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Why I Hate Auto Loans

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Why I Hate Auto LoansThis one is a follow up to last week’s – Should You Invest or Pay Off Debt? The comments on that post are very interesting; you should check them out if you haven’t seen them yet. Some people prefer to pay off debt and others want to optimize by investing. If we purely go by the numbers, investing with other people’s money is a great way to make money. This is only good with low interest loans like mortgage and auto loans. It’s a bad idea to take money from your credit cards and invest it because you can’t beat the high interest rate. However, we’re not robots. Emotions and psychology dictate how we behave. I could have taken out an auto loan and used the extra money to invest, but we didn’t do that. We paid for our current car in cash and chose the safe route instead. That’s because I loathe auto loans. Why do I hate auto loans? Read on…

Our current car

Our current car is a 2010 Mazda 5. It’s a small minivan. We got it new in 2010 and paid about $17,000 for it. We could have taken out a car loan with near 0% interest, but we didn’t want to do that. I’ve had auto loans before and I despise sending in those monthly payments. First, let’s look at the numbers.

No to auto loan

My credit is great so let’s say I could get an 84-month loan (7 years) with 3% interest. We’ll use 3% just to make it more realistic. I think the 0% was some kind of promotion. If I paid for the car in cash and avoided the 3% interest. Here is how much I’d save.

  • Total loan interest of $15,000 at 3% = $1,650

So I would have saved $1,650, not bad.

I’m not sure if 3% is realistic for an 84-month loan. The internet tells me it might a bit higher than that, but we’ll just keep going. The rate is highly dependent on your credit score.

Yes to auto loan

On the other hand, I could have taken that $15,000 @ 3% loan and invested it.

We’ll make it easy and go with VFINX, Vanguard’s S&P 500 index fund.

  • VFINX 7 years ago: $92 per share
  • VFINX (8/1/17): $228 per share

The stock market had a great run over the last 7 years and gained 250%. That $15,000 would have turned into $37,170. It sounds unbelievable, but it’s true. I’m using real numbers here. If you’re not an investor yet, you need to start investing as young as you can.

Profit = Current price – purchase price – interest paid = $20,520!

Oh wow, that’s a huge difference. Actually, this is a bit too simplistic. (I realized it a bit later and came back to fix the numbers.) Let me try again.

A better calculation

The problem is I’d have to pay back the auto loan every month. It’s not like I could invest the $15,000 in VFINX and pay back the loan at the end of 5 years. What we have to do is sell a few shares every month and send $198.20 to the bank. After 5 years, the loan will be finished.

Here is a cool graph.

Take auto loan @ 3% and invest it

I used the $15,000 and purchased VFINX. Then sell a few shares to pay back $198.20 every month. After 84 months, we ended up with about $11,000 in profit. That’s smaller than $20,520, but it is still an awesome gain.

Of course, the stock market has been on fire. It’s hard to lose with that kind of gains. Hindsight is 20/20.

*Taxes – I didn’t take taxes into account. The gain would be less than this due to the capital gain tax, but probably not by a huge amount. It’s too hard to calculate tax because of the different tax brackets.

What if the rate was higher?

As long as I have the spreadsheet, we might as well see how it’d worked out with higher interest.

15% credit card debt to invest

Take 15% credit card loans and invest

Obviously, it’s not a good idea to use credit cards to invest. It’s very difficult to overcome that expensive 15% interest rate.

8% margin loan to invest

Take 8% margin loan and invest it

We’d end up with $6,200 profit, not too bad. Personally, I don’t like margin loans either. I think 8% is too high and the margin call really sucks. That’s when the brokerage makes you sell your stock to pay off the margin loan.

Why I hate auto loans

Going by the numbers, it’s likely that you’ll make a profit if you can borrow at 3% and invest it in the stock market. However, I didn’t do that because I hate auto loans. Here are the reasons why.

Temptation to buy more

My credit score is awesome so the bank is more than willing to give me an auto loan. They would love to collect more interest. If they’re willing, why not get a nicer vehicle? We could get a BMW X5 for $65,000 instead of a Mazda 5. The BMW X5 is a much nicer vehicle and it would impress our neighbors and friends. This option can be very tempting to most consumers.

That’s how they lure you into borrowing more and buying a car you can’t really afford. I suspect this trap is working quite well because the auto loan is a huge part of the US non housing debt. (see graph below)

non housing debt

I made some financial mistakes when I was young too. I got a BMW Z3 instead of a sensible car. We loved it and enjoyed tooting around in a cool convertible. It was an awesome car, but I didn’t like making a car payment every month. Also, the repair and maintenance bill was much higher than a regular car. I enjoyed owing a cool sports car, but I won’t buy another one until I can pay for it in cash.

Are you really going to invest that money?

In the example we went through above, I invested the $15,000. But, come on! How many people have the discipline to do that? Most people would take that $15,000 and spend it on something else like a jet ski. That’s why so many families are in debt today. Americans are horrendous with money management. Give them $15,000 and it will disappear in a few months. Retire by 40’s readers are the rare exceptions, of course. 😉

A Depreciating asset

A car is depreciating asset, especially a new car. Our Mazda 5 would have been worth less than the loan the moment I drove it off the lot. That’s a huge difference from a mortgage. Real estate usually gains value over time. Most of the time, you can sell a home and have a nice little lump sum left over. That’s not true for auto loan. You end up owing money if you have to sell the car.

It’s a bit better for used cars because the biggest depreciation is already gone with the new car smell. It’s funny to realize that I paid 20% of the purchase price to breath toxins… Next time, I’ll buy a newish used car instead.

Cash flow

The last reason I didn’t want a car loan was my early retirement plan. In 2010, I wasn’t sure when I could quit my job and I wanted to be conservative with our cash flow. The best thing to do when income is uncertain is to minimize your monthly expenses. I cut back on everything and minimized our expenses. $200/month isn’t much when you have a well paying job, but it’s huge when you don’t have steady income.

The stock market has done extremely well over the last 7 years, but you never know how it’s going to perform next year. What if the investment tanks? It would impact my early retirement plan. At that point, I prefer to take the sure thing.

Do you have a car loan?

Investing with other people money is a winning strategy when you can get low interest loans. So taking an auto loan and invest it is pretty smart, but there are some pitfalls too. I choose to make it simple and purchased our car with cash. No car loan means less stress and that’s our ultimate goal.

What about you? Do you hate auto loans? Why or why not?

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{ 66 comments… add one }
  • Mr. Tako August 21, 2017, 12:28 am

    We haven’t had an auto loan for nearly 20 years now. It was a mistake I also made when I was young, and I’ll never repeat it.

    Now days, we pay in cash for most things (including cars). We have a significant dividend cash flow which supports this lifestyle. FI is great!

    The only exception is our mortgage, which we could pay-off. For now, I’m happy to let the funds continue to compound in the stock market.

    • Mr. Freaky Frugal August 21, 2017, 4:21 am

      Ditto for me as well except we no longer have a mortgage either. We sold our home and downsized into an apartment when we FIREd.

      I think between Mrs. FF and I we’ve had 3 total car loans in our life. Now we own one car – a 2009 Honda Fit. We love that car. 🙂

  • Budget on a Stick August 21, 2017, 1:00 am

    We had a loan on the wife’s car and it was a big mistake. We bought more than we needed and it should have been used. I thought about selling it and picking up something similar but used, the problem is it was too depreciated to make it worth the hassle.

    I think the biggest reason why I hate the argument about investing borrowed money is most don’t actually do it. They probably bought more than they needed or have plenty of other debts filling up their budget. That investable money never makes it to the index funds.

    Plus the added stress of owing money to other people sucks.

    • retirebyforty August 22, 2017, 9:31 am

      At least you learn to hate car loans now. 🙂 Buying more than needed is the big problem with car loans. It’s not easy to say no to a bigger loan.

  • Ernie Zelinski August 21, 2017, 1:31 am

    For all intents and purposes, I have never had a car loan. For the record, I have never owned a new car. When I purchased my 2004 Solara (with 55,625 miles on it) about five years ago, the dealership was asking $11,900 for this pristine looking car. I offered $10,500 with the condition that I wanted to have an inspection done by an independent car garage. The owner of the garage told me that the car checked out great but there was an extremely outside chance it could have been in an accident because of two drops of paint he saw on the radiator hose. So I told the dealership I would only pay $9,500 and only if they provided an extra key (which cost $350) and replace the windshield which had a real small chip in it that was barely noticeable. The Manager of the dealership started to yell at me so I told him to “F” off. About 2o minutes later the saleswoman called me and told me that they would accept my $9,500 and my conditions of the extra key and the windshield being replaced. Of course, I paid cash since I don’t believe in financing any car, not even a $150,000 Mercdes.

    Five years later, my 2004 Solara still looks like new and I could likely still get $7,500 for it.

    Here are some of my favorite quotations relating to cars:

    “If you think nobody cares if you’re alive, try missing a couple of car payments.”
    — Earl Wilson

    “Buy a used car with the same caution a naked man uses to climb a barbed-wire fence.”
    — Author Unknown

    “A good car is important. I used to get migraine headaches when I drove a Chevy.”
    — from the movie “Local Hero”

    “Never lend your car to anyone to whom you have given birth.”
    — Erma Bombeck

    “I suppose there are people with real money who drive Cadillacs and Mercedes. I don’t know many. As long as practically anyone can own one of these so-called prestige cars, who’s going to be impressed? It you can afford a fancy car, you make more of an impact driving an ordinary one.”
    — Harvey Mackay, author of “Swim With the Sharks” and a multi-millionaire

    “You may be a redneck if . . . you have spent more on your pickup truck than on your education.”
    — Jeff Foxworthy

    “Watch out for the driver in the car following me.”
    — Bumper sticker

    “Once somebody stole our car. I asked my wife if she saw who it was. she said ‘No, but I did get the license number’.”
    — Rodney Dangerfield

    • retirebyforty August 22, 2017, 9:33 am

      That’s a great deal on a Solara. I considered it when we were looking for a newer car. That’s a great convertible. Nice job with the negotiation. That’s a very useful lesson for me.

    • Rat Race Dropout September 7, 2017, 8:44 pm

      Funny thing is, the Jeff Foxworthy comment doesn’t apply to only rednecks anymore. “You might be American if…”

  • Ernie Zelinski August 21, 2017, 1:49 am

    Sorry, I forgot to include my favorite quotation of all time about cars:

    “When buying a used car, punch the buttons on the radio. If all the stations are rock and roll, there’s a good chance that the transmission is shot.”
    — Larry Lujack

    • Darren August 21, 2017, 6:10 am

      Yes! Punch buttons on the radios! That was technology! Love your quotes!

    • Helen August 21, 2017, 7:32 am

      All your quotes are cool. The best one is about checking the radio buttons.

  • Ember @ An Intentional Lifestyle August 21, 2017, 3:21 am

    We did have a car loan. We were stupid right out of college. When we went into pay off debt mode, we traded it in for an older vehicle. We went from our nice 2006 loaded Expedition to a 99 Pathfinder. Talk about a switch. But doing that really got us fully focused on kicking our debts butt.
    Having a monthly note is something we hope to never have again. After our house is paid off, we will be totally payment free. I agree with all of your reasons to hate car loans. But especially how people buy more because it’s not their money. It’s not hard to spend someone else’s money, and that’s all your doing with loans. It explains why so many people have $40k car loans and $450k houses. They can “afford” the monthly payment, so why not?
    Our early experience with debt and payments definitely taught us that we don’t want to go that route.

    • retirebyforty August 22, 2017, 9:34 am

      Good move trading the car in. Did you owe money when you traded it in? I guess it gets rolled into the used car loan.

  • Mr. FWP August 21, 2017, 3:29 am

    I’m with you, Joe: no car loans here. In fact, I paid my student loans back, but I actually paid back my car loan first, before all that. It was the first thing I did.

    I agree one could easily take a car loan, as could I, but time is important and I’d rather not have the hassle even if I wouldn’t be in bondage to that debt (read: I could pay it at any time). The borrower is slave to the lender, and it’s annoying that someone can hold your car over you if a payment is late – or fine you a lot – and cause other headaches if there’s even a minor clerical error. It’s just not worth the time or the hassle.

    When I was a kid, I wondered why my dad was so opposed to rebates, loans, and so on….and now I understand fully: time is more important, and things like that can become annoying.

    • retirebyforty August 22, 2017, 9:36 am

      Great job with your debts. I don’t mind rebates, though. 🙂

  • Ms. Frugal Asian Finance August 21, 2017, 4:08 am

    Mr. FAF and I fell into the auto loan trap about 2.5 years ago. I was after Baby FAF was born and my FIL insisted that we buy a new car so that it would be safer for the baby.

    The dealership guy stopped responding to our call when we told him we wanted to pay off the loan six months later. We were so upset we almost sued him and that dealership, which probably wasn’t worth it anyway. Long story short, we paid more than what they told us and learned our lesson.

  • retirengineering August 21, 2017, 4:16 am

    I’m with you on no car loans. I’ve bought some nicer and more expensive cars (and will continue to do so), I just like to buy them after lots of depreciation has set in. I actually owned a Corvette, and only lost about $1,000 in a 13,000 mile year of driving it! I actually made a post about it here: https://retirengineering.com/how-to-drive-cool-cars-on-a-budget/

    • retirebyforty August 22, 2017, 9:38 am

      My friend has a Corvette too. Nice job with your used cars!

  • Mustard Seed Money August 21, 2017, 4:21 am

    I’m with you I hate auto loans. They are not for me. Having any type of debt feels awful to me and I scheme to figure out ways to get rid of as quickly as possible. So I wouldn’t be happy knowing I have that bill outstanding. Even though it makes financial sense, from a psychological stand point I hate it.

    • retirebyforty August 22, 2017, 9:40 am

      Mrs. RB40 hates loans too. She’d payoff our mortgage if she was in charge of our finance. I’ve learn to love the mortgages, though.

  • Matt @ Optimize Your Life August 21, 2017, 4:42 am

    I’ve actually never had a car loan. But then, I’ve never had a new car. I bought a used Saturn for $1,000 when I was in high school and recently bought a 2009 Corolla with cash. Neither were expensive enough that I even thought about a loan. After never having to make a monthly car payment, I would hate to take one on at this point. On the other hand, I’d find it hard to ignore the investing math. I guess I will have to see how I feel when (and if) I buy something more expensive.

    • retirebyforty August 22, 2017, 9:46 am

      Great buy on your used cars. I had some really cheap cars when I was young too. I got a classic Subaru for $500 and drove it for a couple of years, then sold it for $500. Hahaha, that was not bad. Now, we need a safer car because we have a kid.

  • Turning Point Money August 21, 2017, 4:43 am

    A rule in our house is no loans for consumer purchases, even if it is 0% interest. This is for all the reasons you mentioned, but primarily the last point about cash flow. If we are paying down loans we will have limited money to fund our investment accounts

  • Done by Forty August 21, 2017, 4:45 am

    I am not a fan of auto loans for the average consumer, for the reasons you noted: they’re typically not going to really invest the funds. So the arbitrage play is a bit of a lie in nearly all cases.

    But for someone who’s writing a personal finance blog and who retired before 40, I think it’s actually pretty likely that you’ll invest any funds you’ve freed up. For me, the cut off is between 4 or 5%. Anything below that, I’ll try to leverage up and invest the funds.

    And it’s easy to switch course if you find you’re not actually investing. You can always sell the investments and pay off the debt either. But trying to go the other direction while mid-stream paying off your car is harder…

    • retirebyforty August 22, 2017, 9:47 am

      I see your points. I’m pretty sure I’d invest the money I receive from an auto loan.

  • Dylan @ Trail to FI August 21, 2017, 5:06 am

    We’ve never had a car loan (they’re highly depreciating consumer items!), but I have wondered about using a loan to allow us to invest the rest. I think the risk would be too large to make it work in most markets. Not to mention stressful.

  • Pennypincher August 21, 2017, 5:10 am

    Financial Wiz Suze Ormand says to never take a loan out on a car if you can’t pay it off in 3 years. If it takes longer, you cannot afford that car.
    I say, why borrow money for something that depreciates in value?? Most cars are built to last 200,000 miles today. Hey! Take it to 300K miles!

  • [email protected] August 21, 2017, 5:43 am

    We haven’t had a car loan since I learned about FIRE actually! I bought two new vehicles – one in 2004 and the other in 2008. We sold the 2004 this summer (199,000 miles) and the 08′ has 100,000 miles. We bought a 2005 Subaru Outback in 2015 – and paid cash. Felt great and we’ll never have a car loan again!

    • retirebyforty August 22, 2017, 9:49 am

      Great! Many cars are built pretty well these days so we have more choices in the used car market.

  • Mr. SSC August 21, 2017, 5:51 am

    We typically paid off the car within 2 years and have 0% or under 1% interest when we have gotten loans in the past. My wife’s car, we had saved about $15k and were going to finance the rest thru our CU at ~2% interest. After we’d agreed on the whole thing pricewise, the dealership offered 0% interest, so we put $2k towards the car and put the rest in Vanguard back in 2011. We paid off the entirety of the loan when it got down to ~$3k remaining.

    I think we definitely won with that one. That was the last auto loan we have had. Since then, we just use cash and replace the e-funds later.

    • retirebyforty August 22, 2017, 9:51 am

      Nice one. Thanks for sharing a real life example of investing with an auto loan.

  • Sandy T August 21, 2017, 6:15 am

    When I bought my last car (2010) I took out a loan, but the interest rate was 0.63%. At less than 1% I figured it was a good deal. I was able to keep earning better interest on the money as I paid off the loan. At the time I was not able to pay cash for it fully. In the future I will debate not getting a loan if the interest rate it still really low.

  • Darren August 21, 2017, 6:15 am

    If I could, I would pay off a mortgage because it’s anortized forever and save over $100K rather than worry about the interest of a car loan. Everyone’s got a different tolerance for debt which is interesting to see especially in the PF community.

  • Michael August 21, 2017, 6:18 am

    The last two cars I’ve purchased had 4 year loans, but which we paid off early (2-3 years). If you have good credit, you can get a loan rate under 1% (ours were .08%), which is also significantly under inflation. The main reason I do not mind a car loan is because I do not have the funds for a car just sitting in a savings account because that would cost me money by not earning interest or growing. Yes, I have the funds in accounts, but by spreading the cost over the course of a couple years, I can both dollar cost average AND partially cash flow the loan, which means I will not be depleting my accounts as much. If, or when, car loans go back up to 5-8%, that would absolutely change my position.

    Also, you may actually save more money by financing. My dad (who has plenty of money) recently purchased a vehicle that if he financed, the dealer would knock $2500 off the price. So, he paid 50% and 2 months after the purchase (which was the required minimum length), he walked in the bank and paid the rest. He saved $2500 basically by doing nothing.

    • retirebyforty August 22, 2017, 9:54 am

      You’re right. The auto finance division makes a lot of money from loans. That’s why they have incentives. I’d do the same as your dad.

  • FIbythecommonguy August 21, 2017, 6:37 am

    Last summer we took on a car loan (1.5%) after not having one for over 6 years. My reasoning at the time was I can easily invest the money (cash) and get a higher return to cover the interest. This is true and still holds true today, but I hate sending off a monthly payment. I have been thinking off paying it off, so I can be done with the loan.

    • retirebyforty August 22, 2017, 9:56 am

      The stock market seems uncertain at this point too. It might be better to sell and pay off the loan. You’re already ahead. Nice job!

  • Mr Crazy Kicks August 21, 2017, 6:41 am

    All reasons why we drive a $3k car. Paid in cash, and we hardly have any equity tied up. Most of our cash is still invested and turning a profit. I do still have some loans though. We still have our mortgage, and I’m still paying off my student loans. I’ve done a lot better having the money invested instead of paying them off.

    The student loan is only $2k now, and I’m really tempted to pay it off just to drop the payments. But at less than 2% interest I can’t bring myself to do it 🙂

    • retirebyforty August 22, 2017, 9:57 am

      2% student loan! That’s pretty good. I read that the average rate is around 6%.

  • Jeff @ Maximum Cents August 21, 2017, 6:55 am

    I haven’t had a car loan in over 10 years! When I had one, my biggest issue was getting angry at the payments every month. That caused me to pay it off extremely early. However, that loan was around 5%. I think if it was 3% or lower it would have been ok. If you can get a 0% loan and pay the minimum every month why not take free money?

  • Mrs. Picky Pincher August 21, 2017, 6:59 am

    We actually do have a car loan (the shame!). The reason is because we’re on the debt-freedom part of our FIRE journey. Our car loan has an extremely low interest rate around 2% (hell, it might be lower). Our student loans are much larger balances with the lowest interest rate at 3%. We prioritize debt freedom over heavily investing so we’ll be able to pump more cash into investments once we don’t have debt. We do, however, invest in 401ks and Roth IRAs to take advantage of time.

  • Helen August 21, 2017, 7:19 am

    I had one car loan many years ago, and never liked it. Any debt including car loan is stress to me, and I try to stay away.

  • Dads Dollars Debts August 21, 2017, 7:30 am

    Don’t do it! I bought a car with a 0% loan and still paid it off as soon as possible. Sure it was free money but it was the thought of the monthly payments and just being in debt. Plus when we got rid of the loan I could decrease the auto insurance I had covering the car. So I saved money there too.

    • retirebyforty August 22, 2017, 9:58 am

      Oh yeah, I forgot about auto insurance. Good job paying off the loan early. The amount is too small to make a big difference in your net worth anyway.

  • SMM August 21, 2017, 7:56 am

    I do hate auto loans, but I have one now. I’ll be paying around $1,500k in interest for the life of the loan (5 years, have about 3 years left). I’d have to sell some investments and pay the taxes to pay the car off in full and didn’t want to do that. My estimation is by the time I pay off the car, I’ll have less than 65000 miles on it and with luck, will be able to drive it for at least 5-8 more years.

  • Brad - MaximizeYourMoney.com August 21, 2017, 8:30 am

    We’re totally debt-free and have no intention of any future debt.

    That said, I can understand a mortgage. But borrowing for depreciating assets – it’s a double-whammy hitting your wealth-building potential hard. Definitely avoid that situation!

  • Chris @ Duke of Dollars August 21, 2017, 8:55 am

    Awesome to see some visuals around this and will definitely check out the comments on the other post.

    I currently have an auto loan and it was due to an emergency situation…it was not a fun experience.

    After college, I worked hard and used all extra money to pay off the car loan I obtained in college (it was an old car and low IR to get to internships and campus back then). Once it was paid off, I had bare min insurance since it was actually only worth around 1K due to it being old.

    Long story short, after paying it off and enjoying the no car payment and VERY low insurance rates, someone without insurance and low-income hit my parked car. I had insurance but did not have uninsured on collision damage, and didn’t have collision insurance since the deductible was as much as the car.

    I could have sued the guy for not having insurance, but seeing as it was low cost, it wasn’t like there was going to be any garnishing of the wages. I talked to a few lawyers, they said it wasn’t worth taking him to court for, and wala I was left without a car.

    Seeing as I needed to get to work, the public transport system being pretty much useless where I live, a new car was required. I didn’t buy an old POS, but a reliable 3 year old used one that will last awhile. Thus an auto loan was required, but with the intention of paying it off early :).

    Lessons from the story -> get uninsured collision insurance if you don’t have collision and be thankful you’re in a position to be able to handle situations like

    • retirebyforty August 22, 2017, 10:01 am

      Sorry to hear about your old car. That kind of situation can be very tough when you don’t have much resource. Keep at it. I’m sure your finance will improve in a few years.

  • Mark August 21, 2017, 9:13 am

    I cosigned a 20k carloan for my 24 yo daughter for 72 months with 0% financing. She is a teacher with solid work salary, so she can make the payments easily. She is unmarried and lives about 100 miles away. It was important to me that she drive a dependable car (Minnesota) with very low chance of breakdowns. I figure by the time the loan matures, she will be married and it will be “his” problem then. She is also investing 200/month plus her teacher retirement auto-investments.

    I paid cash for my Toyota. I’m FIREd!

    • retirebyforty August 22, 2017, 10:02 am

      I see your point. We need a dependable and safe car because we only share one car and we have a kid. If it was just me, I’d get a cheaper used car.

  • Sam @ Financial Samurai August 21, 2017, 9:22 am

    It’s funny that you wrote about this topic today because I just bought a new car with cash.

    I can’t stand auto loans either. It’s the dumbest thing to get a loan on a guaranteed depreciating asset.

    • retirebyforty August 22, 2017, 10:04 am

      Enjoy your new Land Rover! Nice car.

  • mary w August 21, 2017, 10:22 am

    I haven’t had a car loan since the 1980s. My mother’s rule was that if you needed a car loan to last more than 2 years, you couldn’t afford the car. My rule now is that if I can’t afford to pay cash for a car then I can’t afford it. Those 7 year car loans are insane. People end up spending waaaay more than they can afford for a car. Plus they are often the people who won’t keep a car for 7 years.

  • Derek @ Money by Dad August 21, 2017, 12:50 pm

    Couldn’t agree more! Paying cash forces you to be far more conscious of the money you’re spending. It’s way too easy to walk into a dealership with one price in mind and quickly blow past that by doing a little payment juggling through financing options.

    • retirebyforty August 22, 2017, 10:05 am

      I hated going through the numbers with the car guys. They just keep trying to upsell. It’s just $15 more per month!

  • FullTimeFinance August 21, 2017, 1:44 pm

    We took the cash we would of paid on our new car and purchased a CD. We then took a zero percent loan which we pay with normal cash. It wasn’t a huge gap, I estimate we made a little over one thousand dollars. It doubled as our emergency fund in the end. But I also realize my case might be unique. We knew the car we wanted before every thinking about financing. We also knew we had cash to pay for it and a negotiated price up front. Financing was a after thought.

  • Dividend Diplomats August 21, 2017, 7:08 pm

    RB40 –

    Like you, I now despise my auto loan. I did take a 66 month auto loan out in 2013, but am paying it off in full in less than 2 weeks or… 18 months+ early. Depreciating asset, cash flow sucking, not much value add if you can get from point A to point B safely – a loan to do that? I don’t think so.

    -Lanny

    • retirebyforty August 22, 2017, 10:08 am

      Congrats! Nice job paying it off early.

  • Mark August 22, 2017, 6:00 am

    C’om really? Are you using the longest bull market in history to compara against an auto loan?
    I’m not fan of loans either but make the same calculation using the 1974 as starting date or 2000-2008 (bottom)..just can’t rely on certain stock market returns because it’s not certain !!!

    • retirebyforty August 22, 2017, 10:08 am

      It’s just an example. Take with a grain of salt. 🙂

  • Robert August 22, 2017, 7:33 am

    I have an auto loan on my used 2014 Prius, but only because I secured a rate 0f 0.9% for 72 months. Further, my job pays mileage, which covers my $167/month payment and typically allows for an additional principal payment of $10-25. I too do not like debt, hence the principal payments, but I won’t pay this loan off outright because of the rate…

  • Martin August 22, 2017, 7:43 am

    The problem with car loans is that many people then buy a car that is considerably more expensive than they can afford. It is considered a status symbol that says – ‘look I’m not so badly off’.
    I have had a few car loans in the past, but like others, I just hate the monthly payments. If you cannot afford to pay cash for an asset that depreciates very quickly, then you cannot afford the car. We have a 2006 Odyssey (bought new), 2015 Altima (bought new) and 2001 Corolla for our son/daughter for $2,000. The latter has been running smoothly for 5 years now with almost no issues and teaches the kids a lesson in the real purpose of a car – getting from A to B. Having said that, I went to a Tesla showroom the other day and sat in the model S – I must admit that they know how to make new cars look and feel enticing!

  • Tim Kim @ Tub of Cash August 22, 2017, 10:36 am

    I mostly agree. And I’d say emphatically agree if we’re talking about the general population. But if you can get 0.9% financing (which is what I have on my 2015 honda accord – but like a lot of us super conservative PF bloggers, I can buy a few lambos and some bentleys with cash if I wanted to), you end up paying lower than today’s value of the car due to inflation hovering at 2% or more per year. And again, for the general population I’d say, yeah the temptation’s there to get more car, and they also probably wouldn’t use the opportunity to invest the money in the market. But I think for PF bloggers who are typically conservative and smart with their money, I can see doing a decent loan.

  • Eric August 22, 2017, 6:48 pm

    I have a car loan. I went to the dealer knowing exactly what car I wanted and negotiated the best deal possible. I had plenty of cash to pay but the 0.9% rate was too good to pass up and less than the interest rate on our online checking account. We made sure there was absolutely no way they would reduce the price any more if we paid cash and so we put as much of a down payment that they would allow on a credit card in order to earn the rewards (and of course paid in full) and financed the rest. We have interest rate arbritration with a checking account so it was a no brainer and having a few extra thousand in the bank will not influence spending but has allowed me to put a down payment on another investment property I couldn’t have without the cash. The rental income now pays most my the loan (principal and interest).

  • CalBang August 23, 2017, 2:28 pm

    100% AGREE. Say NO to any auto loan. The issue is that people generally think they “could” make more % by investing the funds that would otherwise be used wisefully to pay for a vehicle, however, the reality is that most DON’T actually follow through with making that happen. On top of it all, let’s say one is borrowing at a low 3% interest. Even topping that is highly unlikely given the run we’ve already had in this current bull market. What if the market tanks, and now that would-be return is a loss of capital with an auto loan that’s still there? Not good.

    This article was intriguing to me as I have been an advocate to everyone for years that ANY auto loan is a mistake. If you can’t afford it, don’t buy it!

    For me it’s a 10 year old Toyota Land Cruiser, bought used 4 years ago, still worth almost what I paid to buy it (bought from an individual, HATE the car dealership experience!). It’s reliable, safe, holds its value, no compliants. All cars depreciate, but if you’re doing to do it buy a used luxury model, preferably one that’s notably reliable, and let someone else take that hit which occurs over the first few years.

  • Mr. Enchumbao August 27, 2017, 5:52 pm

    Joe,
    You made really great points. I feel the same way about auto loans. I don’t like them because I’d probably spend more if I were to go with one instead of paying cash . You’re also right about the fact that most consumers that say they’re better off investing the money but they never end up doing it.
    I haven’t had a car loan in about 4 years and I don’t ever want to go back to those days. Heck, I don’t even want a mortgage and that’s why we’re saving cash to pay for our house after we retire. Being debt free is part of our DNA.

    • retirebyforty August 28, 2017, 8:10 am

      Good luck with the mortgage. I’m sure we’ll get to that point someday, but now I’m okay with mortgage.

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