The epic debate of whether it’s best to finance a vehicle or pay for it in cash continues on year after year. With tax season among us, lots of people who will receive a refund often contemplate getting a new car. I know I did these past few years. After financing my current car last year and enduring all the pricey repairs in addition to an expensive high interest car note each month, it’s safe to say I’m team: avoid financing, pay for your car in cash.
Having a shiny new car may seem nice at first when you are looking to upgrade from your older car but 99.9% of the time, financing turns our to be a bad decision and a big waste of money. With the average car payment in America hovering around $350 and even being as high as $500, it’s no wonder why it’s getting harder and harder to pay off vehicles and get out of debt. If those shocking numbers don’t make you question getting a auto loan, here are 7 reasons why you should avoid financing a car.
The interest rates for financing a car are horrible and interest can easily eat up hundreds and even thousands of dollars from your principal payment, making the process of paying off the car longer and more nerve racking. Young hopefuls with an average credit score are likely to get stuck with something near a 15-18% interest rate. Even if you’re credit is squeaky clean, you’ll have to pay some amount of interest on your car sooner or later. That money wasted on interest can be better used for another purpose like saving or maintenance expenses for your car.
It’s a Depreciating ‘Asset’
Your car will start losing value from the moment you drive it off the lot. Which is why I don’t see how people can call a car an asset. Unless it’s an antique that you drag out every now and then for car shows, otherwise it’s sitting up in the garage gaining value over time. But if you’re financing a car, that is certainly not the case. Odds are you’re enjoying it and driving it every day trying to get your money’s worth. The car’s value will steadily decrease even while you are still in the process of paying it off.
The Credit Inquiries Suck
When I financed my car I learned the hard way that they run your credit…A LOT. The financing department will run your credit several times not only to verify your creditworthiness but to compare loan amounts and interest rates from various different lenders. While I believe they may be trying to get you the best interest rate, the truth is they don’t really care about the tons of inquiries that will end up on your credit report. If you are in the process of trying to build your credit, 10+ inquiries that will be stuck on your report for 2 years definitely won’t help.
New or Old, Something Will Break
Most people’s excuse for financing a new car is that they won’t be wasting a ton of money working on the car and it will most likely last them longer than a used vehicle. While this may be a valid argument, whether you buy a car new or used, you will stay have to pay; either in the form of your high car note, repairs, or a combination of both.
Cars are not made to last forever and odds are sooner or later, something will break. Fancy financed cars are not immune from the inevitable wear and tear that occurs throughout the lifetime of your vehicle. The brakes and tires will wear down and the mileage will rack up. Before long that shiny new warranty will be gone and you’ll be at the auto repair shop just like everyone else.
You Can’t Live in Your Car
I say this because I’ve seen people glorify their new, financed cars way too much and at the end of the day, it’s only a car people. It can’t talk, it can’t keep you company or do any tricks; It’s just a machine meant to get you from point A to point B. I’ve witnessed first-hand the effects of glorifying your car too much and trying to keep up with the Jones’.
A family friend of ours suffered from lifestyle inflation when they financed a $40,000 Mercedes Benz, then they endured a life crisis that left he/she with no place to go. This is why I would rather spend my money financing a home (an actual residence that I can decorate, make memories in and truly enjoy) rather than a car. I’m not trying to bash people for having nice cars because that’s totally fine but my point is you can’t live in your car no matter how nice it is. If you can’t afford it in the long run and you don’t have your finances together, you definitely shouldn’t finance it.
Higher Auto Insurance Rates
When you finance a car, your interest rate is bound to increase. This will most likely happen if your new car a better model and worth more than your older vehicle. Additionally, if you finance or lease your car, most lenders will require you to carry full coverage, making it nearly impossible to cut your amount of coverage down and reduce the premium until you have paid your car off in full.
It’s Easy To Get Stuck in the Financing Cycle
When I was working in college I’ll never forget the conversation I had with some of my older coworkers when I asked for their advice about possibly financing a new vehicle. One of my coworkers in particular, was all for financing and told me how she gets a new car every 2 years. She lit up with excitement as she talked about the luxury features of her current vehicle that included heated windows.
Out of pure curiosity, I asked her how someone is supposed to pay their car off in a decent amount of time with all the interest that gets added on to the principal balance. Her response was truly shocking. She just smiled and said “You don’t get to pay it off.” At that point in time, I realized that there are some people who welcome the idea of financing and are perfectly fine with making monthly payments for the rest of their lives. I did not want to be one of those people. I couldn’t imagine paying $300-400+ every month for an eternity just to drive a car. That is NOT normal.
But unfortunately, once you start financing, it’s easy to get sucked up in that cycle as the salesmen at the dealership try to persuade you to trade in your car after a few years to get a newer, ‘better’ one. Then, the trade-in allows you to become stuck with a new high-interest car note for a car that you will never truly own all over again.
Have you financed a car before? What did or didn’t you like about it?
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