Smart Car Buying: Beyond the Monthly Payment
When shopping for a new or used vehicle, dealerships often focus entirely on the "Monthly Payment." This is a common sales tactic designed to mask the true cost of the car. By extending the loan term to 72 or 84 months, they can lower your monthly bill while drastically increasing the total price you pay.
The 20/4/10 Rule
Financial experts often recommend the 20/4/10 rule to ensure you don't overextend yourself on a depreciating asset:
- 20% Down: Put at least 20% down to avoid being "underwater" on the loan immediately.
- 4 Years: Finance for no more than 4 years (48 months). If you need a longer term to afford the payments, the car is likely too expensive.
- 10% of Income: Keep total transportation costs (loan, insurance, gas) under 10% of your gross monthly income.
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Understanding Depreciation
Unlike a house, a car loses value the moment you drive it off the lot. If you take a long-term loan with a high interest rate, you might end up owing $20,000 on a car that is only worth $15,000. This is called negative equity, and it makes it very difficult to sell or trade in the vehicle later.