Lesson 6 of 11 14 min
Buying and Financing a Car
Total cost of ownership and how auto loans work.
Written by Mateo LermaLast reviewed 3 sourcesEditorial standards
All lessons in Money After High School
Step 1: The lesson
What does a car really cost, and how do auto loans work?
The price tag is only the beginning. The total cost of ownership includes the loan payment, insurance, gas, maintenance, repairs, registration, and parking.
New cars lose value fastest in their first few years (depreciation). A reliable used car often costs far less for the same transportation.
- Get pre-approved for a loan at a bank or credit union before visiting a dealer, so you know your rate.
- Negotiate the total price, not the monthly payment.
- Get a used car inspected by an independent mechanic before buying.
- Compare insurance quotes before you buy — young drivers often pay a lot.
A common guideline: 20/4/10
Put at least 20% down, finance for no more than 4 years, and keep total car costs under about 10% of your gross income. It's a rule of thumb, not a law — but it keeps a car from crowding out everything else.
Required coverage
Most states, including Texas, require drivers to carry liability insurance. Lenders usually also require comprehensive and collision coverage until the loan is paid off.
Step 2: See it
The real monthly cost of a $15,000 used car
A hypothetical $15,000 used car financed at 7% for 4 years: Loan payment ($15,000 at 7% for 4 years) $359; Insurance (young drivers often pay more) $180; Gas $120; Maintenance and repairs (set aside) $60; Registration, inspection, and fees $15. Total: about $734 a month.
- Loan payment ($15,000 at 7% for 4 years)
- $359
- Insurance (young drivers often pay more)
- $180
- Gas
- $120
- Maintenance and repairs (set aside)
- $60
- Registration, inspection, and fees
- $15
- Total monthly costthe loan is only 49%
- $734
Step 3: Real-world example
Two cars, one budget
Marco has budgeted $400 a month for a car. The loan on a $15,000 used car is about $359 — it fits!
Then he adds everything else: insurance, gas, maintenance, and fees. The real total is about $734 a month. He switches to a $9,000 used car with a bigger down payment and finds a cheaper insurance quote — and stays within budget.
Step 4: Try it
Finance a car
Try a 4-year loan, then a 7-year loan on the same car. Then try a bigger down payment by lowering the amount.
Your numbers
Results
Monthly payment
$359.19
48 payments at 7% APR
Amount borrowed
$15,000
Total interest
$2,241
13% of what you pay
Total of payments
$17,241
- Principal (amount borrowed) $15,000
- Interest $2,241
Show year-by-year breakdownHide breakdown
| Year | Principal | Interest | Balance left |
|---|---|---|---|
| 1 | $3,367 | $943 | $11,633 |
| 2 | $3,610 | $700 | $8,023 |
| 3 | $3,871 | $439 | $4,151 |
| 4 | $4,151 | $159 | $0 |
Educational calculator, not financial advice. Results are hypothetical estimates based on the numbers you enter.
Step 5: Knowledge check
Quiz: Buying and Financing a Car (3 questions)
Answer each question, then check your answer to see the explanation. Retake it as many times as you like.
Question 1 of 3
Step 6: Summary
Summary: Buying and Financing a Car
Budget for the total cost of ownership, not just the payment. Used cars avoid steep early depreciation. Get pre-approved, negotiate total price, inspect used cars, and compare insurance quotes. The 20/4/10 guideline keeps car costs in check.
Step 7: What you should remember
Key takeaways: Buying and Financing a Car
- Total cost = payment + insurance + gas + maintenance + fees.
- New cars depreciate fastest early on.
- Get pre-approved; negotiate total price.
- 20/4/10: 20% down, ≤4 years, ≤10% of income.
Key terms in this lesson
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Sources and further reading
Rules, rates, and official figures in this lesson are based on these sources. People and numbers in examples are hypothetical.
- 1.Auto loans (opens in a new tab)
Consumer Financial Protection Bureau · consumerfinance.gov
- 2.Financing or Leasing a Car (opens in a new tab)
Federal Trade Commission · consumer.ftc.gov
- 3.Buying a Used Car From a Dealer (opens in a new tab)
Federal Trade Commission · consumer.ftc.gov
Cite this lesson
Financial Literacy Club. (2026, September). Buying and financing a car. https://learnwithflc.org/courses/money-after-high-school/cars
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