Buying a car is often one of the most thrilling — and financially stressful — decisions Canadians make. With vehicle prices climbing and dealers pushing offers, many drivers later regret their decision. To reduce that risk, financial planners often point to a simple but powerful guideline: the 20-4-10 rule.
Why this rule matters in Canada
While Canadian-specific surveys on buyer’s remorse are scarcer than their U.S. counterparts, anecdotal and market data suggest similar dynamics at play, AutoTrader Canada has reported a shift in consumer priorities toward affordability and practicality amid economic pressures (1).
At the same time, the prevalence of extended-term auto loans in Canada raises warning flags.
According to J.D. Power Canada’s Automotive Market Metrics reports, 57% of new vehicle loans had terms of 84 months or greater in 2023 (2).
Those long-term risks exacerbate risks associated with negative equity, high interest costs, and prolonged debt burdens.
In this climate, the 20-4-10 rule can serve as a guardrail.
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What the 20-4-10 rule means
1. Put down 20%
The first guideline recommends making a down payment of at least 20% (3). Doing so reduces the loan principal and interest costs, and helps protect against a common pitfall: owing more than your car is worth. Vehicles depreciate at a rate of around 10% or more in their early months of ownership.
2. Finance for four years
The “4” in the rule refers to a 48-month loan term. That shorter arrangement means higher monthly payments, but you pay off the vehicle faster and reduce interest costs, which can be as high as 6 to 10% (4).
That matters in Canada, where extended-term loans (ETLs) are standard. The FCAC report warns that many borrowers using ETLs have negative equity five years into their loan, which means that they are more likely to refinance debt on their next auto loan (5). Because depreciation tends to bite hardest in the early years, long loans can leave you owing more than the car’s value for extended periods.
3. Keep vehicle costs under 10 % of income
Finally, the “10” suggests you should cap all vehicle-related expenses — including loan payments, insurance, fuel and maintenance — at 10 % of your monthly take-home pay.
According to the 2023 Survey of Household Spending, StatsCan reports that transportation accounted for 15.8% of total household consumption of goods and services (6).
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Putting the rule into practice in Canada
Here’s a list of things to consider when buying a car in Canada:
- Your maximum monthly budget for all vehicle costs
- The down payment you can reasonably make
- The most extended loan term you’re willing to accept
Also collect estimates for insurance, maintenance and fuel for the models you’re considering. Then run the full cost projections at home before signing anything.
If you skip these guardrails, you risk falling into negative equity or owing more than your car’s resale value. You also face the burden of paying excess interest over the life of a long loan. Additionally, overspending on transportation can strain your household finances.
Even when you can’t meet all three guidelines, there are still some trade-offs you can make. For example, taking a slightly longer loan only if you pay extra principal as you can, or getting a cheaper car so you can afford the 20% down payment.
While the 20-4-10 rule may not apply to every buyer’s situation, it provides a valuable benchmark for comparison. If today’s market prices make it hard to hit all three targets, aim for the ones you can and stay wary of stretching too far.
After all, a vehicle should help you move forward — not hold you back financially.
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Auto Trader (1, 6); Statistics Canada (2); Canada Life (3); The Globe and Mail (4); Financial Consumer Agency of Canada (5)
This article originally appeared on Money.ca under the title: Avoid buyer’s remorse by following the 20-4-10 car-buying rule
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.