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Money Aug 11, 2012

Why it is important to remember 20:4:10 while buying a car

By Bindisha Sarang

Thinking of buying a car? Unless you are a rich Arab-sheikh or have access to Dad's Bank un-Ltd, the possibility is that you will need a loan to fund your dream-on-the-wheels. In fact, around 80% percent of cars that run on the road (a.k.a pot-holes, if you are in Mumbai) are bought using loans.

You probably might have consulted your panditji to get the perfect numerological number for your car's number plate. And be prepared to bribe your local RTO, to get that perfect lucky number. That said, in reality, there's another number which you need to remember, if you want to make the most of the car, and the loan. And no we are not taking of 322 of Yale's secret society-Skulls and Bones. But 20:4:10 an unwritten axiom from the good old school of personal finance.

But 20:4:10 an unwritten axiom from the good old school of personal finance. Reuters

20: Is the number that stands for percentage you need to make as down-payment towards the loan. This figure makes sure that you have paid a good enough amount initially so that you don't take a large amount as a loan. But this percentage (amount) is not so large that you probably cannot set aside. Also, this ensures that you borrow a smaller amount and hence the total cost of your loan decreases.

4: Is the number of years you need to take the car loan for. Of course, there are lenders who allow you to borrow for a tenor of 7 years, but that works more in the lender's favour than your's. After all, the longer the loan tenor, the more you pay towards interest and hence your dream-on-the-wheels becomes costlier. Of course, not to mention that the sooner you get rid of the loan, the sooner your name will appear on the car's registration papers, instead of the lender's name.

10: is the ideal percentage of your monthly salary that should go towards servicing the monthly instalment of the car. If it's lower, it's even better. Reason being, anything over 10% could easily put you into a debt trap eventually. In fact, ideally not more than 30%-35% of your monthly income should go towards servicing all your debts, like home loan instalments, car loan instalments, credit cards dues and the like.

20:4:10 is an unwritten personal finance rule for car buyers. Take it seriously and this will serve you better than that lucky number plate for which you have to pay a hefty bribe.

by Bindisha Sarang

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