- August 30, 2019
Last year, global car sales rose 0.5%, which equates to 86 million new vehicles sold in a single year. Without a doubt, this is a booming industry, even with declines in the first half of 2019. But with an increase in car sales comes an increase in auto loans.
While many may argue that a car is a necessity, financial gurus would counter that financing the purchase of a new vehicle is doing more harm than good. Among the largest debts people take on are a mortgage, student loans, and auto loans. Unlike auto loans though, a mortgage and a student loan can add value – a home on the basis of appreciation and student loans on the basis of the potential for better job opportunities and higher earnings.
A car, on the other hand, is a depreciating asset, decreasing in value by 20% in the first year and 10% each year after that. This means after five years, your $30,000 brand new SUV is worth around $12,000, 60% less than its original price tag.
Despite this, the demand for auto loans is increasing and persons are borrowing larger dollar amounts than in the past. Experian reports that the average amount borrowed to buy a new vehicle hit a record $32,187 in the first quarter of 2019. This means increased monthly auto loan payments that extend for longer periods of time.
No, we’re not telling you to to give up your dream of owning a fresh-off-the-lot-brand-spanking-new car. But before you take that step, consider the advice below:
Buy a car that’s a year or two old. You can avoid a depreciation hit in the initial years of a new car by purchasing a not-so-new model. The price tag will also be lower than it would be if you were buying a model in the current year.
Make sure it’s built to last. If you are planning on entering a five to seven-year debt repayment commitment to purchase a car, make sure that car will last longer than it takes to pay it off. This means you have to do your due diligence to get the most out of your investment.
Beware the “luxury car equals success” myth. There is a view that a luxury vehicle is a sign of wealth and success. But this may not necessarily be the case. Believe it or not, there are probably more wealthy and successful people driving a Honda than a Mercedes than you think. Buying a nice car says that you spend a lot, not necessarily that you are worth a lot. If you must purchase a luxury car though, consider your options. You may be able to lease rather than buy, thus reducing your monthly payments.
The Bottom Line
As with any major purchase, it’s important to count the cost. You can save $300 per month in auto loan payments based on a 4% interest rate by purchasing a $20,000 used car versus a $40,000 new one.
By all means, if you have a high interest-bearing retirement savings plan, a solid emergency fund and are well on your way to meeting your savings goal for your children’s education, buy a nice car. If not, your ride may be the place you can cut back in order to invest in other areas.