The 20/4/10 rule, adapted for India
A popular guideline for car buying is 20/4/10: put down at least 20%, finance for no more than 4 years, and keep total car costs under 10% of income. In India, many families stretch the last number to 15% because public transport isn't always an option, but it remains a sensible ceiling. Crucially, the budget covers all car costs, not just the EMI.
Max EMI = income × car budget % − running costs
Max loan = EMI × [(1+i)^n − 1] ÷ [i(1+i)^n]
Affordable price = max loan ÷ (1 − down payment %)Worked example
Costs people forget
- On-road price: registration, road tax and insurance can add 10–20% to the ex-showroom price.
- Insurance renewals: a comprehensive policy typically costs 2–4% of the car's value each year.
- Fuel: 1,000 km a month in a petrol car at 15 km/l is about 67 litres.
- Depreciation: a new car loses roughly 15–20% of its value in the first year, and around half in five years.
Ways to stay within budget
A certified pre-owned car that's two or three years old avoids the steepest depreciation. A larger down payment lowers the EMI and interest. Keep the tenure short even if a lender offers 7 years: a long loan on a depreciating asset can leave you owing more than the car is worth. Check any dealer's "flat rate" with the flat vs reducing calculator.
Frequently asked questions
How much should I spend on a car in India?
A common guide is total car costs (EMI, fuel, insurance, service) of no more than 10–15% of take-home pay, with at least 20% down and a loan of 4 years or less.
Is a longer car loan a bad idea?
It lowers the EMI but increases interest, and cars lose value quickly. A 5–7 year loan can leave you owing more than the car is worth.
Should I pay cash for a car?
If it doesn't drain your emergency fund or investments meant for other goals, paying cash avoids interest entirely.