Auto Loans: When to Avoid Them
Consider two people: Joe and Jane. Both have $5,000 saved up from their birthdays and mowing lawns and hard work at Summer jobs. Both are tired of riding their bicycles everywhere. Both are insisting they will end up in a car soon, and so both begin to research the car they want.
Joe visits some new auto-dealerships and some used auto dealerships. He likes the idea of a flashy new car, but is somewhat put off by the price and the idea of how much he will have to pay for one beyond his initial $5,000, so he tends to stick to the used car lots.
Jane knows she has to look good and so avoids the used car lots. She has steady summer work and knows she will be able to afford payments on a car. She’s willing and able to shell out a bit more in order to have the car of her dreams.
Joe finally settles on a $3,500 vehicle from a reputable used-car dealership that he researched extensively using such Internet sites as Kelly Blue Book to make sure his car had a good rating and long ‘life-expectancy’. He also puts down an extra $750 for a good used-car warranty from the dealer so he won’t have to pay for any unexpected repairs on the vehicle. In the end, Joe walks away with a few hundred dollars in his pocket for gas and a nice date with his girlfriend in his new car.
Jane sits down at a dealership and begins to sign mountains of paperwork for the $25,000 car she wants to buy. Since she only works summers, the interest rate on the vehicle is pretty high, but the dealer is throwing in a free tank of gas and a sub-woofer for her speaker system! By the time she’s done, hours later, it is dark, she is penniless, and she drives off the lot, nervous, but excited for all her friends to see her new car tomorrow.
Flash-Forward 2 Years
Jane is struggling to make her car payments. She can’t go out with her friends as often as she’d like because she has to save her money to make the monthly car bill, the car insurance, and to fill the tank with gas. Her car still looks pretty nice, but the novelty has worn off and no one is extremely impressed to see her pull up in it anymore. Her car, which she drove off the lot at $25,000, is now worth about $15,000, but she still owes more than $21,000 on it – she is upside down on her payments and will be for a long time. By the time this car is paid off it will be a ‘hunk of junk’ just like the ones she avoided buying in the first place.
Joe, on the other hand, has plenty of money to continue taking his girlfriend out. All he pays for is gas and insurance. With the money he’s saving on car payments he is paying himself into an interest-bearing account and he figures in 4 more years he’ll have another $5,000 or more saved up to get another ‘new’ used-car right out of the lot. He may not look as good as Jane does, but he has more money, more time, and is paying himself interest rather than paying a bank. At the end of this tale, when both cars end up in a dump somewhere, Joe and his girlfriend will be debt-free and getting married in a large, expensive, paid-for ceremony. Jane will be sitting down to sign a mountain of paperwork again to stay in debt because she needs something to get her to work and back.