If there’s one blogging lesson I’ve learned from Tam, it’s to not waste your good stuff on the away games.
An article over on The Drive about your worst car mistake caused me to reflect on my worst mistake, namely, taking out a car loan. Never again. Apparently this rankled someone who feels that a 0% APR loan on a depreciating asset is a good idea, and that the only reason to pay for a car straight up is “bragging rights.”
Which led to me explaining the emotional and fiscal reasons why I think car loans are a bad idea, and won’t do one again.
It’s not about bragging rights at all, at least for me. What it is all about is peace of mind, and to a lesser extent, good financial decision making. Allow me to explain the former, then I’ll tackle the latter.
If there’s one lesson everyone should have learned from 2020, it’s that you can plan for your future all you want, but sometimes events will break up your planning. The longer your timeframe to plan, the more likely some event will come along and disrupt those plans somehow. With the typical car loan now being five years, and some extending to seven or even eight years, what are the odds that anyone’s financial circumstances aren’t going to change during that time?
From my personal perspective, I’ve been working in software development for almost twenty years. In that time, I’ve been laid off or had contracts end nine times. I’ve been out of work for over two months on three separate occasions. I’ve seen three major global recessions (the dot.com crash followed by 9/11, the 2008 Great Recession, and of course the 2020 Chinese Flu shutdown). I’ve seen at least four global pandemics (SARS, Swine Flu, Bird Flu, and again, Kung Flu). I’ve been unemployed both with a car payment and without a car payment. Let me tell you, there’s a lot more peace of mind to be had when “how do I pay for this car” wasn’t a part of my “get through this unemployment period” budget. That alone is why I won’t go for another car payment, regardless of whether or not it makes financial sense.
Second, to the actual fiscal sense. Allow me to use three different scenarios. In all of these, I’ll try to keep things apples-to-apples using KBB values, and make the following baseline assumptions: #1 – I have cleared $500 per month to spend on a car payment/save for a new vehicle. #2, it costs me $2500 a year to fix whatever breaks this year on my current vehicle (a 2002 Saturn VUE), or whatever I purchase as it ages. #3, I’m going to use some round numbers for convenience’ sake.
Okay, Scenario #1 – New car loan. I can drive into my friendly neighborhood Ram dealer and get a 0% APR loan on a new RAM 1500. With some good negotiation, the pittance I get on trading in my Vue, and a modest down payment, (combined total $6,000) I walk out owing $36,000 on the loan, which I’ll be paying back over the next six years. Total cost $42,000. At the end of six years, I have a paid off truck worth about $25-30k. I’ve lost $12 – 17k.
Scenario #2. Used car loan. I go to my friendly neighborhood Ram dealer, put my $6k down on a pre-owned 2018 Ram 1500 that’s $31000. I can get a 3.93% APR loan for six years ($390 a month). If I pay it down at a rate of $500 a month, I own my truck in 55 months (4 years, 7 months). Then I start saving that $500 for the next vehicle/to fix what starts falling off my truck. At the end of six years, I’ve paid $33,346.79 for the truck, plus $3750 in maintenance, for a total of $37,096.79. I have a paid off truck worth $10 – 18k, and an additional $5250 saved. I’ve lost ~ $14 – 22k in total value.
Scenario #3. I save my $500 a month for three more years. At that point, I’m completely fed up with the litany of squeaks, squeals, and rattles coming from my Vue, and I take my $10k and buy whatever truck I can get for that money. Let’s say it’s a used 2014 Ram with 170k miles (this is 2024, remember). Three years later, I’ve got a truck worth $5000, and another $10k in the bank. I’ve lost $5k in truck value, but I’m $5k ahead because of what I’ve been able to save. The nice thing about this scenario too, is that it works whenever I need to replace my vehicle. I may not be able to get something as nice if my car grenades itself tomorrow, but I’ll pop my emergency fund and get a beater that will work until I can save for something better.
In short, no loans for me, thanks, I’d rather not lose money.