A person I know recently financed a brand new vehicle (a rather expensive one at that). They financed it for six years and rolled a couple thousand dollars from their trade in into the new loan (since they still owed some money on that vehicle). The monthly payment was almost as much as their take home pay from one week. Most financial advisors suggest not spending more than 25% of take home pay on a mortgage or rent. This co-worker is spending nearly that much each month on just their car note.
I told myself for years that I would never get a car loan. I purchased my first two vehicles used and with cash -- no loan required. But when I became pregnant and needed to get a vehicle with a back seat (I was driving a Smart car at the time), my vision became hazy. I sold my Smart car but didn't have a replacement. I got in a hurry. I went to dealerships looking for decent used vehicles. I ended up walking away with a brand new car, justifying it with all the normal excuses (The payment isn't the much... it will be safer and more reliable for my baby... it will last me a lot longer than it will take me to pay it off...) I still value my car (if I didn't, I would sell it), but I do not want to fall trap to the temptation of a new vehicle, even one with a tiny payment, ever again.
The payment was small -- less than $300/month. The interest rate was just under 2%. It felt like they were giving me the money for the loan. And that new car smell... But with a six year note, I still have four more years of paying for that vehicle. By the time I have it paid off, the car will have lost more than half of its original value. I should still have several years of use left in it (possibly 6+ more years). But many people, like in my example above, go out and get another financed vehicle before they are even finished paying off the first one.
On average, a car depreciates 24% the first year and then 6% per year after that. When financing a brand new car, it is tempting to believe that we will have that vehicle forever. But what if something changes in our financial situation after year one? What if you can no longer afford the payments or you want to quit your job and do something different? The car has lost about a quarter of its value and yet you probably still owe about 84% of the loan amount. You're upside down.
My husband was driving a single cab truck. We're expecting kid #2 now and decided it was time for him to get something with a back seat. Instead of seeking out a brand new vehicle and taking on another car loan, we bought a used vehicle and paid cash. This is a risky decision as well because we do not know if this used vehicle will have a bunch of issues and if we will end up paying a lot of money in repairs. But we are trying to do the responsible thing and avoid more debt.
Vehicles are an expense (versus and investment) that depreciates in value every single day. I think a lot of people are falling trap to the easy car loans available today. But the more payments you have going out, the less money you have to invest and the less flexibility you have with your money. The borrower is slave to the lender.
Just some things to think about before your next car purchase. I believe the bubble in the auto industry will pop pretty soon. Time will tell.
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