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It seems like every American is straddled with a monthly car payment. It’s just what you do, right?
Get a job, get a car loan, use the car to get to the job, work to pay the car loan. Yuck. It doesn’t have to be this way.
There are alternatives to getting into auto debt that can change your life. They’re just not as appealing and are less common amongst society.
For anyone young or old that is considering getting an auto loan, this article could save you a lot of money. We will cover why you shouldn’t do it, what you should do instead, and how to do it the smart way if you must do it.
Reasons Why You Shouldn’t Finance a Car
What’s so bad about financing a vehicle? Everyone does it! That was my mindset at 17 years old, and like most teenage males, I was obsessed with cars.
Unfortunately, I cared more about having a slick ride than being financially free. This mindset sticks with most people well into their 20’s and beyond.
Unnecessary auto debt is a lesson I learned the hard way, but you don’t have to. Here’s why getting into debt to have a car is a huge mistake.
Vehicles Are Terrible Investments
Your car is a depreciating asset, and it doesn’t count as a tax write-off unless it’s for your business. Each day your vehicle losses value. Starting your engine, accelerating, slamming on your brakes, just driving, it all wears down your car.
The wear and tear from everyday use not only reduces the value but also increases maintenance costs. You’ll have to keep shoveling money into your vehicle to keep it going.
Even reliable cars are money pits. You have the cost of gas, tires, brakes, insurance, etc. You will never get your money back when you sell or salvage your vehicle.
Loan Payments Hurt Your Cashflow
Financial freedom is all about generating cash flow. Having a car payment deducts from your monthly income. So, not only are you paying for all the maintenance, insurance, and gas, you’re paying the bank interest + principal.
If you finance a vehicle, the bank owns it until it’s paid off. It may feel like it’s yours, but it’s the banks. They are making money off of your poor financial decision. Cruising around in a new car doesn’t feel very good knowing that.
What You Should Do Instead
Buy a reliable beater and drive it until the wheels fall off. That’s it. You will have a way to get from A to B and won’t be strapped down with car payment.
Instead of paying $500 a month for bad debt, you can invest it in the stock market.
A $500 monthly contribution into an index fund over four years will grow to about $30,000! This is with a 10% rate of return, which’s under the average of 9.2% for the last ten years.
What if You Can’t Afford to Buy a Car With Cash?
If you can’t muster up the money to buy an old Honda, you should consider making some drastic financial changes. Try carpooling to work, sell everything you don’t need, and hustle up the dough to buy some wheels.
That may sound hard or unnecessary for most people. Well, it is hard. But getting into auto debt when you are already financially strapped is even harder.
Buy the cheapest and most mechanically strong car you can afford. Drive it and save up for a better one.
Appearance or Wealth?
Too many people don’t drive older cars because they care too much about what others think.
Sure, it’s nice driving a new luxury vehicle, and if you can afford it, then no problem. However, people get cars they can’t afford simply because they are trying to keep up with the Joneses.
Forget about societies focus on materialism and appearances.
Whoever you are trying to impress with a car isn’t worth ruining your financial well-being for.
When It Makes Sense to Get a Car Loan
While I think it is best to avoid auto debt entirely, there are some arguments for getting a car loan.
Let’s say you want to buy a vehicle that is $15k and you have the cash to buy it. Instead, you get an auto loan with a 3% interest rate. You then put the 15K into the stock market and get a 7-10% annual return.
Sounds smart, right? It is if you plan on keeping that money invested for at least five years or longer.
If you plan to invest for the short-term, it’s not. You could end up buying right before a bear market and lose a lot of money. If you are investing for the long-term, you can hold through it.
Always consider your investing time-frame. Buying a car with cash is a better choice if you can only invest for less than five years.
Getting a Car Loan the Smart Way
If you insist on getting a car loan, make sure you follow these steps:
- Only finance a vehicle you can afford. Focus on the total amount, not just the monthly payment.
- Put at least 20% down.
- Pay it off after 6 Months if you can. This will boost your credit score and save you a lot of money from reduced interest.
- Take the vehicle to a mechanic for an inspection. You should do this even if you are not getting a loan.
- Avoid being upsold by dealers and take your time.
It’s no argument that a car is a poor investment. But not everything has to be a financially prudent decision in life. Personal finance is personal.
If you are willing to accept the additional expenses that come with financing a car, then all means go for it. Plenty of car enthusiasts know what they’re getting into and don’t care because it makes them happy.
But if cars aren’t a big part of your life, you shouldn’t turn one into a financial burden. For most people, a paid-off car is the best kind of car.