Don't Let Your Car Loan Own You

from daveramsey.com on 27 Mar 2008

Too many people today view their car as their status symbol. A nice car means a successful person, while an older car means one has no money. Remember, anyone can get a nice car if they make the stupid decision to get a loan with it. You are not wealthier by having a nice car and a big loan. If anything, you are poorer. It's not wrong to own a nice car if you paid cash for it.

So what kind of car should I have?

The total value of all your vehicles (including boats, all-terrain vehicles, etc.) should not equal more than half of your gross income. If you have that much of your money tied up in transportation, your budget for things like rent and food will be stretched way too thin. At that point, it doesn't matter how nice the car is, because it owns you and your life.

According to the U.S. Bureau of Labor Statistics, more than 80% of car loans are for longer than four years. If you buy the car new, then by the time the loan runs out, the car will have lost between 60% and 70% of its value. That's beyond ridiculous ... it's stupid! Why would you get a $25,000 loan at 8% over four years, pay $598 a month, be stuck with a car worth $8,750 when the loan is done ... and think it's a smart idea?

How a car loan hurts you

If you have a big car loan, it hurts you in the long term as well as the short. First of all, if you took out the loan described above, you would pay over $28,000 for a $25,000 car. How smart is that? Would you pay $200,000 for a house if you knew you could buy it for $175,000? Would you apply for a $20,000 student loan to go to a $15,000 school? Of course not. So don't pay more for a car than it's worth.

Second, if you invest that $598 in a mutual fund for 30 years, it would be worth almost $2.1 million. Hope you like the car! In the meantime, don't jeopardize your family's well-being or your future just for a stupid car. The car you owned 30 years ago won't feed you at retirement. It won't send your kids to college and it won't give you the ability to be so rich that you can give money away and bless others. Car loans will eat your lunch, so stay away from them.

Learn how you can drive free cars for life.