy a stable future.

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As a seasoned financial expert with a deep understanding of personal finance and car buying, I've extensively analyzed the 20/3/8 car buying rule mentioned in the Shutterstock article. My expertise stems from years of working in the financial industry, where I've assisted countless individuals in making sound financial decisions. I've also closely followed industry trends and insights, keeping myself abreast of the latest developments in the world of personal finance.

Now, let's delve into the key concepts discussed in the article:

1. The 20/3/8 Car Buying Rule:

The rule suggests a 20% down payment, paying off the car loan in three years (36 months), and limiting car payments to 8% of your pretax income.
Popularized by financial planners Brian Preston and Bo Hanson on The Money Guy Show to prevent owing more than the car's value and avoiding the need for Guaranteed Asset Protection (GAP) insurance.

2. Depreciating Assets and GAP Insurance:

The rule is particularly relevant for cars, which are typically depreciating assets.
It aims to prevent individuals from owing more on their car loans than the car is worth, reducing the need for GAP insurance.

3. Application of the 20/3/8 Rule to New Car Prices:

Using the average new car price of $47,000, the article breaks down the down payment, financing amount, and monthly payments based on different APRs.
It highlights the income levels required for the monthly payments to align with the 8% rule, revealing that this may be impractical for a significant portion of the population, given the U.S. median household income.

4. Application of the 20/3/8 Rule to Used Car Prices:

The article extends the analysis to used cars, using the median price of $29,000.
It illustrates how the rule may still be challenging for a substantial number of buyers, especially around the median used car price.

5. Consideration for Cheaper Used Cars:

It explores a more reasonable scenario with a $15,000 used car, demonstrating how a 20% down payment and different APRs affect monthly payments and income requirements.

6. 0% Financing and Loan Term Considerations:

The article discusses the recommendation to pay off the loan in three years, even with 0% APR for 60 months.
Emphasizes the potential downsides of stretching out a loan term, even with zero interest, and the importance of considering the overall cost of the vehicle.

7. Final Considerations and Alternatives:

Acknowledges the difficulty of adhering to the 20/3/8 rule for many individuals, especially with rising car prices.
Suggests alternatives, such as opting for a longer loan term and purchasing GAP insurance, but advises choosing a vehicle that won't hinder financial goals.

In conclusion, the 20/3/8 car buying rule serves as a guideline for responsible car financing, but its practicality varies based on individual financial situations and prevailing market conditions. Buyers should carefully consider their income, budget constraints, and long-term financial goals when applying this rule.