April 05, 2018
I can learn so much about a household’s commitment to building financial security by asking them about their car.
And from what I hear and see these days, plenty of you are being down right dumb when it comes to financing a car purchase.
The average length of a loan to buy a new car is close to 70 months. Are you kidding me? That is way too long, and a tip off you fell in love with a car you can’t truly afford, and taking out a way-too-long loan was the only way to get the monthly payment down to where you could “afford” the car.
A 36-month loan is a sign of being financially smart. I will even give you a break if you decide on a 48-month loan. But 70 months or longer? That’s nuts.
Fall in love with your IRA or your home. Those are assets that over time may increase in value. A car will never, ever increase in value. It is a depreciating asset that loses about 20 percent of its value in the first year. And keeps on falling from there.
And don’t tell me that cars are just expensive, and you had no option but to take out a long loan. You are so not standing in your truth. The car you want may be too expensive. The car you need can be very affordable. All it takes is a willingness to only shop for cars that make financial sense. A new car or a used car that you can pay off in three years is living within your means.
And for all of you with a long car loan, you better keep driving that car for a long time. But that’s not what many of you are doing. Edmunds.com reports that last year about one-third of cars that were traded-in had “upside down” loans. That is, people traded in a car that was worth less than their loan. So they had to come up with cash to pay off the loan on the car they are trading in, to finance the car they want to buy. No problem says the auto loan industry: they will sell you a new car with a loan that includes the money you need to pay off the loan from the car you want to trade in.
That’s a very big problem if you happen to care about building financial security.