How Much Car Can You Actually Afford? The 20/4/10 Rule, Canadian Edition
By Jordan Ellis · Published · Reviewed
Quick Answer
The 20/4/10 rule means 20% down, a loan of 4 years or less, and car costs under 10% of gross income. On an $80,000 income, 10% is about $667 a month. If that has to cover everything (payment, insurance, fuel and maintenance), it supports only about an $11,000 car including tax. If the 10% covers just the loan payment, it supports roughly $35,000 including tax, or about $31,000 before 13% HST in Ontario. Stretch the same $667 payment over 84 months and it 'affords' about $55,000 of car, while adding thousands in interest and years of negative equity.
Dealers ask “what monthly payment works for you?” That question is designed to sell you the most car. Here’s the question that protects you instead.
The 20/4/10 rule
- 20% down. New cars commonly lose value fast (often 20% or more in the first year), and a real down payment keeps you from owing more than the car is worth.
- 4-year maximum term. Longer terms pile on interest and keep you underwater for years.
- 10% of gross income. The monthly ceiling for car costs.
The rule comes in two versions, and they give very different answers. On an $80,000 income, 10% is about $667 a month:
| Version | What the $667 covers | Loan it supports (7%, 4 years) | Car price incl. tax, with 20% down |
|---|---|---|---|
| Strict | Payment + insurance + fuel + maintenance | ~$9,000 (payment ~$215 after ~$450 of running costs) | ~$11,000 |
| Common | Loan payment only | ~$27,900 | ~$35,000 |
The strict version is what keeps a car from crowding out savings. The common version is a reasonable upper limit, as long as insurance and fuel still fit comfortably in your budget. Get your own ceiling with the car affordability calculator, then check a specific price with the auto loan calculator.
The tax number nobody quotes
The sticker isn’t the price. Add sales tax: 13% HST in Ontario, 14% in Nova Scotia, 15% in New Brunswick, Newfoundland and Labrador and PEI, and 5% GST in Alberta (BC also charges a higher PST rate on vehicles over $55,000). Then add freight and PDI (often around $2,000 on a new car) and documentation fees. A $40,000 SUV in Ontario is $45,200+ before it moves. Finance the after-tax number or the payment you budgeted is fiction.
The 84-month trap
Stretching the term is how a $45,000 loan gets a payment under $700:
| Term | Payment (at 7%) | Total interest |
|---|---|---|
| 48 months | ~$1,078 | ~$6,700 |
| 60 months | ~$891 | ~$8,500 |
| 84 months | ~$679 | ~$12,000 |
That’s seven years of payments on a car that will be worth a fraction of what you paid, likely negative equity for much of the term, and a rollover trap if you trade in early. The auto loan calculator shows your exact interest at each term.
Before you sign
- Get pre-approved at your bank or credit union first, so dealer financing has a real rate to beat
- Negotiate the total price, never the monthly payment
- Price insurance on the specific car before committing (the difference between models can be $100/month)
- Run the payment math on the after-tax, after-fees number
Bottom line
A car is transportation with a monthly bill attached. Buy the most reliable car the 20/4/10 rule allows, finance it for as short a term as you can, and don’t let the conversation drift to monthly payments.
Official sources
Rules and dollar limits change. Confirm current amounts with the official pages below before you act · Last reviewed .
- Financing a car (Financial Consumer Agency of Canada)