Title Card For Car Loans
Saving Money,  Stop Being Broke

5 reasons why car loans aren’t a smart choice.

With the holidays coming soon, you will begin to see a lot of commercials for cars. Because nothing says “I Love You” like a new car and car loans.

When it comes to buying big purchase items, it seems that commercials have somehow convinced Americans to buy those big-ticket items during the holidays.

It’s evident the pretty people in the commercial are happy when they get their significant other a new car. If the pretty people in commercials seem so happy, your life will change as well if you get your significant other a new car. Which is all the reason why you should get a new car! Nevermind the fact that car insurance rates are higher for new cars, a new car is the answer to all your problems.

As ridiculous, as that might sound, I’m assuming that what goes through most people’s decision process when purchasing a new car. As proof of the commercials working, car sales see a major bump at the end of the year!

Like most big-ticket items, Americans decide to pay for cars in the most obvious way possible – car loans.

We teach you here that you should avoid loans in general. However, car loans are a different beast. Here are 5 reasons why you should avoid car loans.

1. Car loans are expensive because of the fees

Ever went to go buy a car and when you went to get a car loan, they threw a whole bunch of mumbo jumbo at you? Origination fees, dealer fees, and by the time they finish going through the list – you’ve already been completely bored out of your mind.

If there something I have observed through life, the more complex and fine print something is – the more likely people are able to take your money. Health insurance is an excellent example of this.

Car loans fees are another example of this. Fees are there because everyone needs to make a cut of the money. This means the car dealership needs to make money. The carmaker needs to make money. The bank that help create the loan needs to make money as well.

Car loans so common now that car companies are actually making a large profit off of car loans.

Depending on what fees the car dealership has you can expect to pay 2-4% of the actual cost of the loan. This means loans fees can easily go over $1,000!

2. Car loans make the car more expensive

When it comes to looking at loan terms, would you rather pay less per month or pay more per month?

That is the typical question that most Americans ask themselves when it comes to determining what loan to take. No thought is put into how much time it would take to pay off the loan or even the interest rate.

As a quick refresher, there several parts of loan you should know:

  1. The number of years of the loan: For car loans, this can range from 1-7 years.
  2. The interest rate of the loan: This determines how much you are charged for borrowing the money by the loaner.
  3. The monthly payments: This determines how much you must pay per month which is determined by the interest rate and the number of years of the loans. By the end of the loan, assuming you pay the monthly payments you will have paid off all the loan including the interest rates.

The lower a loan’s monthly payments are, the more likely that the terms (or amount of years) you will be stuck paying.

Assuming you have the same interest rate, if you extend your payments over time, then you are paying more money overtime. If you take less time to make your payments, you will pay more per month, but pay less over time.

The problem is regardless of whether you go for a shorter payment time, you are still owing more money than what you actually purchased the car for!

3. The car’s value decreases over time which make it more costly

Ever go into a car dealership and the smarmy salesperson keeps referring to the car as an “investment”? I want to yell at the salesperson that a car is not an investment.

Cars should never be seen as an investment. Investments make you money over time. Cars lose value (and money) over time. As a matter of fact, most of a car’s value is lost within the first 5 years of driving a new car.

Think of a car similar to a home that you bought. Homes can go up and down in value over time based on a number of various factors. However, you can also control some of those factors.

Poorly kept home

For instance, let’s say you bought a home for $100,000. To increase the value you spend $50,000 on repainting the home, new floors, and add new fixtures. The expectation is that you would be able to sell the home at $150,000 or even higher. On the other hand, let’s say you don’t do much to maintain the home, let the dog run loose, and let the kids punch holes in the wall. You will expect the home to sell lower than $100,000. This all makes conceptual sense to a lot of people.

With a car, the value of your car will only go down. If you bought a $20,000 car, there is very little you can do to increase its value. You can get better tires, a new paint job, and new seats for $10,000. Unlike your home, you couldn’t expect to sell your car for $30,000. Despite spending $10,000, those actions only stand to decrease the value slower, but never grow the value of your car. Even expensive cars lose value over time, they just don’t lose their value as quickly.

The best way to explain taking a loan on a new car is you are basically signing up for an underwater loan. Underwater loans is a terms typically used when buying houses. A loan is considered underwater, if the house’s resale value is lower than the worth of the loan itself. This means when you are trying to sell your house, you would end up owing money despite selling your house.

The only difference is house loans might not always end up being an underwater loans. Car loans are guaranteed to become an underwater loan.

4. Car companies are making it easier to fall into an endless cycle of debt because it is making them money

Based on a Wall Street Journal article, car companies now make a lot of their profit on giving out car loans.

That statement should not be overstated enough.

Imagine if you ran a restaurant and a large source of your profit was something completely different like selling health insurance. Except in the case of car companies, they’ve essentially become banks on top of selling cars!

Car companies have made it even easier for people to get loans now. They require low credit scores and very little down payment. This is all done to encourage people to get new cars.

Even more, car companies are beginning to do 7-year loans to trick people into thinking they are buying a cheaper car with lower monthly payments. A 7-year loan by itself is bad. However, Americans are making it worse.

According to the Wall Street Journal article, by chance or because Americans are lacking self-discipline, Americans change their cars before their 7-year loan is done. What Americans do is trade in their car and loan and get a new 7 – year loan that includes the previous loans.

For instance, let’s say someone bought a $30,000 car on a 7-year loan. With the cost of fees and interest, that $30,000 loan is actually $40,000. After a couple months of driving the car, they decide they don’t like their car even though they have a $39,000 loan. Instead of paying off the car, they decide to trade it in for another new $30,000 car. Because the old car is now worth $20,000, the leftover $19,000 is tacked onto the new car’s loan. This means that the new car’s loan in total is over $59,000!

This is how car companies are making profits off of you now. Don’t be the person who gets caught in this endless cycle of debt!

5. Cars are designed to stay on the road longer than ever before.

For the longest time, experts believed that cars can run about 100,000 miles. Heck, even popular financial experts have recommended callers to plan for their car to stop working after 150,000 miles.

Despite the popular belief, cars are now built to last longer than ever before. As a matter of fact, cars should last at least 200,000 miles before major issues begin to show.

This means great things for you as a money-savvy person.

If you currently own a car with a loan on it, pay it off quicker. The quicker you pay it off, the earlier you have financial freedom and spend your money elsewhere.

If you currently own a car without a loan, drive it into the ground. You likely won’t have any issues anytime soon.

Old car

For people who are interested in buying a car, you are in luck. There are many old cars sitting in lots waiting to be snapped up. As a matter of fact, with cars lasting much longer than before, there are plenty of cheap 150,000 cars that you can purchase fairly cheap. Additionally, with leasing becoming more popular than ever before, used cars are cheaper than ever before.

There are may reasons to buy a car, but buying a car because you feel like you need a new one is the wrong reason. Always, try to buy a car in full – even if you get a car that you might like. Car loans are designed to set you up for failure, so avoid them at all costs!

So what should you do?

We recommend that you get a used car in the meantime. However, if you are really lacking any type of money to buy a car in cash, buy the cheapest car you can with the shortest loan time period possible. That way, you are not losing as much money over time.

This bears repeating – whatever you do, avoid leasing your car like the plague.

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If you have any questions, please reach out to us at mrandmrshops@bunnyhopstowealth.com and read our story here.

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