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Dumbest Financial Move? The Car Payment

Do you currently have a car payment? How long have you had been making payments on your car in your lifetime? A few years ago, I had a neighbor that insisted that her car payment was a necessary expense. After all, in order to go to work and make money, you have to have a dependable vehicle to get there! So, a car loan is just one of those things that you have to have! As you may have guessed, I strongly disagree.

How Much Is Your Payment?

What is the typical car payment for the average person? If you buy a modest, new vehicle, you’re most likely paying around $300 a month. For most people, they just assume that they’ll have a car payment for the rest of their lives. Do you have any idea how much that equates to over the course of 60 years? $300 times 12 months, for 60 years means that you’d dish out $216,000 over the course of your life! Do you realize that with this money, you could buy 21 cars that are worth $10,000! That sounds like a better deal to me.

You’re Paying Extra

For the most part, vehicles have a fairly low interest rate if you have excellent credit – typcially something like 2.9%. But, over the course of 4 or 5 years, you’d still be paying an additional $1,500 or so in interest alone. It doesn’t sound like much, but if you repeatedly finance a car for the rest of your life, that’s $20,000 that you’re just throwing down the hole!

Financed and Brand New

Now, it’s one thing to finance your used car. I can understand if you are in desperate need of transportation and finance a $3,000 vehicle to get you to and from work each day. However, when people purchase new vehicles AND finance them, it becomes an entirely different story!

Let’s say your brand new car costs you $20,000. Over the course of 5 years, you’ve paid a total of $22,000 after interest, and your car has now depreciated to a value of $8,000. You’ve paid almost $3,000 per year on this car, and that doesn’t even include the typical repairs and maintenance costs (not to mention the car covers that you had to buy to keep it in mint condition)!

The Cheap Dependable Used Car

I have to admit, I do enjoy driving sporty cars – and sure, it would be fun to speed around town each day in my awesome ride, but I have to face reality! I’m in debt and if I don’t control my emotions, I will stay in debt for the rest of my life! So what did I do recently? I sold my Altima and purchased a highly dependable but cheap Honda Civic. It cost me $2,500 and it purs like a kitten each time I fire it up!

My get-out-of-debt mobile! Yes, I can get my 6’8″ frame in there! :)

Invest Instead of Waste Your Money on Interest and Depreciation!

I recently heard a story about a salesman that set a goal for himself to earn $100k in a single year. If he succeeded, he was going to purchase a brand new Mercedes – and he was going to do it with cash. Well, he did in fact hit his goal. However, even after taking a test drive in his dream car, he decided to take his money and put it into a mutual fund. After 15 years, his awesome Mercedes would have been valued at $4,000, but guess what his mutual fund was worth? $256,000. Now, which would you rather have?

What if we did that same calculation? What if, instead of paying for a $20,000 over the course of 5 years, you put that money into an investment that earns you 10%? Do you know what that would be worth in 40 years? $807,000! I’d say that’s a heck of a lot better than having a brand new car once in your life…

Be Smart. Buy Only What You Need

Honestly, nobody really needs to buy a car that costs more than $5,000. Sure, you might not be able to buy an Infiniti like your next door neighbor, but who cares? Your next door neighbor is probably sinking financially! I respect people with modest cars far more than the Beemer that is financed for the next 6+ years. Be smart and purchase only what is necessary. You will be far happier in both the present and certainly in the far-distant future.

As a side note, you should also seriously consider donating your old car to charity. It may seem more financially sound to sell your old car for parts, or to have it scrapped, but there are a surprising amount of benefits associated with donating a car for charity. First and foremost, it can be used as a significant tax write-off, and just about everyone can use some help when it comes to taxes. Furthermore, it also gives you the opportunity to give something back and support a myriad of great causes. Not everyone necessarily has the money to donate to their charity of choice, but a car donation allows you to give something back.

Have you ever financed a car, or do you finance a car consistently? What do you think of it now?

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51 comments to Dumbest Financial Move? The Car Payment

  • Ryan

    I financed a 2 year old car right after I graduated college and got a good job. I had a pretty dependable car before that but I told myself I needed something better in the winter with 4wd. Now that I’ve had it for 2 years and its paid off it really hasn’t snowed enough to justify the purchase. I’m extremely irritated that I spent soo much on it too

    • Thanks for the comment Ryan. At least you did buy the car brand new! Then you really would have been kicking yourself! Sounds like you learned a pretty valuable lesson though – that will pay dividends in the future. :)

  • Bridget

    When i bought my last car I financed it but I paid it off in a year and a half. What a relief it has been not to have that payment and instead I’ve been puttung that money towards savings! Not having a car payment means I have more control over where my money goes.

    • It is great to be without that payment isn’t it? I’d much rather decide where to put my money each month, rather than have my loans decide… Thanks for the comment!

  • tinalouise

    Boy was I glad to see you cover this topic today! I love this site and can’t wait to see the new posts every few days. I am hoping some day you can cover people that have family members that require near perfect “clean eating” and strict home environments due to life threatening allergies.

    On the financial car issue…….In GA these car rules no longer apply though and it’s put a pickle on my family. The cash for clunkers program took all the used cars away. If your lucky enough to find something it’s priced way over what it’s worth and people will pay it. Then the cars usually comes with thousands of dollars worth of problems often even if a mechanic checked it out. We also have a lot of used car scams from Craigs List and a lot of flood cars. We literally saw a car recently that still had moldy water floating inside all it’s lights.

    My children have saved money for years to follow the used car plan and they literally can’t find anything and we have college right around the corner and we are really stressed about this.

    We are in a rural area and to be employed the family has to head out in different directions about 20 miles away one way. To handle this so far I play taxi and my husband helps when he can. But with 2 commuting to college soon I am really starting to worry about not being able to juggle this mileage and being in 3 cities every day.

    My husband and I so far have always driven Hondas and we keep them 17 years or longer each. We keep them in great condition and replace engines if necessary. But with the economy bad and pay cuts we have not been able to pass our family car plan onto our kids.

    If anyone with commuting college kids reads this and has a suggestion I would be so thankful and promise to pay it forward. I wanted to add that our kids will likely graduate debt free from college because they are commuting to college and they have earned the GA Hope scholarship. We may be paying 10-30% out of pocket. Living in a dorm (not covered) would ruin the plan and they also would lose their jobs with seniority. Plus jobs by the colleges require a car anyway and are hard to come by. One childs school does not offer on campus living anyway.

    We seem to have hit the perfect storm:
    - No teen jobs (thankfully we knew somebody that would hire them a 8-12 hours a week at minimum wage)
    -used cars are gone from cash to clunkers program
    -pay cuts abound with the parents
    -live in a very rural area and must commute for pretty much everything

    • HI Tina. It definitely sounds like you’re in quite a pickle. I have learned a few things recently regarding used car purchases. (1) You can find the car that you’re looking for if you constantly keep your radar up (that’s how I got my most recent Honda for $2,500), and (2) you don’t need to limit your search to your local area. I have a friend in Florida (1400 miles away from me) that I want to visit at some point this winter, so I keep my eyes open for car deals in that location as well. After all, luxury cars are much cheaper there. If you have relatives or friends that you’re going to visit anyway, expand your car search to those areas as well! I wish you luck!

  • skrpune

    Ugh, I feel like this is the umpteenth time I’ve had to “defend” my so-called dumb decision to buy & finance a new car. If you go reliable & reasonable & get a good rate, it’s not dumb. We traded in a paid off vehicle & are paying 1.9% interest on an AWD Subaru (it may not be a ton of snow here in Chicago winters, but streets & parking spots are slippery enough for me to warrant AWD or 4WD). We’ll end up paying less than $300 in interest, and the car payment is less than $250 monthly. I’m getting better gas mileage, too. I also negotiated HARD on this car & on the trade-in and ended up getting a wicked deal. And considering I plan on keeping this car for the long haul, it doesn’t sound so dumb to me.

    I don’t mean to come off defensive, but what may seem like a dumb decision to one person is not to dumb to another.

    • Hi Skrpune! Don’t appologize for your comment – I love to hear both sides of opinions. If everyone agreed with me everytime, what fun would that be? None! :)

      I do understand your position. There are some good deals out there when you finance a car. However, I just can’t get over 2 things. Depreciation and a constant payment each month. Do you think you’ll be as confident about your decision when you sell your car for less than half of what you paid for it? That part of the deal would just make me sick…

      • skrpune

        I can deal with a moderate monthly payment. And worst case scenario, if we need the cashflow, I can sell & pay off this vehicle & have more than enough money leftover to get a used vehicle if need be. For me, there’s peace of mind in knowing that I have a reliable, safe vehicle with good warranty coverage & much better gas mileage than I was getting.

        As far as selling it later, I am planning on driving this puppy into the ground! I see a lot of older Subarus on the road, and I’m not too worried about this car making it to its old age. That being said, I also am putting $ away on a regular basis into a car fund…just in case we have any unexpected repairs on or need to replace our other (9 year old, long ago paid off early) vehicle. Just covering my bases!

        The car we traded in was a Wrangler, and it was our second one. We made a killing both times – Wranglers keep their value better than just about any other car out there. We made almost all our $ back on the sale of the first one, and made out nearly as well with this last trade-in – it cost us maybe $3K to drive it for 3 years. Not too shabby!

        • You seem very sensible Skrpune, and you are obviously very logical with your purchases. But, why not just buy a car that’s 4 years old so you don’t have to pay all that depreciation? After all, most cars lose 50% of their value in the first 4 years.

          • skrpune

            Our first Wrangler was used about that age, and our second Wrangler was a “new used” car – had a couple thousand miles on it from dealership usage, but had no owners on the title, so we worked a good deal and still got to write off the purchase tax (oh how I loved that tax break!). With our last vehicle, I did research buying used, but honestly, the price difference wasn’t all that significant. We might have saved a couple grand, but we would have lost out on a few years of free warranty coverage and a few years of usable car lifespan. I was actually shocked at how costly comparable used vehicles were.

          • Very good Skrpune. It sounds like our differences aren’t really that severe. Carry on Skrpune, carry on. Haha. ;)

  • Totally with you on how a car payment strips you of wealth. I went from one extreme to the other (a Porsche to a 12 year old Honda!), but it was the right thing to do. I am finally car payment free, and as long as maintenance doesn’t exceed $2,000/year, the math wins! Great post!
    Tony@YouOnlyDoThisOnce recently posted..Mind Like Water

  • I agree with the overall concept of never having car payments, but I think that everyone’s situation is different. Yes, if you are buying a new car and financing it every 5 years, you are crazy. But if you do your research and get a great deal, then financing a new car isn’t always a bad decision.

    I was debating what I wanted in a car and realized that with interest rates so low (I got a 0.9% loan) that it made sense for me to take the loan. I keep the money I would have paid on the car invested in short term bonds which are earning me more than 0.9%. I just take the money out of that investment each month to make my car payment.

    I keep my cars until they start falling apart (read: 10+ years) so I’m not repeatedly buying a new car constantly. Will I be happy with the purchase when I sell it for much less? I guess I never look at a car as an investment anyways, so I don’t get disappointed when I sell it for less. I know I will sell it for less from the start.
    Jon @ MoneySmartGuides recently posted..3 Tips to Finding a Reputable Bankruptcy Attorney

    • Sounds like you’re sensible Jon. Since car loans are so cheap, I do understand the draw to just get it financed, but there are very few people that will actually invest the money that was earmarked for that car purchase. Most would spend it on other depreciating items, which then makes the loan a waste of money. As a rule of thumb, I just pay off all debts as fast as possible because there will always be a temptation around the corner for me to spend my money on foolishly.

  • I financed my first car after college, a new 2010 Honda Civic, at 0.9% and I could have paid cash. Instead I kept the cash in the bank and paid it off 2 years later. I plan to keep the car for at least 10 years and bought it in the auto industry’s darkest hour for an absolute steal when used car prices had skyrocketed due to the failing economy. I wouldn’t change a thing. I actually wrote a post on why I bought new on my blog and why I financed instead of paying cash on budgets are sexy… or maybe the other way around, I don’t exactly remember.
    Lance@MoneyLife&More recently posted..Four Ways to Split Expenses at Home

    • Sounds like you got a good deal, but did the depreciation bother you at all? I mean, say you bought the car for $16,000. In a couple of years, it’s going to be worth about $8,000. That’s a ton of money to lose on a car in just 4 or 5 years!

  • lisa lo

    Best – 1987 Ford Aerostar, paid 1,200 and it lasted ten years!

    Worst – GmC Sierra diesel 4×4 1996…the worst moneypit ever in all creation. I was GLAD to see it get repoed!!

    • Yep. One of the other things I don’t like about buying a new car is that they have no track record. Maybe they are the worst future lemons out there! You really have no idea until after you buy it. I’d rather buy a 4-year old car or older and take a look at the consumer reports over that time-span.

  • My last car was financed and I kept it 17 years. My new car is financed (1.99%) and be paid off in less than 4 years. I could have paid cash, but I will get a better return investing the funds. This will be my last car which means I will keep it roughly 15+ years.
    krantcents recently posted..How to Prepare for 2013 or Any Year!

  • The car that I am using is a sedan type and fuel efficient. I got it through car loan for 4 years to pay and I paid already since April 2012. I happy now that I am using my car without monthly payout.
    My Wealth Desire recently posted..How To Make Smart Passive Income and Become Wealthy

  • It really depends on the interest rate, but I do agree with you, a car’s value depreciates really fast and we will never be able to sell it for the same amount we paid for it. Though, I think if I keep the car long enough and make it serve its purpose, then it’s an investment worth having.
    The College Investor recently posted..How to Get Started with Minimalism

    • That’s really the largest negative to buying a newer car – that pesky depreciation part. Tack on the interest and it really becomes a raw deal! Thanks for the comment!

  • Great post.

    Living in NYC, I don’t have a car yet (or any of the costs associated with them; I consider myself lucky, actually). At some point when I move to the ‘burbs, I’ll obviously need to get one. And I will try like all hell to pay for it in cash, for the reasons you state above.
    Mike @Personal Finance Beat recently posted..★ My Budget

    • Glad to hear that you’re going to do your best to pay for your car with cash. You won’t regret it. Just make sure that you don’t get caught up in the “shiney car syndrome” where you keep convincing yourself that you need a newer and newer car (most people convince themselves that they’re buying a new car because it’s more dependable, but really, they just want a cool looking car).. Best of luck to you!

  • After having financed several vehicles over my lifetime, I can honestly say that NOT having a car payment is breathtaking.

    We currently have 2 vehicles (both paid for). Both vehicles have over 123,000 miles on each of them. One is 8 years old, and the other is 5 years old.

    I also plan on NEVER having a car payment again unless I can completely offset the payment to purchase it by using other income producing methods.
    Chris recently posted..Early 2012 tax filing checkup

    • Glad to hear it Chris! You’ve become very wise over the years huh? I’d say most definitely! Keep paying for those cars with cash and live below your means. Stick with that and you’re far wiser than most people in America today.

  • I paid off my five-year car loan Over a year ago. It feels so nice not to have a car payment. However we plan on having kids within the next few years and will need a family car. Neither of our cars will hold a car seat. We been focused on paying off our student loan debt and saving money but I don’t think we’ll have enough to purchase a family car with cash. I just don’t see a way out of financing a car…but if we do go with a loan, I want to keep it to three years max.

    • There’s always a way to avoid a car loan. You want a family vehicle right? Well, although it isn’t flashy or “cool”, the minivan is defniitely the way to go. It’s handy, plus they become extremely cheap as a used vehicle! If you can sell one of your vehicles for $5,000, you could buy a pretty nice looking minivan for straight up cash. :)

  • I think you are talking about two things in your article – having a car paymet forever and having a car payment for a bit. The first one has some downsides, as you’ve mentioned. The second one depends on the situation. For us, the car financing was way less than the mortgage or any after tax return, so we financed 100% of it. As others have mentioned, the price difference between new and 2-3 yrs old also made the decision pretty straight forward. For us and our situation/vehicle needs, it definitely made the most sense.
    Anne @ Unique Gifter recently posted..Malibu Mail – Random Acts of Kindness

    • Thanks for the comment Anne! You know me, I’m just anti-debt all around. What if you lost your job recently and weren’t able to make your car payments? Then what happens? The bank takes your car away! Well then what? Well then you have very little hope of finding a job and holding one… and it becomes the start of a downward spiral. Owning your important assets free and clear is essential when hard times happen.

  • I felt the same way when it came to student loans. We only paid $3k in interest but would have paid $11k if we took 10 years to pay it off by making minimum payments, $24k if we took 20 years… seems like such a waste of money to me!
    Jessica @ Budget for Health recently posted..Choose fruit for dessert (and cover it in chocolate!) for Valentine’s Day

    • Yep. There’s really no reason to hold onto those loans! Congrats to you for paying those loans off early! Having no payments on anything is a wonderful thing. Oh, and I saw that your bid was approved on your future house! How exciting! Congrats!

  • In my opinion it’s all relative as to what you value in life as remember it is short. If you save your entire life for that car and miss 20 years potential enjoyment, is that really worth it. Obviously it would be silly to get a car you literally could not afford however stretching is sometimes worth it!
    Chris@The Credit Cat recently posted..What should you invest in, in 2013?

    • For me, a car is not a goal to acheive, it’s just a means of getting me from point A to point B. Every “awesome” car that I’ve ever driven – the feeling of excitement goes away in about 2 weeks. It’s never worth the amount of money that I’d have to pay to have 2 weeks worth of enjoyment. In short, it’s just stuff, and stuff won’t make you happy.

  • I agree that car payments should be avoided if at all possible. We paid $5,000 cash for our first car. Our current vehicle was purchased new, and Ford was offering a $1,000 discount if we financed… so we took the financing… and paid it off in three months. Those three months sucked! Each time we received a bill, I felt like I was being reminded that we didn’t actually own our vehicle free and clear. I could never be comfortable making a long term car payment.
    Julie @ Freedom 48 recently posted..Product Review: Nellie’s Laundry Soda

    • Sounds like you love the feeling of no payments, just like me! It’s a great feeling to do what you want with your money, rather than having bills come in your mailbox that tell it where it’s going… Good for you!

  • You are 6’8″ and you fit in a Civic?! I’m totally telling my 6’1″ husband to shut it about his Accord.

    That said, I hate car payments, I’ll have them if I need to but you can bet I’m paying them off as soon as possible. I refuse to believe that car payments are a necessary part of life.
    Jana @ Daily Money Shot recently posted..How to handle someone laughing at your dream

  • I bought a new car once, when I graduated college. I will never make car payments again. The value of the car depreciated and I was left with nothing at the end of a four year loan. Now I get good used cars, maintain them regularly and get full insurance in case of an accident. That’s another financial tip I learned the hard way. An accident can cost you a lot of money if you just have minimal insurance.

    • That’s a typical thing for college grads to do – they buy a new car to reward themselves for all their hard work. But, most of the time, they don’t have any money when they do it! I’m glad you won’t ever do it again. You’re on your way to great wealth!

  • I do agree that for many people car payment drags for several people and not to mention the interest you are paying, and the loss of leverage while negotiating the car. I personally have never bought cars on finances for these reason.
    Buy & Hold Blog recently posted..S&P 500 and Dow Jones Nearing All Time High

  • I recommend that everyone should watch the movie “Craigslist Joe.” You can watch it for free on Hulu. It’s a good lesson in extreme frugality, but the point I wish to get to here, is sometimes you can find free cars on Craigslist. Of course, you have to do your due diligence before you take something for free to make sure it’s actually a good deal, because if it needs thousands of dollars of repairs (or there’s a dead body in the trunk), that isn’t a good deal.
    John Fisher recently posted..Frugal Kitchen Tips Reviews

  • Claudzilla

    Derek,
    I recently gave up my ten year old Kia Rio, bought new at a bargain basement price, for a 6 year old Mazda5. I had to finance the Mazda, but determined that now that I have two kids, I had to have something bigger than the Rio. I financed through my employer, a bank, so the rate is pretty good, and the loan is only for three years. Once it’s paid off I plan to drive this baby for as long as she’ll last me. I was without a car payment for a decade and don’t relish watching $200 go out the door every month.
    However, I took my time finding the car I wanted, and shopped online to get the best deal I could. Also, I hope to be able to pay this thing off early, if my savings plan stays on track for the next year or so.
    Sometimes it’s nearly unavoidable to finance, but research and patience help take the sting out of it, to a degree.

    • Hi Claudzilla. While I understand your situation, I think financing is 100% unavoidable. It doesn’t sound like your Kia Rio was ready to die or anything. You could have held onto it for another year and saved up your bucks for a larger dependable car, like an old dependable Buick. You could have paid cash and gotten what you needed. I imagine that the Mazda 5 wasn’t all that cheap compared to other larger cars that were on the market.

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