Financing a Car is for Idiots

It really is, in fact I list it as one of my top 5 dumbest financial mistakes you can make (along with credit cards, AR loans, continually updating electronics, and crazy student loans).  This one though, was probably the most difficult for me to overcome.  I’ve mentioned several times that my life vice has been cars so I’ve learned the hard way how much trouble you can get in with auto loans.

First of all, wealthy people can tell if you can afford a car or not.  I see plenty of young (and not so young people) pull up at the gas station in the new Benz or SUV, thinking they’re hott stuff because they’re paying the monthly payment on a car KILLING their net worth.  Many times if I’m driving an exotic they’ll casually stroll over with smug audacity that they can actually compare their financed lifestyle to something I’ve worked my entire life for.  “I’m looking to get that next” they say in which I usually reply “You probably won’t.” and drive away.

Car companies have carefully crafted their industry to ensure that you’re continually paying a fixed amount to them monthly whether its through a lease (which is even dumber) or a loan.  In fact, a friend of mine who owns a large auto group says that it’s no coincidence that cars “magically” start needing replacement parts around 75-90,000 miles which tends to be after 5-6 years of ownership.  That’s also the typical financing period for new cars.

The problem is, once you start it’s terribly difficult to get out.  A new car is seen as a status symbol, a sign that you’re professional, successful, and even more attractive.  Car marketing is savvy, showing good-looking models and attractive financing deals to let you know you CAN afford it, as long as you can afford that monthly payment.  They start early too, targeting teenagers with minimum wage jobs, enslaving them to their new liability.  Once you pay for insurance, gas, and maintenance you soon realize it’s much more expensive than previously thought.

Many people realize they can’t climb out of the hole because right when you drive off the lot you’re already under water on your loan.  So, they assume it’s just one of those things you have to pay monthly for, your entire life.  “I need a reliable car though, I can’t afford to keep fixing an old beater car” or “If I get a lease I can get a new car every few years.”  All excuses trivial and any intelligent person can understand it doesn’t make financial sense.

This is what I recommend you do and it’s what I’ve done in the past.  Lets say you have a $400.00 a month payment (which is low the national average is $500 a month) and you’re already struggling to pay that.  Out of a 60 month loan period you have 30 more months to go and your already worried the car’s going to need work soon.  First of all, keep up your maintenance religiously.  Nothing wears out a car faster than letting parts deteriorate, especially if preventative maintenance could have saved you the money.  A well maintained car can EASILY last 10 years no matter the make or model.  Will you have to replace some parts? Of course.  Will it be much more cost effective overtime?  YES!  Second, put a plan together to pay it off faster.  If you pay $400 a month, pay $450.  Did you get some birthday money?  Put it down on your car.  The key is attacking your car loan like your credit car debt.  If you can pay it off even 3 months early that’s a huge victory.

Next, you’ve paid it off and are sick of it.  It’s old, outdated, and you “deserve” a new car.  Not even close.  That $400 a month you were paying is now going to fund your new car fund.  I’ve had a separate car account almost my entire adult life and it’s extremely helpful.  With your car paid off you have to start planning for the future car purchase and you do that by contributing that $400 a month toward that next car.  Doing that for 2 years gets you almost $10,000, 3 years $15000 and so on and that’s not counting any additional savings you can throw in.  By the time you can enough money to pay cash, that original car should be reminiscent of a Mad Max vehicle.  With duct tape holding bumpers on, torn upholstery, cracked dashes that car should look like death but guess what, you’re a member of an elite and small club of people that ACTUALLY own their car.  What you’ve also done is pulled yourself out of the hole and started the cycle of paying cash for your cars.

When you get the next car the monthly savings payments don’t end, and in fact should increase.  The $25,000 car you bought will be worth 5 grand in five years, meaning you have to save the difference, plus cars continually get more expensive meaning the $25,000 car you just bought will cost $30,000 the next time you’re in the market.

Does this sound frustrating?  Extremely.  Will most people not listen to it?  OOOh ya.  The difference is though.  My cars show that I’m actually successful, and theirs show they’re pretending to be.

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