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The Two Biggest Mistakes You Can Make When Buying a Car

April 16, 2015 at 12:00 PM

If you lack the cash to buy a car free and clear, you really need to hear me out on the two worst financing moves you can make. What I am about to tell you can save you hundreds, if not thousands of dollars. And trust me, this is exactly what car dealers and financing companies don’t want you to know:

A car loan longer than 36 months is a waste of money. I know, I know, there are all those great looking ads showing how “affordable” a payment will be with a 60 month or 72 month car loan. Don’t fall for it. For starters, we need to get on the same page: A car is the worst investment. Why? Because from the moment you drive it off the lot it loses value. You will never recoup what you paid for the car when you eventually sell it. Got it? Good.

So if you’re going to lose money on this deal, why would you agree to pay more interest on the loan? That’s exactly what you end up doing when you choose a longer repayment term.

The reason the car industry hawks five year (and longer) loans is because they want to entice you to buy a more expensive car. The longer the term, the lower your monthly payments. But what they don’t point out to you-and I do-is that because the payments go on for a longer time, you end up spending more over the life of the loan….for a crappy investment.

My advice: Shop for cars that you can pay off with a three-year loan. No more.

Leasing is the Worst Way to Build Financial Security. A shiny new car every three years seems so enticing. But have you every stopped to consider the cost? If you are leasing and trading in, and then leasing again, you never own the car free and clear. You will be making monthly payments forever. That is a colossal waste of money. If you instead follow my advice and take out a 3-year loan, you will own the car free and clear after 36 months. Given the dependability of cars these days, that could mean you could keep driving the car for five, seven or even more years (depends on your mileage ) without having a loan payment. That gives you years when you can be saving more for other important goals—such as retirement-rather than continuing to throw money at your depreciating car.

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