The 2-6-10 Rule is a simple budgeting guideline used by individuals in India to evaluate if they can afford their car loan EMI (Equated Monthly Installments). It can help you stay within budget by avoiding too much debt when borrowing money for a purchase.
20 Percent Down Payment Rule (It is often Misread as 2 Percent down payment)
The first part of the guideline says that you should make a minimum of 20% down payment of your car’s on-road price.
The reason is that it reduces the amount you have to borrow (which reduces your monthly payment) and overall interest paid, which makes your payments easier to qualify for.
For example: If you buy a car for ₹10 lakh, plan on paying ₹2 lakh; to avoid being in too much debt, you will only need to borrow ₹8 lakh.
- 6 Years of Total Length for a Car Loan Rule
- Keep your car loan to no longer than 6 years.
The reason this rule is important is because cars depreciate quickly, and you will pay more interest for a car loan that is longer than the length of time it takes to depreciate because you will be continuing to pay for a car that has lost a lot of its value..
The result will be that you have a higher monthly payment (which has more interest) but a overall cost lower than that of having paid more in interest on a larger loan because your loan was too long.
10 Percent Maximum Car Payment of Total Income Rule
When you are looking at the maximum amount you can afford for a car loan payment, it should not exceed 10% of your total income.
The reason that this limit is important is because it allows for flexibility in your budget for savings and emergencies; therefore it will help prevent financial stress.
For example: If your income is ₹80,000/month, you shouldn’t have a car payment greater than ₹8,000.
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Conclusion:
Following the 2-6-10 Rule will help you not overspend on a rapidly depreciating asset, which will help you maintain a healthy savings balance and avoid becoming “car poor”.
Is the 2-6-10 Rule Mandatory?
It’s a guideline; banks and other lenders (NBFCs) are free to set their own limits based on their risk management standards. For example, some lenders may consider:
- (Longer amortization periods)
- (20% Down Payment)
- (MAX. 10 year Loan)
- (20% Maximum Payment to income).
However, just because you’re able to borrow more doesn’t mean you should borrow more. The only time you should consider stretching your budget is when one or more of the following apply to you:
- You have a good, stable income.
- You don’t have much other debt.
- You have a healthy emergency fund
- You need to drive this vehicle for business purposes.
- On the other hand, exceeding the 2 to 6 to 10 rule is a much higher risk of failure financially.
- To sum it all up, the 2-6-10 rule is a responsible, safe method of financing a vehicle.
By following the 2-6-10 Rule, you’ll have the ability to drive your vehicle without adding undue stress to your financial situation and will find the peace of mind that comes from knowing that your extra spending was done wisely.
