May 16, 2016

You may not have the cash laying around to purchase a car outright, so you’re considering financing a car. I get it, it’s a status symbol and part of your image so you really want a new one (or a very good used one).

This problem arises when people feel like they are earning a lot of money and have nothing to spend it on. It usually starts right after college when people get a good first job, but the habits continue throughout life.

You want the car and you want it NOW. You don’t want to wait.

Financing a Car can be a Bad Idea

For most people, their largest purchase is buying a home. I am a huge advocate of turning your debts into assets that pay you. I often write things like this article about that explains why you should buy a duplex instead of a single family home.

Second to buying a house, is the purchase of a car or truck and people are spending more than ever to finance cars. My opinions don’t change and I still think it’s really important to focus on investing instead of buying debt. Basically, a car is only worth what it can give you.

Why am I talking about car financing?

There is a record $886 billion in financed vehicles right now. It’s crazy! Between huge student loans and car payments, how does anybody actually start investing? Anything related to real estate is the focus of my website. Debt holds you back from investing, so it’s what I’m talking about today. Most people get a ton of car debt, which makes it so much harder to really invest.

When you increase your debts, you spend more of your monthly income paying those debts, and save less money each money for investments. On top of it, every loan you have puts you further away from buying a home or investment property. Since investments pay you and a car doesn’t let’s learn how to reduce our debts and focus on investing.

You should opt for a lifestyle of investing instead of debt. Check out my article on debt and real estate.

Reasons Why Most People Buy a Car

There are a lot of good reasons to buy a car:

  1. You need to get to work and back.
  2. You live in an area where you can’t walk anywhere.
  3. There is very little public transportation in your area.
  4. Your family doesn’t live nearby and you need to visit occasionally.

So, for most people, a car is about getting around to do things. The most important reason to own a car is to get to work and back. Obviously, buying groceries and necessities are another reason to buy a car.

So you should buy a cheap car that serves its purpose. Buying an expensive car is a bad idea because a cheap car can get you to the grocery store just as easily as a shiny new Lexus LS. Every dollar you spend over the minimum is just a complete waste of money.

Reasons Why Some People Buy an Expensive Car

Here are some less common reasons:

  1. You work out of your car (traveling salesman).
  2. Your clients see your car so it’s a symbol.
  3. You are trying to sell something and need to show status.

OK, these are also valid reasons. Consider a contractor that is going to build an addition on your house. If he shows up in a car you may think differently about him than if he shows up in a truck. Then consider, what if he shows up in a crappy small truck or a huge truck. This may be a good reason to spend more on a nice truck.

A person selling you on something might drive a nice car too. “Hey, buy my book on getting wealthy. It really works!” If the person is driving a beater, you won’t take him seriously. Show up in a shiny BMW 7 series and suddenly people are listening.

The fact is that people are judgmental. People believe what they want to believe based on what they see. So, when your status is part of the sale pitch, it’s important to fit the description people expect to see. These are good reasons to buy an expensive car… but only if the income justifies the expense.

 Why Financing a Car Can be a Mistake

When something burns you, you pull your hand away. Similarly, when people accumulate some money, it “burns a hole in their pocket.” They just can’t get it out of their pocket fast enough. Sometimes it’s OK to spend a little money, but it’s more of a problem to spend money you don’t have. The availability of credit is no reason to go on a spending spree.

Financing a Car May be a Bad Idea

  1. Cars Depreciate
    • All cars depreciate. New cars depreciate the most. When you finance a car or truck, it is guaranteed that you will owe more than the car is worth the second you drive off the lot. If you ever have to sell the car or get in a wreck, you owe more than what you can get for it. You will need to find even more money laying around to pay the difference before you can even consider getting another one. Every step is more money and more debt.
  2. Repairs
    • You can afford the payments, but did you consider the repairs? You need oil changes, filters, tires, brakes, transmission fluid etc. If you avoid maintenance because you can’t afford it, you simply reduce the life of the product you just spent a ton of money on. You never save money by avoiding maintenance. It’s simply called deferred maintenance and we all know that deferred maintenance is more expensive than just maintaining it properly!
    • If you buy a used car, you may be stuck with major repairs long before the loan is paid off. If you own a truck that needs its engine or transmission replaced it can cost half as much as the truck or car is worth. You might just trade it in for something new, but if you have a loan to pay off, you may get no net trade in value, or very little. You just get deeper into debt.
  3. Interest Payments
    • Another reason it is a mistake to finance a car is that you end up paying interest. Obviously, if you get a 0% rate then go for it, but most people are paying at least something. Car dealers may give you a lower price on your car because they know you will finance the car, and they get a piece of that.
  4. You Simply Don’t Need It
    • The reality is, you don’t need that car, so you don’t need to finance it. If you do need a car, buy something cheaper than what you want to buy. You should spend what you need to spend, not what you want.
  5. Car Salesmen are Good at Their Job
    • Trust me, I was in sales. Car salesmen are great at their job and they know how to get you to spend more money. You might think you are good and will buy only what you need to buy, but the majority of people spend more than they need to and buy more ‘car’ than they need. You may have planned to pay cash, but instead, you buy something bigger and finance the difference. After all, It’s only a few bucks a month for that fancy widget.
    • By knowing exactly what you want and how much you will spend, you won’t be convinced to spend more and finance the rest.
    • Instead, opt for a car that is 2 or 3 model years old. They have depreciated the most but still have a long life left. Cars depreciate the most in the first 2 to 3 years so you will lose the most money if you buy new. Financing a new car means you are wasting more money than financing an older car.

Why Financing a Car is a Good Idea

There is really only one reason you would finance a vehicle instead of buying the vehicle outright. If you are disciplined and actually have the cash saved and have it invested in an interest-bearing account at a much higher rate than the financed amount. Then, withdraw the payments directly from that account.

Essentially, you would be acting like a bank. You are borrowing from one person and investing at a higher interest rate somewhere else. Again, this only works if you actually invest the money. Compound interest is really powerful, small savings really add up!

Unfortunately, most people take half the advice. They borrow the money for a car and simply spend their savings on a new TV, computer, or entertainment. Now they have no savings, no interest, and plenty of debt.

Honestly, I’d say spend all that money on a nice cash-flowing property. Find something that pays more than your car payment. Now, you can buy whatever you want!

An Alternative to Financing a Car

An easy way to avoid taking out a loan for your car is to save for your next vehicle now before you need one. Make extra payments toward the car to pay it off faster, then once it’s paid off, keep applying that payment toward an interest-bearing account that will go toward your next car.

You could use the money to buy the next car, or simply finance the new car if you can earn more interest in the account.

About the author 

Eric Bowlin

Eric is an investor that achieved financial independence at the age of 30. He started in 2009 with the purchase of his first triplex and now owns over 470 rental units. He spends his time with his family, growing his businesses, diversifying his income, and teaching others how to achieve financial independence through real estate. Eric has been seen on Forbes, Trulia, WiseBread, TheStreet, Yahoo Finance and other financial publications. You can contact Eric by emailing him at [email protected] or with this contact form

  • 20 Years old, making just shy of 6 figures in 2014 went in with my Dad and signed for a $68,000 2014 F150 special edition.

    Cost me $1100/monthly before insurance (added all maintenance and warranty plans available so that was my only expense otherwise)

    Was fine until my rent went to $1000 monthly, my insurance increased from two speeding tickets, gas at 14 mpg started to hit me more and more as prices increased over $3 a gallon.

    After a few years I started to sweat, I barely afforded my refinance from 5.7% to 3.2% but I got it done, which increased my payoff duration but gave me breathing room.

    Then it totaled. I was hit by a red light runner. I had to make two more monthly payments while waiting for insurance to pay out. Not the best situation.

    I bought a $19,000 Silverado 2008 110,000 miles as a replacement. But being spoiled, I want to get back into a newer vehicle.

    I am selling my Silverado I have had for 2 months tomorrow, and purchasing a 2013 5.0 F150 47,000 miles for $29,999 with $3,000 down.

    Do I need it? No.
    Does it help me buy a home? No

    My thought is it should be reliable, long life, all the whistles I want and had in my 2014, the depreciation has slowed to $1800 a year and I will be paying $6000 yearly minimum. So this is the route I want to go. I would be ahead quite a lot, and if I sell my side by side, I could just tack on another $400 monthly and it would be mine outright in no time at all.

    I have to have a truck. I know myself enough to know that for me in Alaska, a nice truck is important enough to justify the cost/loss of money into it.



    • Trucks have utility, but I personally wouldn’t buy an expensive vehicle again unless I created the passive income FIRST to pay for it. I used to have a $50,000 truck but buying and financing that was one of the biggest financial mistakes of my life.

      Keep your expenses low until your pasisve income grows. Then you can afford anything you want.


    • You are 20 and make close to $100,000.00? Really? You should be living like a king! Personally I would simply live thrifty for a few years and buy a nice, new truck with cash in full. How the heck do you earn $100,000.00?


  • I have learned my lessons about financing vehicles, and never plan on doing so again. I am stuck in my current truck loan, but I’m working toward paying it off early and I take care of it so it will last me. My husband also has a car note, but his is a company vehicle so we had certain needs. His car will be paid off in a year and has plenty of life left. He really wants to trade in both of our vehicles when his paid off and get a better company vehicle, and a different car for me. I can’t seem to get him to understand why financing is such a bad idea. Any advice on converting someone who truly believes new is better?


    • It really all comes down to life goals. Of his goal is to work for the rest of his life, then brand new cars or trucks with a loan makes sense!

      But, for those who want to be financially independent and retire early, paying down debt and increasing that residual income makes sense.

      So the car loan really isn’t the issue. The issue is that he feels he has the cash available to pay for it and then wants to. You should focus on showing him how much extra you can save and how that savings will let you both retire years earlier.


  • There’s no problem with financing a car, but use a bank loan which is therefore not tied to an asset, as well as providing a much better rate! Typically >3% vs 10%+
    Always going for the cheapest option is not always a good idea long term. While my old used car has definitely saved me money over financing a newer one, the table is beginning to turn and repairs are mounting. I will be financing a newer car (probably 6 yrs old, NOT new) rather than continuing to repair fairly soon, but I will be sure that I keep within my means, and save up enough so I need to borrow as little as possible. Then as far as the garage are concerned I’ll be paying cash, and owing back to the bank, which will be very manageable.


  • Just traded in a truck for an older Toyota Avalon and reduced the loan amount by $8,500. Sold my motorcycle and paid off the Avalon. No auto debt. Saving over $400 per month in payments. Investing this into a fed govmt retirement buyout. This article is spot on.


  • I think there is good advice here but the part about spending more than the minimum “is a complete waste” is a highly subjective concept that I would disagree with.

    I would also disagree with the notion that the only point of a nice car is as a status symbol.

    A nice car has many key advantages:

    1. Makes you feel good when you see it… pride in owning such amazing engineering and beauty. Cars can be a form of art.

    2. Better newer cars are often more safely built.

    3. Better newer cars (CAN) last longer and be less costly to repair, especially something like a Tesla model 3 or S which has much less upkeep than an ICE car.

    4. Enjoying a smoother rid experience or the thrill of a powerful car when your accelerating.

    5. A great sound system in your car that makes driving more enjoyable.

    6. A more comfortable interior that makes the drive smoother and more enjoyable.

    As for financing I agree that you should live within your means. Don’t finance a $100,000 car if you are making $50,000 a year. But if you don’t want to be saving 5-10 years to buy your dream car with wash and you have a good steady income (and great passive income) then financing makes sense because you are getting the car sooner and enjoying it NOW. Sure you could save for 5-10 years and then buy the car… but you have lost that 10 years of enjoyment… and you only have one life. Moreover you are now 10 years older and maybe you are not less able to enjoy the thrill of said car.

    So although I agree about being fiscally responsible… the notion of an expensive car being a total waste is simply false for those who appreciate well made, reliable and powerful cars.


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