5 Reasons Car Loans Are A Bad Idea.

charity bake sale2 1 1 5 Reasons Car Loans Are A Bad Idea.

I wrote earlier about only spending money on things that add considerable value to your life. You may be one of those people who absolutely love their car. You may still enjoy going out for a weekend drive, or rush hour may not actually be that bad in your air-conditioned leather seats. Your vehicle makes you happy and adds value to your life, I get it. But at what cost was that value added?

What have you given up by financing that vehicle? $400, $500 a month? If you make $5,000 a month, $500 isn’t really that noticeable is it? Let’s take a moment to look at what you have given up for that vehicle.

1. Cars Depreciate – Quickly!

When I spend my money, I like to spend it on things that add value and hold value in my life. The truth is, on average, that new car you financed will lose 20%-25% of its value in the first year. It will continue to lose approximately 10%-15% of its value each year after that until it is basically worthless.

If you financed a $25,000 vehicle with a $4,000 down payment at 3.5 % interest for 60 months, you would be paying about $2,000 extra for that vehicle by the time the loan was paid off. On average, after that 60 month time period, your $27,000 investment would be worth around $13,122 – if you’re lucky. I know this may sound absurd, but why don’t you just buy a 3-5 year old vehicle (with cash) and save a large chunk of change?

2. Unexpected Repair Bills

Since you’re already paying $400 a month for your vehicle, keep in mind that the air conditioner will go out – right after that factory warranty expires. Do you have a few hundred extra dollars lying around for that repair or will it go on the credit card? Oh wait, you bought the extended warranty?

It would have been cheaper to decline the extra warranty coverage and to pay for the A/C with cash… do the math.

According to Consumer Reports, the average extended warranty is $1,214. Owners who actually use their warranty only claimed $837 in repairs on average. That’s not counting those who didn’t even use their warranty…¹

Also, remember you will need to pay for oil changes, routine maintenance to include buying new tires, brakes etc… but let me guess, they threw in the oil changes for “free” didn’t they….

3. Finance Games

If you have financed a vehicle, you know what I’m talking about. The salesperson will throw a bunch of extras in if you use their financing. Hopefully, it’s obvious to you that they make more money off you if you finance rather than paying cash. The dealership does not stay in business by giving things away for free so rest assured, all those “extras” they are throwing in are being paid for by you.

Another game they like to play is to draw your attention away from the list price and have you focus on the monthly payment. They want you to ignore how much you are actually going to pay over those 60 months and instead focus on how much you are going to pay each month. Is that monthly payment too high? No problem! They now offer 72 and 84-month loans to drastically lower your monthly payment.

No, I’m not kidding, and some of you may even have these loans. If you are purchasing a vehicle, do not discuss monthly payments – discuss the bottom line.

4. Used Cars Can Be Just As Reliable As New

Confession time – I hate my car, I really do. It has 181,629 miles on it.
The front driver window does not roll down and it doesn’t have cruise control. It’s a 2007! I didn’t know they made cars without cruise control in 2007 until I bought it. The seat is starting to tear and the front bumper doesn’t sit flush because my wife ran over a large object in the road years ago.

I absolutely want a new car but I know I don’t want a new one enough to spend the money right now. I have other financial goals that are more important. My car gets me from A to B which is what it is supposed to do. It’s not fancy, but I promise you, no one at work cares what I drive.

5. Financing Cripples Your Retirement Goals

If you took that $400 a month and saved it for a period of 20 years rather than wasting it on depreciating vehicles, you would have saved $96,000. Over a 20 year period that may not seem like that much money.

Now if you had invested that money and made an average of 10%, your $400 a month investment could realistically grow to $302,412. By financing vehicles for a 20 year period, you are throwing away $206,412! This is not voodoo math my friends, this is the reality.

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As I stated earlier, arresting your debt and building your future requires a complete shift in your mindset. While the rest of America will finance different vehicles for the next 20 years, you could be ahead of them by hundreds of thousands of dollars by being content with a mediocre vehicle. It all depends on where you want to be in the end.

What do you think? Are there other reasons buying a new car is a bad idea? Leave a comment below!

If you missed my earlier articles about budgets and paying off debt, you can find them here:
Simple Steps To Start Your Debt Free Life!
Budget Isn’t A Bad Word

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About The Author

Ryan Luke

Ryan Luke is a father of three, a husband, a financial coach, and a full-time police officer. He has been featured on MarketWatch, Forbes, Fox Business, Experian, MSN, and USA Today. He focuses on providing easy to understand personal finance information to first responders so they can get out of debt and build wealth on a public servant salary.

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