17 Reasons Why Car Loans are Horrible for your Finances

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Did you know that the average cost of a new car today is almost $50,000 dollars?! That’s incredible but hardly surprising.

Yep, according to Kelley Blue Book calculations here, the average vehicle cost in late 2022 was over $48,000 dollars (and I’m sure it will be over $50,000 by the time you read this).

The average person definitely doesn’t have $48,000 dollars saved up. Broke and in debt already, they turn to a car loan…something that’s going to crush their finances and hold them down for as long as they keep that “new” car.

On top of that, the finance industry is getting more savvy. They’re letting almost anybody come in and borrow whatever amount of money they need for that car. That means car debt is rising and dealerships are making more money than they even know what to do with. It’s sickening.

But YOU can change this. And only YOU. Nobody else is going to do it for you.

So today, we’re going to take a look at car loans and why they’re horrible for you finances. First, let’s look at what a car loan actually is, the average car loan in America today, and 17 reasons why car loans are horrible for your finances. You ready? Let’s go!

What is a car loan?

A car loan, also known as an auto or automobile loan, is an agreement between a consumer and a lender, to borrow or finance a certain sum of money, to purchase an automobile.

Instead of buying a car outright, you use a lender, like a bank or financial institution, to give you money to buy the car. You use that to buy your car and then you have loan terms to stick to to pay that lender back – for example: you borrow $30,000 dollars at a $3.5% percent interest rate and you have 60 months to pay it back.

So in a nutshell, you don’t pay for it. The bank pays for the vehicle and you pay the bank back the money you owe them. This is the most common way that people buy new cars. In fact, according to fortunly’s article here, MORE than 85% of car loans are financed. So that means more than 8 out of 10 new cars are financed. You HAVE to change this mindset. If you don’t, you’ll ALWAYS be broke.

The average car loan today

Here’s a number that will crush your finances – According to Bankrate.com here, the average car payment in America at the end of 2022 is $667 dollars (and looks to keep climbing in 2023)! That’s disgusting. I’ve got to say that that is probably a conservative estimate and the real cost of a car payment today is most likely much more.

With 85% percent of new cars being financed, and 60% percent of used car borrowers getting a loan, the average consumer is locked into a viscous cycle of debt and repayment. And as more and more people roll old car debt into new car payments, the sheer amount of debt that some people have is enormous. It’s time to change that. Time to take a look at the 17 reasons why car loans are horrible for your finances…

17 Reasons why car loans are horrible for your finances

1. Cars are overpriced

First things first. Brand new cars are way overpriced. Let’s just face it. With inflation hitting everything really hard in the last few years, everything has gone up – cars included.

All cars are overpriced right now but new cars especially. Think about it: dealers HAVE to make money when they sell a car. They have to pay for employee salary and commission, rent, insurance, the cars themselves, and have a little bit of profit left over to stay in business. So they mark the car up a couple thousand bucks to cover it all.

With that being said, YOU’RE paying for all that. Then that car loses all that value, or depreciates, simply driving it off the lot. Thousands of wasted dollars…just gone.

Unless you’re a millionaire, I want to take NEW cars completely off the table. You won’t be buying them anymore (until you’re wealthy and can pay all cash).

When searching for a car, you’ll want to find a good quality, low-mileage, USED car for a decent price. That way, you’re getting a deal and you can pay ALL cash for it. Cars are overpriced. So don’t fall victim to buying one for more than you need to.

2. New car depreciation

New car depreciation is for real, y’all. Here are some scary numbers for you according to Ramseysolutions.com’s post on car depreciation here:

After only one minute off the lot, your car is worth about 10% percent less. So a $30,000 dollar car is now worth $3,000 less or about $27,000 dollars.

After one year off the lot, your new car will lose 20% percent of what it was worth. So that $30,000 dollar car will now only be worth about $24,000 dollars.

And after 5 years, that car will have lost more than half of its original value – or 50-60% percent. So after 5 years, your $30,000 dollar car will only be worth about $12,000-15,000 bucks.

Wow. So you might as well just buy that car used at 5 years old. At that point, you’ll be saving a huge chunk of money and still be getting a good quality vehicle.

3. You can’t really afford the car

Here’s the brutal truth of the situation if you take out a car loan: if you can’t afford to pay for it in cash, then you can’t afford it. If you have to take out a loan, and get on a payment plan, you can’t afford that vehicle.

That’s how REAL wealthy people think. So I’ve adopted this mindset and it’s kept me honest in all kinds of situations. If I don’t have the money to pay for whatever I want to buy, I simply don’t buy it. So if you don’t have the money for that new car, you’re going to be buying something more affordable.

That means you need to save up cash for your next vehicle. If you do that, you can definitely afford it (it also feels pretty awesome to pay cash for a car).

4. It costs you YEARS of payments

Once you finance a vehicle, you’re stuck. You’ve signed up for a LONG repayment. Most people aren’t thinking about that, though, when they sign up for their car loan. They’re simply awestruck over the shiny new vehicle in front of them. So they don’t see YEARS of payments in front of them. Even though you may see 60 months, just remember that this means 5 YEARS.

A monthly payment is drawn up and most just sign on the dotted line. It’s tough to see. However, YOU can end this. I want you to start understanding how crappy it’s going to be to get locked into something that’s going to take years of your life to pay back. From here on out, that’s not an option.

5. The 60, 72, 84, and 96 month car loan trap

Before just a few years ago, the normal car loan terms were 20% percent down for 36-months at a fixed percentage rate. Those were the days of mostly affordable cars, good wages, and a negative outlook on debt and all of its dangers.

But today, debt is the norm and just about anybody can finance a brand-new vehicle. These days, the “normal” car loan is 0% percent down for 48 months. However, that’s changing rapidly to allow people to borrow more and more money, stretching it out for longer periods of time just to be able to “afford” the payments.

So the norm is changing to 60 and even 72 months. It’s called “creative financing” and it’s here to stay. Some lenders are even changing up the game to offer 84 and 96 month financing. It’s pretty ludicrous, and fairly rare to see, but I can see this trend picking up steam as cars continue to get more expensive in the future.

Here’s why 60, 72, 84, and 96 month loans are a huge financial trap:

longer loan terms allow you to finance more money and keep the monthly payment down. So most people get extravagant vehicles for outrageous amounts of money. Something most people don’t need.

Lenders also encourage you to stay in debt longer, not to help you, but because that’s how they continue to make money. The longer the loan term, the more money lenders make.

Lenders also understand that, after a certain period of time, most people get tired of their vehicle. That means a new car with new payments and an awesome new loan term for the lending company…I mentioned that lenders like making money, right?

It’s all one gigantic, years-long financial trap that you should go way off the road to avoid (pun intended).

6. Low credit score – high interest rate

The next car loan trap that you’re likely to run into is something I like to call “low credit score – high interest rate.” Basically, if you don’t have a good credit score, or high credit score, lenders won’t give you a decent interest rate on your loan. Those with a bad credit score always get higher interest rates, which means they pay more in interest to the lender.

It actually makes no sense if you think about it: if you have a low credit score, and are a risky person to lend to, lenders jack up the interest rate and make it even harder for people to pay…which means they’re even more likely to go into default by not paying their loan.

I mean, I understand WHY lenders give higher interest rates. But it’s tough on those whose credit score isn’t as good as others. Which is exactly why, if you’re credit score is terrible, you should never try to get a car loan. All cash or nothing at all.

7. (Almost) unlimited financing

It absolutely blows my mind that lenders will allow people to borrow more on a car than what they make in a year. “Oh, you make $40,000 dollars per year? No problem, this $50,000 dollar brand-new truck is very affordable.” Why would you ever do that? Just because you can? No, that’s a terrible way to manage your finances.

What’s worse is that lenders will really allow you to borrow almost as much you want to finance a vehicle…even multiple vehicles! Because of that “creative financing” thing that I mentioned earlier, you can easily borrow the cost of a vehicle, stretch out the payments and be able to pay for that car every month.

A $100,000 dollar vehicle, with a 3.5% percent interest rate over 72 months will run you about $1250 bucks. And while that’s a pretty outrageous car payment, there are a lot of people who find a way to squeeze that payment in to their finances. Don’t get me wrong – you should NEVER do something like the example above. But I just want you to see how people actually get these insanely luxurious vehicles.

They’re broke…but they have a nice car and they sure do look great, right?! Sure, but those people have absolutely no money and a ton of debt. Don’t be like them.

Are you starting to see why car loans suck? I hope so. Let’s keep going.

8. Most will borrow more than they need to

Yes, there is almost unlimited financing. And we can get as mad as we want at the lenders. But the sad truth is that most people are going to borrow more than they need to just because. Most people are undisciplined and have no intention of limiting themselves. They don’t care how much they have to pay or borrow.

I’m of the mindset that you should never borrow any money for anything ever. Extreme? Maybe. But people are going to borrow money to finance cars. It’s just a fact. However, most people never set a budget and stick to it. Most have no budget at all. They say, “I want that BMW and I don’t care how much it costs.” Then, when they have a $1,000 dollar payment, and it’s tough to pay every month, the regret sets in.

Don’t make that mistake. Set up a set budget for your next car purchase and pay ALL cash for your next vehicle!

9. You’ll go underwater quickly

It’s safe to say that, by now, you can see that car loans are pretty absurd financial mistakes. Whether you’re borrowing too much, getting a high interest rate loan, trapping yourself into a lengthy payoff period, or rolling equity from another vehicle into your new loan, it’s easy to find yourself underwater. By being underwater on your loan, I mean that you owe more on the vehicle than what it’s actually worth. Also called negative equity.

So for example: you have a car worth $25,000 dollars but you owe the lender $30,000 dollars You are underwater $5,000 dollars (or you have a negative equity of $5,000 dollars). This is VERY dangerous for a couple of reasons…

10. Hard to get rid of

First, if you’re trying to get rid of a car that’s underwater – you know, maybe to fix a bad financial mistake – you’re going to have to pay off the entire amount that you owe. But the car itself may become worth less. So if you try to sell it, you’ll only get the current value. You will then have to fork over the extra money to pay it off before the buyer (or dealer) can get the title.

Secondly, the same goes for if you don’t like the vehicle anymore. In order to get rid of it, you need that title. That means the vehicle has to be paid for. And if you trade it in, you’ve got to pay the extra that’s owed.

Lastly, accidents can be financial disasters. If you have a car loan, but get into an accident, you could be out the entire amount of the car value. If insurance won’t pay, you still owe on that car. You HAVE to pay or else they’ll sue you. Even if you get a small amount of insurance money, it might not cover it completely. I hope that never happens to you.

11. Defaults and the repo man

Alright, so let’s talk default and repossession. A loan default is when you owe money to a lender, but fail to pay your loan. So, once you’re behind a couple of payments, the lender can “call the loan,” or tell you that the entire amount currently owed is due in full. If the borrower fails to catch up or pay the balance, the loan will go into default.

If that happens, the lender will repossess, or take back, the vehicle that they own. Remember, the bank or the lender actually owns the vehicle until the loan is paid in full. And let me tell you…they’ll send a tow truck out and haul away your vehicle in 2 minutes flat if it’s time for repossession!

If you paid cash instead of borrowing the money, there would be no way to default on a loan and no chance of repossession. Because you own that vehicle outright. Sounds like the better option to me!

12. Doesn’t allow for delayed gratification

Delayed gratification is a really interesting concept. Essentially, delayed gratification is the ability to delay an impulse for an immediate reward, such as buying and financing an expensive vehicle, in order to receive a more favorable reward at a later time. When dealing with purchasing a vehicle, understanding and implementing delayed gratification is extremely important.

Scenario 1 – No delayed gratification: if you’re not disciplined and you don’t want to practice delayed gratification, you’ll go to the car dealer, find what you want, and impulse purchase a vehicle that day. You’ll make an immature, undisciplined decision and it will hurt you financially for years. The $500 dollar payments get heavy and that $30,000 vehicle becomes a burden on your life. You resent the purchase and soon realize you’ve made a terrible decision.

Scenario 2 – Delayed gratification: instead of impulse buying that same car that you want, you try something different. You pay cash for a crappy beater to get you around. With no car payment, you can easily save up $500 bucks per month for 3 years. That comes out to $18,000 dollars. Well, guess what? That same car, at 3-years old, is now worth about $17,000-18,000 dollars! You buy that awesome car in cash and you get to experience the true joy of delayed gratification. You own the vehicle outright and now get to enjoy the fruits of your labor for years. That car was a great purchase and you’re super proud of yourself and all of your hard work.

Scenario 2 is where you want to be. Don’t be the person that gets crushed with debt in scenario 1.

13. “You’ll always have a car payment”

This is the biggest load of horse crap that I’ve ever heard in my life. I’ve heard this more times than I can count – “oh, cars are expensive. You need a new car. And you’ll always have a car payment.” WRONG. Guess what I DON’T have? Yep, that’s right, a car payment. I have 3 paid-for vehicles sitting in my driveway and no car payments at all. And I’ll never have another car payment again ever in my life.

Now here’s where that original statement is true: “You’ll always have a car payment” is true if you don’t manage your finances properly, are extremely undisciplined with money, are immature and can’t tell yourself “NO,” or you just HAVE TO have a new vehicle. Yes, if you can’t get your act together, you’ll always have a car payment.

But YOU can do something about it. YOU can choose to live life differently. YOU can get your car paid off and YOU can choose to save up and pay cash for your next vehicle. It’s hard…but so worth it.

14. Debt is slavery

The next reason why car loans are horrible for your finances? Because debt is slavery. Being in debt is not wise, and as the Bible says in Proverbs 22:7, “The rich rules over the poor, and the borrow is slave to the lender.” If you have debt, in any form, really, you are a slave to the lender. They rule you and actually own your stuff until you pay up.

It’s a crappy feeling. So don’t let this happen when it comes to your vehicles! Save up and pay all cash for your next car!

15. The million dollar mistake

Here’s the tip that I’ve been waiting to write about because it’s the most important concept in this whole post.

Having a car payment for decades of your life can be a million dollar mistake. Here’s how:

Let’s say you have a car payment – say $500 bucks per month for 60 months. And like a normal person, you get a new car every 5 years. This cycle repeats for 30 years and you continue paying $500 per month that entire time. Over the course of 3 decades, you’ll have spent over $180,000 dollars on vehicles and interest payments! That’s alotta’ dough.

But let’s really think about why that’s a million dollar mistake. If you were driving a paid for car, you could easily invest that $500 per month into good growth stock mutual funds. And instead of paying interest over the years, you’d be earning it. A $500 dollar per month investment every month for 30 years, with a 10% percent rate of return, comes out to just over $1 million dollars.

I REALLY hope that car was worth it. That mistake just cost you a million bucks and possibly a very comfortable retirement. So don’t let your car cost you your entire future.

16. You could’ve just saved up

You did it all. You financed a huge payment for years and years, all to show off your sweet ride to a few envious friends. In the end, nobody really cares about your ride. And you lose, because you borrowed a bunch of money and went deeply into debt.

You could’ve just saved up some money and got the same car. You could’ve stashed cash and came out on top with zero debt. But you had to be stupid. Borrowing a lot of money to buy something that goes down in value is pure stupidity. Instead of saving up for it, now you get to pay the stupid tax.

17. It’s just a car

If you cut through all the B.S. and really think about it, IT’S JUST A CAR. It’s a means of transportation that helps you get from point A to point B. That’s it. So there’s nothing that you really NEED out of your car other than a functioning automobile with heat and A/C. Everything else is an unnecessary luxury.

But, hey, please don’t get me wrong. I’m a big fan of really beautiful and amazing cars and trucks. But you shouldn’t buy any vehicle that you can’t afford. Don’t buy your dream car on an 8-year payment plan just because “you only live once.” That’s a bad plan. Drive used, high-quality, reliable vehicles until you have enough money to pay for your dream car in cash. It’s that simple.

Finally

Like I’ve already said – it’s just a car. It’s a means of transportation to help you get around. Cars are cool. But if you’re broke, and you have to finance it, you can’t afford expensive cars (or any car that has to go on a payment plan).

Once you have the money in cash, buy whatever you want. But don’t go deep into debt just to buy a car. You CAN’T afford it. You just can’t. If you do, it will seriously mess up your finances and start crushing all of your financial goals. So stay away from car loans, get rid of yours if you have one, and pay ALL CASH for your next vehicle.