The 20/4/10 Rule: Why 84-Month Auto Loans Are Financial Suicide
That 7-year car loan makes the payment "affordable." But you'll be underwater for years and pay thousands more than the car is worth.
The average new car loan is now 70 months. One in three is 84 months or longer. Dealerships push these extended loans because they make cars "affordable"—but they're creating a generation of underwater buyers. Here's why long auto loans are a financial trap.
The 20/4/10 Rule
Before we dive into why 84-month loans are dangerous, here's the rule financial experts use to determine if you can actually afford a car:
The 20/4/10 Rule
20%
Down payment
(minimum)
4
Years max
(48 months)
10%
Of gross income
(max payment)
If you can't meet these criteria, the car is too expensive.
The Underwater Problem
Cars depreciate fast—about 20% in year one, then 15% per year after. With an 84-month loan, your balance drops slower than your car's value. You're underwater (owing more than it's worth) for most of the loan.
$40,000 Car: 84-Month Loan at 7%
| Year | Car Value | Loan Balance | Equity |
|---|---|---|---|
| 1 | $32,000 | $35,200 | -$3,200 |
| 2 | $27,200 | $30,100 | -$2,900 |
| 3 | $23,100 | $24,700 | -$1,600 |
| 4 | $19,600 | $19,000 | +$600 |
| 7 | $12,000 | $0 | +$12,000 |
You're underwater for 4 years. If you need to sell or the car is totaled, you'd owe money.
What Happens When Life Changes
Being underwater isn't just a paper problem. Here's what happens when reality hits:
You lose your job
Can't sell the car to cut expenses—you'd need to bring thousands to the dealer.
The car is totaled
Insurance pays market value, not loan balance. You'd owe the difference (unless you have gap insurance).
You want to trade in
The dealer rolls your negative equity into the new loan. Now you owe even more on the next car.
Compare different loan terms
See how much more you pay with longer loans—and find a term that works.
The True Cost of Extended Loans
Let's compare that $40,000 car at different loan terms (7% APR):
| Loan Term | Monthly Payment | Total Interest | Total Cost |
|---|---|---|---|
| 48 months | $958 | $5,970 | $45,970 |
| 60 months | $792 | $7,500 | $47,500 |
| 72 months | $684 | $9,250 | $49,250 |
| 84 months | $607 | $10,990 | $50,990 |
The 84-month loan saves you $351/month but costs $5,020 more overall. Plus you're underwater for 4 years and driving an aging car while still making payments.
The Smarter Alternative
If you can't afford the 48-month payment, you can't afford the car. Here's what to do instead:
The Bottom Line
Long auto loans exist because people want more car than they can afford. The 20/4/10 rule exists because math doesn't care about what you want.
If you need 84 months to afford the payment, you're not buying a car—you're renting one from the bank at a terrible rate.
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