Why Auto Loans are a Bad Idea

Our society creates unnecessary problems by borrowing too much money. There are many great articles published on why getting into credit card debt is bad. There are also many excellent articles on how the United States government is going to continue to borrow money until the whole country is bankrupt. This article is not going to cover either of these topics. Today, we are going to look at the auto loan.

When you finance a vehicle, you pay much more for it than if you simply saved money to buy it outright. You wouldn't pay $4.00 a gallon for gasoline when you can get it anywhere else for $2.00 a gallon. So, if we are so against paying more than we need to for small purchases, why should we pay more than we need to for big-ticket items? We should not be doing this.

Let's examine this further. Two people spend the same amount of money on a car. Dave goes to his local car dealership and gets then entire amount of his car financed. He gets a loan for $25,000. He agrees to pay $506.91 for 60 months, with an interest rate of 8%. On the same day, Steve elects to save $500.00 a month in his bank account giving 4% interest until he can pay $25,000 cash for his vehicle. Let's compare these two scenarios.

By the time Dave pays his loan, he will actually have paid a total of $30,414.59. $5,414.59 was the interest that the bank gained. That could have financed a great vacation. It did, but not for Dave!

Meanwhile Steve has $25,000 saved in four years and two months. He didn't make any withdrawals prior to getting his car, so he has almost $2000 left over in his bank account!

For over four years Steve had to resort to public transportation, bumming rides, and driving an old "beater" until he could actually afford the car he wanted. Dave elected to get a car right away. At the beginning, it seemed like Dave was better off. Let's fast forward four years and two months later.

Steve now has a brand new car that is paid off. Dave still owes $4413.76 on a car that is four years old! This four year old car is now worth only half of its original value.

Remember, Dave was fortunate enough to keep a job through the life of the loan and make EVERY payment on time. If he was late on any of his payments, the interest and late fees he would incur would cost Dave even more. 

Jobs today are not secure. If you lose your job and can't afford to make your car payments, the finance company will repossess it. If you don't pay the back payments, late fees and repossession costs, the finance company will sell your car at auction for a fraction of its actual worth. If the balance of the loan is greater than what the car sells for (it almost always is), you are still going to owe for a car you can't drive any more.

Why else should you not get a car loan? You should invest in your future, not someone else's.

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Comments 1 comment

saseme 5 years ago

What if you lose your car in an accident and a loan is your only option? Not everyone has money laying around for a car.

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