The payment is $239. The car costs $559 a month.
The story so far In Lesson 4.3 you picked a used car for $12,000: $2,000 down, and a 4-year loan at 7% for the other $10,000. That's $239.46 a month. Now it's signing day. The dealer adds sales tax, title and registration, and a paperwork fee: $1,070 more, due today. Then the car needs insurance ($150 a month), gas ($120) and upkeep like oil changes and tires ($50). The real cost of having this car is about $559 a month. This lesson shows how to see that number before you sign, and how not to overpay.
Buying a car means paying the price, the taxes and fees, and then the monthly cost to keep it running.
For most people a car is the second-biggest bill after rent, and it loses value every year you own it.
Pick a car that fits the 20/4/10 rule, get a loan offer before you shop, agree on the out-the-door price, and get a used car inspected.
Auto loan officers at banks and credit unions approve loans. Car salespeople and finance managers at dealers sell the car and the loan. Auto analysts track prices and resale values.
What you're looking at: your car and what it costs each month. The loan payment is the orange block on top. Insurance, gas and upkeep stack under it: $239 + $150 + $120 + $50 = about $559.
Buying a car, with your eyes open.
Car buying has four money traps: paying for value that disappears, surprise fees, forgetting the costs after you drive away, and getting talked into a long loan. Here's how to spot each one.
New or used: the value drop
A car is worth less every year. That loss is called depreciation, and it's steepest at the start: a new car often loses about 20% in its first year, and around half its value in about five years. Buy a car that's a few years old and the first owner has already paid for that big early drop.
- A $26,000 new car
- After 1 year at 20% off: $26,000 × 0.80 = $20,800. You lost $5,200, about $100 a week, just by owning it.
The out-the-door price
The sticker price isn't what you pay. The out-the-door price adds sales tax (it depends on your state), title and registration fees for your state, and dealer paperwork fees. Always ask for the out-the-door number in writing.
- Your car
- $12,000 price + $720 sales tax (6%) + $150 title and registration + $200 paperwork fee = $13,070. That's the $1,070 due at signing.
The full cost of owning it
The cost of ownership is the loan payment plus everything else the car needs: insurance (Lesson 6.1), gas, and upkeep. Older cars cost more to fix; newer cars cost more to insure. Get an insurance quote before you buy.
- Each month
- $239.46 payment + $150 insurance + $120 gas + $50 upkeep = $559.46.
- Part of your $3,000 income
- $559.46$3,000 = about 19%.
The 20/4/10 rule
A simple test for whether a car fits: the 20/4/10 rule. Put at least 20% down, borrow for no more than 4 years, and keep the payment plus insurance at or under 10% of your monthly income before taxes. It's a guideline, not a law, but missing it is a sign the car is a stretch.
- 20% down?
- $2,000$12,000 = 17%. Close, but short: 20% would be $12,000 × 0.20 = $2,400.
- 4 years?
- 48 months. Pass.
- 10%?
- $239.46 + $150 = $389.46, but 10% of $3,000 is $300. Over by $89.46.
Loan length
The line marks 10% of $3,000, which is $300.
What you're looking at: a car cost checker for someone earning $3,000 a month before taxes, putting $2,000 down and borrowing the rest at 7%. Slide the price and pick the loan length. The bar is the loan payment plus $150 of insurance, with a line at the 10% limit.
Shop like a pro
1. Get preapproved first. Ask your bank or credit union for a loan offer before you visit a dealer. Your credit score (Lesson 4.1) sets the rate. If the dealer can beat it, great; if not, you already have a loan. 2. Negotiate the out-the-door price, not the monthly payment. "What payment do you want?" lets a dealer stretch the loan to 6 or 7 years so the payment looks small. 3. For a used car, pay a mechanic you choose to inspect it (often $100 to $200), and check its history report with the VIN, the car's ID number.
- Preapproved at 7%
- $239.46 a month for 4 years: $1,494.08 of interest.
- Dealer's offer at 9%
- $248.85 a month for 4 years: $1,944.80 of interest. Your preapproval saves $450.72.
Two minutes. Just listen.
Tap any line to jump to it.
Car lot.
Eight moments from car shopping. Each one gives you the facts. Do the math or make the call, then tap your answer. One try each.
What you're looking at: made-up car-buying situations. Each lists the facts, then asks one question.
The logic, step by step.
Four numbers to work out before you sign.
Step 1: The out-the-door price
- Your car
- $12,000 + $720 + $150 + $200 = $13,070.
Step 2: The down payment check
- $12,000 car
- $12,000 × 0.20 = $2,400. You put $2,000 down, $400 short.
Step 3: The 10% check
- Your car
- $239.46 + $150 = $389.46, and $3,000 × 0.10 = $300. Over.
Step 4: The full monthly cost
- Each month
- $239.46 + $150 + $120 + $50 = $559.46.
Worked example: a car that fits
- A cheaper car. An $8,000 used car, with the same $2,000 down.
- 20% down? $2,000$8,000 = 25%. Pass.
- 4 years? Borrow $8,000 − $2,000 = $6,000 at 7% for 48 months: $143.68 a month. Pass.
- 10%? $143.68 + $150 insurance = $293.68, under $300. Pass.
- The payoff. $239.46 − $143.68 = $95.78 a month less, about $4,600 over the 4 years, that can go to your emergency fund or investing.
The owl that moves into a used nest.
Great horned owls usually don't build their own nests. They move into old nests that hawks, crows or squirrels built in an earlier year. The hard work is already done, and the nest still does the job.
What you're looking at: an illustration, not data. A great horned owl in an old stick nest another bird built, with that bird flying off in the distance.
Why this sticks. The first owner of a car pays for its steepest value drop, the way the hawk does the hard work of building. A good used car, checked by a mechanic, lets you skip that cost and still get where you're going.
The page you'd copy down.
- Depreciation: a new car often loses about 20% the first year, around half in about 5 years. $26,000 × 0.80 = $20,800.
- Out-the-door price = price + sales tax + title and registration + dealer fees: $12,000 + $720 + $150 + $200 = $13,070.
- Cost of ownership = payment + insurance + gas + upkeep: $239.46 + $150 + $120 + $50 = $559.46 a month.
- 20/4/10 rule: 20% down, loan of 4 years or less, payment + insurance ≤ 10% of income before taxes.
- Get preapproved first: 7% vs. the dealer's 9% on $10,000 for 4 years saves $450.72.
- Negotiate the out-the-door price, not the monthly payment.
- Used car: independent mechanic inspection ($100 to $200) and a history report from the VIN.
Fill in the blanks
Grab a friend or a study group.
Same car, three ages
Everyone looks up one model you'd like: new, 3 years old and 6 years old. Compare the prices. How much did the first owner lose?
Dealer role-play
One person is the salesperson asking "What monthly payment works for you?" The other only answers in out-the-door prices. Then switch.
The 20/4/10 race
Pick an income, like $3,500 a month. Each person finds a real used car listing that passes all three parts. Fastest one wins.
Just you and your money.
These stay on this device. Nobody else sees them.
Exam-style questions.
Written the way a college exam would ask them. Each right answer on the first try is worth 10 xp.
On the job: you're a credit union auto loan officer
A member, Leo, wants your advice before buying a car. Here are his numbers:
- He earns $3,500 a month before taxes.
- Car A, new: $32,000. 20% down ($6,400), borrow $25,600 at 7% for 6 years: $436.45 a month. Insurance: $180 a month.
- Car B, 3 years old: $12,000. 20% down ($2,400), borrow $9,600 at 7% for 4 years: $229.88 a month. Insurance: $120 a month.
Your task: check both cars with the 20/4/10 rule and tell Leo which one fits.
See a model answer
His 10% limit: $3,500 × 0.10 = $350 for payment plus insurance.
Car A: 20% down, yes. But 6 years is longer than 4, and $436.45 + $180 = $616.45, which is $266.45 over his limit. It fails two of the three tests. Over 6 years he'd also pay $436.45 × 72 − $25,600 = $5,824.40 of interest.
Car B: 20% down, yes. 4 years, yes. $229.88 + $120 = $349.88, just under $350. It passes all three.
Advice: Car B, after an inspection by his own mechanic. It costs $616.45 − $349.88 = $266.57 a month less, and the first owner already took the biggest value drop.
Driving it all together.
What you're looking at: a map of where this lesson fits in the course. Read it left to right: the lessons it builds on, this lesson in the middle, and the lesson that comes next.
- Back · Unit 4Loans
- Back · Unit 6Insurance: health, car and renters
- Before · Unit 7Rent your first apartment
- You are hereBuy a car without overpaying
- Next · Unit 7Renting vs. buying a home