For so many people a car is an unavoidable expense. Whether it be for their job, for lugging around their kids, or just for getting around. It seems like car loans are just a way of life these days, but do they need to be? Financing a new car can be a great ideal in theory, but is it a great idea in practice?
Growing up kids are playing with cars from such a young age and it can sometimes make people see cars as this status symbol and something they need to have to be happy. Unfortunately, financing a new car is only going to hurt your finances even if it will make your friends think you’re cool. Here are a few reasons why you should never finance a new car and some alternatives for what to do.
NOT an investment
I’ve heard a ton of people say that their new car is “an investment” which seriously makes my brain hurt. The definition of investment is “the action or process of investing money for profit or material result.” For profit, That’s the key part of that definition.
Unless you’ve purchased a super cool car that’s going to go up in value like say an old 1960’s Thunderbird, you’re going to lose money. That’s just a fact. You are unfortunately not investing your money because so much of it is going to be lost so quickly.
ALWAYS upside down
There’s this crazy thing called depreciation. It’s a bummer but it’s a reality. The definition of depreciation is “a reduction in the value of an asset with the passage of time, due in particular to wear and tear.” A car is the single fastest depreciating thing you can purchase.
Cars are known to lose at least 10% of their value in the first 5 minutes of you driving them off the lot and at least 20% of their value in the first year. Because of depreciation, unless you put down a huge downpayment chances are you’re going to be upside down on your loan for a large chunk of time. What does upside down mean? Being upside down on a loan means that you owe more money to wherever you borrowed it from than what the item is actually worth.
MORE than you can afford
Let’s be real, most car salespeople are skeezy. Do people even say skeezy anymore? What a word. Anyway! When you walk into a car lot with a certain budget in mind, most of the time they are going to convince you to spend more than you can afford. They’ll convince you that you need a warranty, or a nicer model, or a different car entirely.
They often speak in terms of a weekly (or bi-weekly) payment instead of how much the car costs in total to make you think “oh, $70 a week is something I can make happen” instead of “$25,000 is a little out of my price range”.
Since they’re able to convince you to buy more than you can afford, you’ll end up paying higher taxes on the purchase. You’ll also end up paying more for insurance to insure your more expensive, fancier car.
UNFORESEEN high repair costs
Since you’re financing, you’ve probably taken on more than you can afford. Can you even afford to pay for the repairs with your extremely high monthly payments?
Let’s talk about a situation where you get into a pretty bad accident. The repair costs are going to be way more than you can afford as well as more than the car is worth. In a situation where the person owns the car completely, chances are they would just scrap the car and spend the money on a new one if their insurance wouldn’t cover the entire thing. The issue is that you owe more than how much the car is worth, and the repairs aren’t covered by insurance because you were at fault (oops). This means that if you were to scrap the car you’d have to pay the entire car off, then buy an entirely new car! FUN.
NEVER be debt-free
Once a financer, always a financer (for the most part). When you go to finance a car, chances are the agreement will be for around 7 years (based on recent trends). This means that when you’re officially the owner of your car, it will be 7 years old and you’ll be so used to having a “new” car that you’ll want a newer one.
Financing a new car puts you into a spiral where you’ll be continuing to finance a new car every few years for the rest of your life. You’ll be signing up for a lifetime of high payments and you’ll never be able to experience the joy of being debt-free.
WHAT to do instead
I really hope that these points have deterred you from going straight into financing a brand new car. It may seem kind of crazy to think about purchasing a car in cash, but it’s totally possible. Let’s talk about a situation where you could be driving a newer nice car in just a couple years and own it completely.
Let’s say you already own a beater car that you got for $1000 that could currently sell for a good $500. The car still runs and you could drive it for six months while you save up around $400 a month to add to a newer car fund. I’m hearing you off in the distance saying “I can’t save $400 a month”… you were just thinking of buying a new car where the payment would be at least that much, so I’m sure you can make it happen. Now, in 6 months, you’ll sell your beater and add that to the $2400 you’ve saved up and gotten a nicer car than what you’re used to.
You then drive this car for two years, at which time you could sell it for $1000, and would have saved up $9,600, making you have $10,600 in your car fund. You could buy a VERY nice used car for $10,600 without any debt and never have a car payment.
Do you own your car outright? Or did you finance? Let me know your situation and what you think in the comments!