I hear it all the time. Having an auto loan is normal and just part of life. America loves its automobiles and nothing is wrong with this. We like the freedom it provides to travel and get to the place we want to go when we want to get there. Also, it is often a status symbol of wealth and success for many people.
An auto loan does not have to be a normal part of life. Don’t try to keep up with the rest of society and the neighbors on who has the nicest mode of transportation. The claim that auto loans are just a part of life is not true. It is true that it keeps a large number of people broke and in debt.
Why would you want to be normal and like everyone else?
New cars have become more expensive over the years. As a result, banks have started to increase the available loan periods for them. This is leaving an increasing number of people locked into the debt of payments on an automobile. It holds them back from living free of debt, saving for retirement, and building wealth. Having an auto loan can limit financial goals.
An auto loan does not have to be a part of life and it shouldn’t be. When it comes to things you buy that establish debt, why would you want to be normal? Being normal in this case can mean keeping a job you hate or having to retire much later. Your hard-earned money goes to making a car payment. Most cars are not a wise investment. They depreciate quickly and become almost worthless as scrap metal if kept until they die. There are only rare automobiles that appreciate in value.
Don’t be normal. You can buy a reasonable dependable used car outright and save money compared to a new one. This will allow you to save for more important financial decisions.
The Normal Arguments for Having an Auto Loan
The people that take out auto loans each time they need a car always have a reason. But there is never a good one.
One of the first reasons already covered is the claim everyone has auto loans. This is not true. There are plenty of people that do not put themselves in debt by buying a car through taking out a loan.
The second claim is reliability and loans are the only way to purchase a new car that has a great warranty. Yes, this can be true. But it is likely when a warranty expires payments will continue. Most bumper to bumper auto warranties are 3 years or 36 months. They can differ. But this is somewhat standard with many manufacturers. Five years for an engine and powertrain. With loan terms from 60 months and up the comprehensive warranty will expire during the payment period. The response to an expired warranty many times is the purchase of an extended one. However, it can be expensive and is rarely worth the money spent. Also, car manufacturers do not make cars to break during the warranty period. It can happen but is not likely. Most non-routine repairs and the more costly ones will happen once the warranty is gone.
A reasonably used vehicle can be very reliable. In fact, cars that reach 50,000 miles may just be broken in at this point. With a minimum amount of maintenance, many vehicles can reach 100,000 miles without many problems. A car that is well taken care of may go even further.
These are not the only reasons for having an auto loan. There can be many others and people always come up with something to justify the debt and be normal.
Why are Auto Loans a Bad Idea?
The best auto loan is not having one. Loans equal debt. There can be types of debt that may be good. For example, leveraged debt is not always bad if there is good certainty of making more money. However, auto loan debt is a depreciation debt. This is especially true on a new car. These usually depreciate 22% in the first year and about 55% after five years. With average auto financing at about $31,070 according to Edmunds, this deal results in a vehicle valued at $13,981.50 after five years. This can vary depending on condition and mileage, but there will be a large loss even with an immaculate car.
Being Upside Down
Depending on the down payment made financing a car, it could be worth less than owed in the event an accident occurs. With finance charges and all the extra add-ons car dealers put on the final invoice, more money is always paid for a new car than the insurance value. Thus, owing more on the car than it is worth. There are protections for being upside down on an auto loan. Car dealerships will be happy to provide them at a charge. As a result, it will cost more.
A Financed Car is Not Owned
When you finance a vehicle, you do not own it. The lender does. This should not be a surprise to most people. Yet, a lot of people that take out an auto loan say they own a certain type of car when asked. This is not true. Until paid off, the bank is the owner.
Not owning the automobile a person drives can cause a serious issue since it is the way to get to work for many people. If a person loses their job and falls behind on the payments, the stealthy repo man will come. Without notice they may take the car. The lender may be somewhat nice at first offering the chance to drop a car off, but eventually, they will get it either way. Having a car repossessed due to a job loss only creates more problems by not having one to look for another employer. Getting to interviews will be a challenge with no transportation.
Being Stuck in Debt and Poor
Being in debt is a major issue with taking on an auto loan. The truth is that 1/3 of all car loans are sub-prime. This issue has always bothered me the most with car dealerships. Having poor credit does not necessarily prevent a person from financing. A large number of car dealers’ prey on people with low income and bad credit. Not all car dealers are bad, but in my opinion, most are evil.
New car dealers advertise low payments, no money down, and even free vacations for purchasing a new vehicle. In addition, they may have offers like cash back and “free” big screen televisions or computers with the purchase of a vehicle. Low-income families and people in major debt can be enticed by arguably what should be illegal advertising. If you did not already realize this, businesses do not give things away for free. Car dealers will more than make up for the freebies they hand out. With an 84-month auto loan at 16% interest, it does not take long for an auto dealer to make a profit.
The “Buy Here, Pay Here” car lots are even worse than the new car dealers. Buying from them often means having some of the worst credit. Furthermore, the cars they carry can be questionable many times when it comes to reliability.
Struggling to make ends meet and taking out an auto loan will keep a person from getting ahead. It creates a vicious circle of debt.
How Does Someone Find a Reliable Used Vehicle?
If you have decided that an auto loan and even paying cash for a new car is not a good financial decision, how do you find a reliable used one? I am not going to stretch the truth here. It can be tricky finding a good reliable used car and a gamble. However, the odds are in your favor to not only find one but be able to afford any issues that come up along the way. The warranty argument for having an auto loan is somewhat true. If you finance a new car, there will be a warranty for a period of time that will cover anything that comes up. But you will pay and be paying for this.
According to AAA the average auto repair bill is between $500 to $600 dollars. This is no small bag of peanuts. The mindset a person must have when buying a used car for cash is to play make-believe. Set an amount as a car payment and put this away each month. If something comes up, the money will be available to pay for repairs. Even a good used auto needs occasional repairs. But also, new financed cars will as well. Things like tires and breaks all need to be replaced at some point. In addition to routine things that wear out, a regular fantasy car payment will also add up to properly maintain a used car. This will ensure it gets the maximum life. When you can pay cash to follow all the recommended maintenance it makes it much easier. Thus, a used automobile can last quite a long time.
But What About Major Repairs That Could Happen?
It is unlikely a decent used car will be in the shop every month. If this were to happen repeatedly, it would be time to cut it lose and unfortunately try again. This can happen, but it is rare. New cars there can also be a lemon here and there. The good news is with money put aside even a blown engine or transmission would not be out of reach to repair if it is worthwhile to do so. This is not a bad thing. Replacing a major component can make it last much longer. For example, a properly rebuilt engine could run another 100,000 miles.
Selecting a Used Car
- Ideally, try to buy one that is 3-5 years old with low miles. Within this period the first owner will have paid for much of the depreciation. At five years with someone only putting 10,000 miles a year on their car, there will be plenty of years left on it.
- Don’t buy for flash and flair. Exotic luxury imports will often have issues and buying them used can be a nightmare. They will require specialized parts and mechanics that know how to work on them. It is not a matter of how much will it cost, but how expensive it will be.
- Do your research. This is a big one. Personally, it can take me months of looking into things before I ever make a final decision. Check places, such as Consumer Reports and Edmonds. Read reviews, recalls, and maintenance ratings before deciding on a make and model. Furthermore, compare prices and crash test ratings. This last one was always especially important to me having a daughter to drive around. You don’t want to buy a car that everyone is trying to get rid of cheaply because it has a horrible record when there is an accident. Researching the fuel economy is also a good idea. If you are trying to save money and remain debt free, buying transportation that only gets 10 miles to the gallon is a bad idea.
Once a decision on the possibilities is made, it is time to start casually shopping. There are really only a few choices on where to buy. Either a car dealership or a private seller is the two most common. Some people buy cars at auction, but this takes someone that really knows what they are doing. If you are not extremely knowledgeable about the mechanics of a vehicle, I strongly suggest not to go this route.
Buying a Used Car from a Dealership
A decent deal can be made at a car dealership on a used one. Yet, be aware that these are money makers for them and they will try to make the most they can. Don’t ever let them talk payments. You are not there to finance in the first place and they will figure out what you may be able to afford. The sales person will try to push the most expensive. Tell them you are only interested in price and the finance rate you can get. Yes, I said finance rate. You are not going to take out an auto loan, but let them think you may.
Test drive the car and look it over. Agree on a final price in writing and then tell them you are going to pay cash. This will come as a surprise, but make sure you have the out the door price before doing this. Before this happens, they may offer a lower price. The sales person will think they can make up for it with finance charges and ad ons. Get the price in writing before spilling the beans and telling them it will be a cash deal.
Buying a Used Auto from a Private Seller
Purchasing used from a private seller will most often get a lower price than a car dealership. This can be a gamble, but it may also be a great deal. The reason for this is a private owner may need the money. Offering cash goes a long way. Always start much lower and you can go higher in price at that point.
The gamble with a private seller is they could be trying to pull one over the buyer. Car dealerships will do this as well, but they have more to lose with their reputation as a business. Look the car over and give it a test drive ensuring to check everything you can.
Buy Here Pay Here
I did not include this one even in the options. Do not buy from a “Buy Here Pay Here” car lot. There are always exceptions to everything. But they notoriously have a bad reputation and often prey on people with poor credit and low income. It is best to avoid them unless you really know about cars.
Before the Deal
Before making a deal on either purchasing from a private owner or dealership, check the Carfax. This is an online service that may cost a few dollars, but it can be worth it. The service checks for accidents, insurance claims, and any additional reported items. The seller either private or dealership may offer it to you. The dealerships often will these days, but get your own report. It is not fun, but don’t trust the seller. They may be honest, but you never know.
The Carfax report can tell a lot about a vehicle. I was once even given one at a large dealership only to recognize the car they were trying to sell me was used as a taxi at one time. No thanks, I will pass on that one.
Keep in mind that a Carfax is not a tell-all story. If something happens to a car and it is not reported, there is no record. For example, in recent years with a major hurricane, cars were being sold with major damage that was never reported for insurance. Just make sure to do your research.
Take It to a Trusted Mechanic Before Buying
Before purchasing a used vehicle from either a car lot or a private seller take it to a trusted mechanic. This may cost a few dollars, but a good mechanic can recognize issues and will be well worth the money.
Ask for Extras
Asking for something extra only applies to buying at a car dealership the majority of the time. This is one that has worked for me repeatedly. The one thing about buying a used car is often it may need new tires. If the price is right or on the fence, ask for a new set to be put on as a condition of purchasing. You will be surprised at how often you can get something thrown in. With auto dealerships, they want to make the sale at almost any cost as long as there is a profit. They have sales goals to meet and will do just about anything to make it happen as long as it increases the bottom line.
The truth is when a car is traded in for a new one the auto dealer always gets the upper hand. It may appear that trading in is a good deal on paper, but they will make up for it someplace else.
If a deal seems bad or you get a gut feeling, always walk away. Walking away even when the deal is right may even be something you want to do. This is particularly the case with buying used at a car dealership. If you are on the fence about the price, walk away. I almost guarantee they will be calling you with a lower price as soon as you walk out the door.
Auto Loan Contradiction
Taking an auto loan makes no sense in almost all cases for new or used. But we all live in the real world and sometimes it just has to happen. Yes, I am saying this even though I just got finished explaining why not to take an auto loan. Let’s be honest, not everyone is in the same situation or is as fortunate as others. Having a reliable vehicle in many parts of the country is needed to get ahead and live life. We often need them to get back and forth to work, go to the grocery store or pick up our children. Arguments could be made to take a bus, taxi or Uber. But this is not always possible.
If you can find other means of transportation until enough money is saved to buy a reliable used vehicle this is the way to go. It does not make sense to buy one that is so close to being scrapped it will always cost money almost every month unless you are a very good mechanic yourself. If times are difficult, try to save as much as possible to buy something reliable in order to pay for it outright. If a small loan must be taken, pay it off as quick as possible and start saving for the next used auto. Trade up when you can. Not having much money to work with will already be stressful. Buying a used car that is on its last legs will increase this stress immensely. Make sure to buy something that can get back and forth to work to move out of car debt quickly so it does not happen again.
Take No Auto Loans Except in Very Rare Situations
Not taking an auto loan may not be normal to a number of people, but with depreciation it is the smart thing to do. Used vehicles are also best to buy due to the rapid loss on investment, but if you want a new one cash is still king. Not everyone has the same opportunities at any given time and on a rare occasion the smallest auto loan may be needed. This is just a reality for some people that may be less fortunate.
The mindset to be in to never have an auto loan is to pretend there is one. Place a payment away each month for the next purchase and repairs that may come up. In the case of someone that has no choice, take out the smallest loan amount possible and pay it off quickly to then put that same money into an account each month. This will result in the circle of debt not being repeated.
Take Your Time Shopping for A Used Vehicle
Do not rush into buying a used car. Do the research and work to get the best price and reliability. If shopping at a car dealership, play the game the way you want to play and ask for extras. Don’t be afraid to walk away if something does not seem right. You may even get a better price by walking out the door.