If you are looking to get a car and you don’t have enough money saved to purchase the car outright, you may be tempted to finance a car so that you don’t have to wait. Most young people long to have a nice car. It is part of an image that they want to obtain. Plus, after they graduate from college and get a decent paying job, they feel like they have all this money to throw around. Yet, if they want to save up for a car, that would mean a lifetime of waiting to purchase the car of their dreams. The next best option then is to finance the car. This means there is no waiting – we do live in a “microwave” culture of wanting things now, now, now! Yet, financing a car can be a huge mistake!
Why Financing a Car Can be a Mistake
If you are looking to take a loan out on a car, you should consider the following reasons why it can be a mistake:
- Owe More Than You Have: It is well known that cars are a depreciating asset. Cars, especially new cars, lose value pretty fast. If you have a long enough car loan, it is possible that the car will be worth less than what you owe. This means that if you ever had to sell your car, you would lose money. Even if you don’t want to sell it and plan on keeping it, if your car gets ‘totaled’ (beyond repair), the insurance agency will only give you the current value of the car. This means that you have to find extra cash laying around to pay the difference before you can even look at buying a new car. Then, where is the deposit going to come from for the next car? You are forced to go further into debt.
- Necessary Repairs: It was just a few months ago that my friend’s car broke down. The engine needed to be replaced. I guess I should clarify that it wasn’t a small car – it was a SUV, with a costly engine. The total repair costs were about half of what the car was worth. Usually this kind of necessary repair on vehicle that is 10 years old would suggest that you just sell the car for scrap metal and buy a different one. The only down side is that they still owed as much as the car was worth (if the engine didn’t need to be replaced). If they chose to scrap it, that means that they would have had to either pay off their entire loan (which they couldn’t afford to do) or keep paying the payments on a car that they were no longer driving. All of this while having to get a different car that was running. Long story short, they ended up fixing the car by scraping together some savings (that was supposed to go towards a down payment on a house) and cross their fingers that nothing else goes wrong with it before it’s paid off.
- Paying Interest: Another reason why it is a mistake to finance a car is that you end up paying more for your car. Unless you are getting a 0% rate, you are paying more money for the same amount of car. If you felt good about yourself because you negotiated a lower price on the car, but then took out a loan with a 4% interest rate, you should think again!
An Alternative to Financing a Car
An “easy” way to avoid taking out a loan for a car is to save for your next car before you need one. I am currently driving a car that is 7 years old. I estimate that I can drive it at least 3-4 more years before any major repairs might come up. While I’m not sure that I would sell my car in 3-4 years (because I love it and have had very few problems with it), I know that I need to be prepared.
If I start saving now (like I suggested in my short term financial goals), I could save a $167 per month for the next 4 years and have $8,000 to put towards my next car purchase. When you consider that my car will still be worth $4,000, that means I can buy a car worth $12,000 in cash. The best part is that this means I don’t ever have to stress about how my wife will get to work or how I will pay for necessary repairs. By simply planning ahead and saving first, you can avoid the same horrible situations.
Do You Finance Your Car Purchases?