The Risk Of Auto Debt
Here is the hard fact: Automobiles are getting more and more expensive, taking a greater percentage of your monthly income to purchase a vehicle.
Today, it seems like for most people, having a reliable vehicle is a necessity, not a luxury. But for others, they buy their vehicle for luxury, even when they really can't afford it.
The Cost Of Financing A New Auto
There are ways of intelligently using someone else's money for purchasing a new auto. Low-cost financing (such as 0.9% rates) can be a good use of your credit, and get you into a more affordable auto. But here is the catch: Don't refinance any remaining balance of your existing vehicle into any new loan.
Rolling in unpaid balances from older vehicle loans is becoming a common event. It is been estimated that about 1 in 3 people who finance a car in 2019 are rolling over debt from a prior auto, with an average carryover balance of nearly $5000. Both of these numbers are increased, from about 5 years ago, where about 28% of people rolled over a balance, around $4000.
What this means is that they are continuing to pay on a vehicle that they no longer own. YIKES! DOUBLE YIKES! (Dave Ramsey would go NUTS with that!)
My Thoughts
It's time to really think about what you are buying when you are purchasing a vehicle. First, you should look at your purchase as buying a mode of transportation. If you keep that mindset, you will look at your vehicle for what it should be: Reliable, Safe, Economical TRANSPORTATION. Don't think that your vehicle will bring you status. Or make you anything you are not. It won't. You may think so, but you are likely fooling yourself.
Second, it's a depreciating asset. You will never make money on a regular auto when you purchase it. You should be all about making that safe, reliable vehicle as economical as possible.
In order to do this, here are a few thoughts and suggestions that I have come up with:
- Buy what you need, not what you think you can afford. Remember the purpose of your vehicle is to get you somewhere. An economy car does it just as well as a Bentley. Don't spend a lot on something that will just lose value.
- Consider the cost of buying new, versus a pre-owned vehicle. I highly recommend purchasing a two-year-old, well-maintained car that is coming off of a lease. You can get a lot of car for a much smaller price.
- Look at the other costs of ownership. Maintenance, insurance, and gas are all on-going costs of ownership. Think about what they will cost. Check those out before you buy that auto.
- Maintain your car meticulously. If you keep your car in great shape, there are many benefits. You enjoy it more. It is more reliable. You will keep it longer. My two cars both have over 130,000 miles each and they are often mistaken for new autos by people. I have no need to buy anything new.
- Consider the warranty. I am a believer in extended warranties, but not everyone does. Do the math and guess to see if it makes sense to you. Some previously owned autos from dealers (ie. "certified") come with some pretty amazing warranties, in some cases better than new warranties.
- Try to buy with cash. If you can, don't run a car payment with high-interest rates. If you do need to borrow, then look for a deal with the lowest rate possible. Promotions occur pretty often with some brands.
- Buy for reliability. This will help eliminate the need to buy as often and save you money.
So NEVER buy a car and refinance a balance on the older auto. Get a reasonable and reliable car and maintain it well.
Keep your money and invest it wisely. Perhaps someday you can get that Bentley....or at least laugh at the dealer as you drive by, by knowing you can afford one but are driving something that makes more sense.
BTW...I think Bentleys are wonderful, and if you can afford one within these parameters...then go for it! But consider getting one coming off of a lease and save yourself a bundle! If you can't pay cash for it...you likely can't afford it.
WhiteCoat Risk Management provides these articles to help improve general risk awareness in all aspects of your life. It is not responsible for any actions you take or fail to take regarding any aspect of your financial planning or risk management. This article is provided for information purposes and is not intended to provide individualized advice. You alone are responsible for your decisions.
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