By Philip Bachman
We introduced a blog series about car shopping on April 14. Today’s article will caution against thinking of cars as a financial investment, and it will discuss buying cars with credit.
Auto manufacturers and ad agencies want you to believe cars are a good “investment” for longevity, safety, or other reason. Yes, cars meet important needs and are important to all of us from a lifestyle perspective. But unless it is a rare vintage or collectible car, cars are not a good financial investment.
Even though cars almost always lose value, the auto industry makes it so easy to buy them on credit. According to Automotive News (12/18/2013), cash buyers – defined as “no lender on title” – made up 15.2% of new vehicle purchases and 47.4% of used vehicle purchases. In other words, the majority of people obtain financing for their car, a depreciating asset, either through a loan or a lease.
Although the following may not describe you, buying a car on credit empowers some people to spend more than they should. Focusing on monthly payment instead of the total purchase price with total interest is a mistake. Financial planner Chris Hogan writes in his book Retire Inspired (2016) that buying new cars on credit often reduces the amount of money people set aside for retirement and is therefore costly in the long run.
A related trend in the auto industry to be aware of is longer loan terms. Loan terms for 36 or 48 months used to be standard. 60 months used to be considered a long amortization. However, in recent years, the average length of new and used car loans has crept up to 67 and 63 months, respectively, according to the Detroit Free Press (03/03/2016). With longer terms, consumers are more likely to have negative equity when trading in their car before the loan is paid off.
There is no “one size fits all” recommendation when it comes to deciding whether to buy a car on credit or with cash. Each person’s situation is unique. What may be a consideration to one person, for example sticking to a monthly car payment budget, may differ from a consideration of another person, for example evaluating a car purchase amount in light of their net worth.
Stay tuned for another article discussing leases, the “cousin” of loans. Most people are less familiar with leases than loans. Rather than endorse or refute leasing, the upcoming article will explain the basics of auto leasing so that readers may be familiar with how it works.