Chapter 4 · Concept 34 of 50
Auto Loans
Down Payments, Loan Terms, and Depreciation
Car loans can be confusing because dealerships often focus on the monthly payment rather than the total cost. When discussing a monthly payment with a dealer, they can make almost any car appear affordable by extending the loan term.
Let’s use a $30,000 car as an example:
The lower monthly payment may seem like a better deal, but the longer you keep the loan, the more expensive it will be.
Cars can also lose value very quickly. A car’s value typically drops by about 15% immediately after leaving a dealership.
If you make no down payment and take a long loan, you may owe more than the car is worth. For example: After two years, a car might be worth $20,000 while you still owe $24,000.
To be on the safe side, consider the “20/4/10 Rule” when buying a car:
Let’s use a $30,000 car as an example:
- A 48-month loan would be ~$690 per month, ~$3,000 in total interest
- An 84-month loan would be ~$430 per month, ~$6,500 in total interest
The lower monthly payment may seem like a better deal, but the longer you keep the loan, the more expensive it will be.
Cars can also lose value very quickly. A car’s value typically drops by about 15% immediately after leaving a dealership.
If you make no down payment and take a long loan, you may owe more than the car is worth. For example: After two years, a car might be worth $20,000 while you still owe $24,000.
To be on the safe side, consider the “20/4/10 Rule” when buying a car:
- 20% down payment
- 4-year maximum loan term
- Total car costs under 10% of your gross monthly income
HARD LESSON
u/TruckPoor • 12.5k points • 12 days ago
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