Do Americans love their cars too much? Even as a car enthusiast I would say yes. There is no other explanation for our behavior. Most of us who do not want to consider financing furniture or equipment purchases will take out a loan to finance our vehicles without thinking about it.
Every time I fill out an application that asks about my family’s finances, there is always a section that asks how much my car insurance is. Since I bought my first car, my answer has always been the same: zero. Yet I always see friends and colleagues driving around in new cars bragging about the great conditions they were given for financing. As you will see, good financing is always an illusion and you never have to borrow money to buy a car. Cash is still king when it comes to purchasing your car.
Reasons to buy a car with cash
1. Financing leads to lost discounts
Car manufacturers like to attract customers with financing offers that sound spectacular. One or two percent APRs are popular and zero percent offers are sometimes even options. The only thing that many people forget is that all these offers are at the expense of a higher price. Read the fine print and you will probably see that a discount is offered to buyers who refuse the financing. But even in cases where that is not explicitly stated, you are always in a better position to use effective negotiation strategies when you bring money to the table.
2. Auto Loans are not tax deductible
A mortgage on your principal residence and a student loan can both be great deals because you can deduct interest payments from your income and pay taxes at a reduced amount. However, there is no such tax deduction on car loans.
3. Car loans will be upside down most of the time
We all know how a car with thousands of dollars in value drops the moment you drive it out of the field. From that moment you will owe much more money to the car. Being upside down on a car loan is in many ways just as bad as being upside down on your mortgage loan. In both situations, you pay more for something than it is worth. And although a house may increase in value one day, this cannot be said of the majority of cars on the road today.
4. Paying interest can run off your finances
While most people simply assume that they pay a car every month, imagine what you could do if you never had that obligation. You can save for your retirement, afford a larger house or simply increase your discretionary expenses. Remember that when you make a car payment, you pay interest. Instead, why not save your money to buy a new car with cash and earn interest at the same time?
5. A car payment is en route to your safety net
Because my wife and I both own our cars outright, we have fewer monthly expenses. If we lose our incomes, our safety net will last longer than would otherwise be the case. If I have a long-term doom scenario in mind, I can even sell my car and use the proceeds for the financial survival of my family. With a car loan or lease payment, I would be in a much more difficult financial position.
6. Car loans Mask the true costs of your vehicle
Buying a car with cash and selling it these years later really makes it clear to you how a vehicle decreases in value. But when you finance the purchase, this becomes less clear. If you are like most people, when the car is paid off, you will trade the car in for your next vehicle and start the cycle all over again. This makes it more difficult to look at the purchase of your car for what it really was: one of the most expensive things you have ever bought and then lost tremendous value in the time you owned it.
How to avoid a car loan
First, you must let go of the need to drive the newest and best vehicle, even if you live in an image-driven city like Los Angeles. A car is just a tool to get from one place to another. Frankly, it is just something else that you own and not worth getting into debt.
Then you have to realize that there are many really nice, reliable and safe used cars available for much less than you might think. Even if you like cars, there is probably something you can live within almost every price range that you can afford in cash.
If you do not have enough money to make the purchase, be patient. Save more money faster by sacrificing small luxury, such as eating out several times a week. Also, include part-time work from home to supplement the income from your full-time job. Make a budget and plan. If you have saved enough for the purchase, you can give up the part-time job or go back every week to eat out if you wish. But the last thing you want to do is empty your nest egg to buy a car with cash.
To find an affordable car within your means, you may have to lower your expectations slightly or consider buying a used car.
From a car loan to a cash payment
Many people will have to pay off their existing loan before they can start saving for their next car. Once you are the owner of your car, a great strategy is to save the money that you would otherwise have spent on a car payment for your next car purchase. When it is time to sell your car, you can add your savings to the value of your existing vehicle and start searching for a car in that price range.
The good news is that as cars get older, depreciation slows down, especially if your car is well maintained. In other words, you do not lose much value by letting the car stand longer and you can increase your savings at that time. That way you can afford more cars when it’s time to replace it.
You may have ended up in the car loan cycle because you were originally unable to pay in cash and needed transportation. But you have to break this habit. Saving for large purchases and then paying in cash for them is not only a smart financial move but also brings a certain pride of ownership and awareness of the value of money.
There is no rational explanation of why people who can save money like to borrow money to buy a car. Their decision is often uninformed or purely emotional. Yet emotions and a lack of information do not lead to sound financial decisions, especially when it comes to large purchases. By making a few adjustments to your spending or saving habits, or your attitude to what kind of car you need, you can eventually free yourself from the endless cycle of car payments.