Just the other day, I read an article about paying down your car loan and the author suggested that a car loan should be paid off before you start paying down your credit cards (if you are trying to get out of debt that is). He had five solid reasons for doing so, but I just didn’t buy it. So, I left my opinion in the comments section:
All of the reasons make sense, but I just can’t get over the fact that you will be losing more money to that credit card interest (because it will almost always hold a higher percent interest than the car loan). I would recommend selling the car, paying off the loan immediately, buying a $2,500 Buick that will run solid for a few years, and then pay down the credit card aggressively.
I was nearly laughed off the page!
The author agreed that my plan made complete sense, but felt that no one would seriously take the advice because of how much we identify with our cars (“we are what we drive”).
This is total crap.
I mean, yes, I agree that people are quite attached to their cars and will likely not sell them in order to get themselves out of debt, but why the heck not? If you had a car that cost you $450 a month in payments and you were barely making it through each month financially, wouldn’t it make your life a whole lot better to just sell it, buy a car for a couple thousand bucks that will run for a while (there are plenty of these out there), and then live life happily with an extra $400ish dollars in your account each month? Am I just too logical a person?
Reasons why people won’t do it
No matter how logical my advice is, I think the author was right. Chances are that 95% of Americans will not take it. Here’s why:
- People will likely learn that you are tight on money and might talk about you behind your back
- Embarrassment for driving a 10-year-old car
- They “won’t be what they drive” and won’t feel powerful or confident when they drive a hunk o’ junk
- Each one of us wants everyone else to believe that our lives are amazing and we are in complete control
Basically, we are all afraid. Afraid of what others might think about us if we drive an old, non-stylish vehicle. Do you know what though? Only the broke people are impressed with what you are driving. Those that are financially wise secretly think you’re a moron for spending your future life-savings on a metal box that gets you from point A to point B.
If, however, you choose to buy a cheap Buick and start putting more money into your 401k, the personal finance gurus will start nodding their heads in approval.
Reasons why they should do it
So if you are one of the few that is actually considering selling your expensive car and ditching your payments, here are some reasons that might motivate you to do so:
- No more payments on the car means that you will have additional money at the end of the month
- Your car insurance will cost much less
- You can easily tackle your debt and have even more money left at the end of each month
- When the debt is gone after a couple of years (vs. NEVER if you keep the expensive car), you can invest heavily and be wealthy for once
- Your retirement will be lavish and full of fun and memories (vs. a crappy broke life with a sweet car)
You might not think that luxury car payments would really make that much difference, but let me surprise you for a moment. If you are 30 years old and decided to buy a $45,000 vehicle today, you would postpone your retirement for 10 full years. That’s right! Instead of retiring early at age 55, you will have to drag yourself to work for 10 more years until you reach 65 years of age.
By paying for a cheap car with cash, you are saving yourself a life-time worth of payments, saving money on insurance, which will then allow you to invest in your future. You could put your extra money into a 401k. You could invest in real estate. You could even start your own business! The options are endless!
Are you ready to sell your car to get out of debt?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.