Why You Should Never Finance A Car

Oink Oink, Piggies!

That “new car smell” is fantastic, isn’t it?  Well, here’s a piece of news for you: new cars don’t stay new.  But many people find it hard to resist buying a new car.  New-to-you used cars are also an option which people pursue.  But the problem is that many people buy a car they simply can’t afford.

Most people don’t actually “buy” a car…they “finance” one.  You should never finance a car.  Ever.  Here’s why.

You should never buy a car you can’t afford.  If you finance it, you can’t afford it.

If you finance a car for whatever reason, you can’t afford it.  0.9% APR so you want to borrow money?  You can’t afford the car.  You have the cash in the bank but don’t want to deplete your emergency fund?  You can’t afford the car.  0% interest?  You can’t afford the car.

Now I hear the trolls pounding away already: “If I invest the money I would have otherwise put into the car at a low interest rate, I can make more over the life of the car loan!”  That’s stupid.  For one thing, car loans are up to 6-7 years (which is ridiculous in and of itself), and in the markets, there’s a good chance you can lose money in as short of a period as that.  For another thing, if you never missed or made a late payment and had an extremely low interest rate, you’re looking at having “made” a pretty small amount that’s really not worth the hassle.  …And for another thing, if you miss or are late to one payment, you can be hit with fees, interest rate bumps, etc. that can instantly demolish any tiny gains you might have otherwise got…and more.

Other trolls are saying: “I need a car for my job!  I need a car for my family!  I need a car for (insert reason here).”  You may, indeed, need a vehicle for transportation.  But there are plenty of vehicles that don’t cost $30,000-40,000.  (The average new car/truck price in 2015 was an incredibly high $33,560).  If you absolutely have to have a car, buy one with cash.  If you don’t have enough cash to buy the car, you clearly cannot afford that car.  In that case, you should probably find a cheaper one.  You can always sell it later on and buy a better car down the road.

Dave Ramsey recommends something like this with regards to buying a car if you need one: first, buy a car with cash that you can afford, get by with it until you save up more…and then if you want or need to, sell the car, and buy a better one you can afford with cash later on.  This process ensures you never finance a vehicle.  Now, should you ‘upgrade’ your vehicle as Dave Ramsey says you might want to do when you save up enough for another one?  That depends on what your family’s needs are, how much you have saved/invested, how much you’re making, etc.  The bottom line, however, is that you don’t ever borrow money for a car.

Just Because You Have Enough Money to Buy a Car with Cash Doesn’t Mean You Can Afford It.

This is important.  Let’s say you have only $30,000 in your checking account, you make $45,000/year, and that’s all.  Can you afford a $25,000 car?

No.

Why?  While you might have enough money to write a check for the car, you can’t afford it.  You’d be down to $5,000 in savings, which is likely not enough savings for even an ’emergency fund’ or ‘rainy day fund.’  Cars cost money to maintain and run, and insurance on a higher-valued car is more than on a lower-valued one…meaning your insurance expenses are going to be higher than if you had a cheaper car.

The bottom line here is that just because you have enough cash to buy a car doesn’t mean that you can afford it.  Only buy a car you can afford.

Cars lose value.  A lot of it.

Cars go down in value.  That’s common sense.  Your car will be worth less next year than it is worth now.  That’s a fact of life.  So, why would you borrow money to buy something that will only go down in value?  If you want to be poor your whole life, be sure to borrow money to buy things that go down in value.

Bottom Line: Don’t Borrow Money For A Car.

Oink oink!
-Mr. Piggy Bank

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