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The epic debate of whether it’s best to finance a vehicle or pay for it in cash continues on year after year. With tax season among us, lots of people who will receive a refund often contemplate getting a new car. I know I did these past few years. After financing my current car last year and enduring all the pricey repairs in addition to an expensive high interest car note each month, it’s safe to say I’m team: avoid financing, pay for your car in cash.
Having a shiny new car may seem nice at first when you are looking to upgrade from your older car but 99.9% of the time, financing turns our to be a bad decision and a big waste of money. With the average car payment in America hovering around $350 and even being as high as $500, it’s no wonder why it’s getting harder and harder to pay off vehicles and get out of debt. If those shocking numbers don’t make you question getting a auto loan, here are 7 reasons why you should avoid financing a car.
Table of Contents
Interest Sucks!
The interest rates for financing a car are horrible and interest can easily eat up hundreds and even thousands of dollars from your principal payment, making the process of paying off the car longer and more nerve racking. Young hopefuls with an average credit score are likely to get stuck with something near a 15-18% interest rate. Even if you’re credit is squeaky clean, you’ll have to pay some amount of interest on your car sooner or later. That money wasted on interest can be better used for another purpose like saving or maintenance expenses for your car.
Related: How Does Compounding Interest Work? (Basic Guide)
It’s a Depreciating ‘Asset’
Your car will start losing value from the moment you drive it off the lot. Which is why I don’t see how people can call a car an asset. Unless it’s an antique that you drag out every now and then for car shows, otherwise it’s sitting up in the garage gaining value over time. But if you’re financing a car, that is certainly not the case. Odds are you’re enjoying it and driving it every day trying to get your money’s worth. The car’s value will steadily decrease even while you are still in the process of paying it off.
The Credit Inquiries Suck
When I financed my car I learned the hard way that they run your credit…A LOT. The financing department will run your credit several times not only to verify your creditworthiness but to compare loan amounts and interest rates from various different lenders. While I believe they may be trying to get you the best interest rate, the truth is they don’t really care about the tons of inquiries that will end up on your credit report. If you are in the process of trying to build your credit, 10+ inquiries that will be stuck on your report for 2 years definitely won’t help.
New or Old, Something Will Break
Most people’s excuse for financing a new car is that they won’t be wasting a ton of money working on the car and it will most likely last them longer than a used vehicle. While this may be a valid argument, whether you buy a car new or used, you will stay have to pay; either in the form of your high car note, repairs, or a combination of both.
Cars are not made to last forever and odds are sooner or later, something will break. Fancy financed cars are not immune from the inevitable wear and tear that occurs throughout the lifetime of your vehicle. The brakes and tires will wear down and the mileage will rack up. Before long that shiny new warranty will be gone and you’ll be at the auto repair shop just like everyone else.
You Can’t Live in Your Car
I say this because I’ve seen people glorify their new, financed cars way too much and at the end of the day, it’s only a car people. It can’t talk, it can’t keep you company or do any tricks; It’s just a machine meant to get you from point A to point B. I’ve witnessed first-hand the effects of glorifying your car too much and trying to keep up with the Jones’.
A family friend of ours suffered from lifestyle inflation when they financed a $40,000 Mercedes Benz, then they endured a life crisis that left he/she with no place to go. This is why I would rather spend my money financing a home (an actual residence that I can decorate, make memories in and truly enjoy) rather than a car. I’m not trying to bash people for having nice cars because that’s totally fine but my point is you can’t live in your car no matter how nice it is. If you can’t afford it in the long run and you don’t have your finances together, you definitely shouldn’t finance it.You can always check the actual prices on huge sites like Edmund’s and Find The Best Car Price.
Higher Auto Insurance Rates
When you finance a car, your interest rate is bound to increase. This will most likely happen if your new car a better model and worth more than your older vehicle. Additionally, if you finance or lease your car, most lenders will require you to carry full coverage, making it nearly impossible to cut your amount of coverage down and reduce the premium until you have paid your car off in full.
Related: How to Find the Cheapest Car Insurance Rates
It’s Easy To Get Stuck in the Financing Cycle
When I was working in college I’ll never forget the conversation I had with some of my older coworkers when I asked for their advice about possibly financing a new vehicle. One of my coworkers in particular, was all for financing and told me how she gets a new car every 2 years. She lit up with excitement as she talked about the luxury features of her current vehicle that included heated windows.
Out of pure curiosity, I asked her how someone is supposed to pay their car off in a decent amount of time with all the interest that gets added on to the principal balance. Her response was truly shocking. She just smiled and said “You don’t get to pay it off.” At that point in time, I realized that there are some people who welcome the idea of financing and are perfectly fine with making monthly payments for the rest of their lives. I did not want to be one of those people. I couldn’t imagine paying $300-400+ every month for an eternity just to drive a car. That is NOT normal.
But unfortunately, once you start financing, it’s easy to get sucked up in that cycle as the salesmen at the dealership try to persuade you to trade in your car after a few years to get a newer, ‘better’ one. Then, the trade-in allows you to become stuck with a new high-interest car note for a car that you will never truly own all over again.
Have you financed a car before? What did or didn’t you like about it?
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About Choncé
Chonce is a personal finance blogger and freelance writer who enjoys sharing debt stories (as she and her husband work their way out of $40,000 in debt) along with talking about saving, budgeting, conscious spending and improving your financial house. In her spare time,she enjoys working out, playing sports with her son, cooking, and thrifting.
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Comments
I had to finance my last car but it was a small loan (under 10k) and excellent interest. My old paid for car died unexpectedly and I had to get a new (used) one. But I used common sense looking for a new one, meaning not a beater but not anything fancy. I did have the cash to pay for it on hand, but as my friend wisely advised me, I needed that cash because being a freelancer my cash flow is very unsteady. Turns out my freelancing business slowed way down last July and still hasn’t fully recovered. If I had no cash on hand… Am I happy about a loan? No. But under the circ*mstances it was the right decision for me.
Chonce saysI’m glad you went with a smaller loan, that’s what I tried to do but interest is still kicking me in the butt. It’s also great that you had the money on hand even though you didn’t use it for the car. That is something I’m working on for my next car purchase.
- Connie says
I live in NYC and have never had a car (I don’t even have a driver’s license haha). My bf does have a car though (he mostly parks it at his parents who live in an outer borough). He went the cheap & used route so he was able to pay all cash.
- Chonce says
I wish I had the option to opt out of getting a car. By living in the city I’m sure that everything you need is easily accessible and it’s great that your bf was able to find something affordable.
- believeinabudget says
My parents surprised me with a new car when I graduated college and she is turning 11 this year! I have a feeling I will need a new car in 2-3 years and am not sure what route I will go. I almost don’t mind buying a new car if I am going to have it for 10-13 years+. I was always raised buy new and run it into the ground. I have seen a few friends buy used cars that almost all needed a lot of work, and I just don’t see the point of that. But…we’ll see what my financial position is when the time comes 🙂
- Chonce says
I agree, if you’re financially able to buy a new car without having to take on a ton of high interest debt, car repairs tend to be less at first and you can get plenty of time to run that car down to the ground. I hope my car lasts me another 5-7 years. But if you know you’re going to need a new car in the future, it’s a good idea to start saving up now if you can. Any little bit you can put aside will help in the long run.
- Jeff says
I got a nice refund on the way and debating which route to go, after reading this I think I’ve made my decision. Thanks!
- Chonce says
Haha no problem! Just think smart and don’t get into high interest debt. That’s my main advice with this post.
We bought our last car used with cash. Our current car was a hand me down from the in-laws (lucky)
I’ve actually considered financing a car just because some of the deals seem amazing. We calculated that our used car cost us $275/month for depreciation and repairs. So, I’d be open to 0% financing (or cash for a new car) if the price was good andt here was a warranty. I guess we’ll see when we get there.
- Chonce says
If you could find a way to make financing more affordable than buying used (rare but not impossible) then that would be a good incentive, only if it works for you and your situation. I’ll be posting more about vehicle financing options next week 🙂
- Dear Debt says
Preach girl! I am carless for a reason. But cars depreciate so quickly!
- Chonce says
Exactly! The days with a new car are numbered and 90% of the time not worth the money but there are some expections
- Jason @ TheButlerJournal.com says
I financed my first car. It was a 2000 Chevy Malibu. The price was $5550 when I purchased it. After I paid off the note I had spent well over $9000. That is one of the dumbest things I’ve ever done. I told myself that that was going to be my first and last car note.
- Chonce says
Woah that’s a lot of interest! That’s pretty much what I’m looking at for my car though if I don’t start hustling to pay it down, fast. Hopefully it will be my first and last but you live and you learn.
- Fig says
I actually financed a car earlier this year. It wasn’t my smartest move ever, even if it was something I could afford and really wanted! At the time I didn’t have cash for a used car so I let a lot of people around me talk me into financing something more expensive. I don’t think I’ll ever do it again so I’m already planning how to pay for the next car I have in cash once this one is paid off!
- Chonce says
That’s good that you are planning to pay off your car quickly and prepare to purchase the next one ahead of time. That’s what I’m trying to do. And on the bright side your current car should last you a very long time before you have to get another one.
I haven’t financed a car – I got a used 2002 Honda Civic back in 2009 that is thankfully still going like a champ! The biggest turnoff to me is how fast new cars depreciate. It just doesn’t seem like the math works out in your favor. I get the peace of mind that might come along with a new car, but I think, depending on the mileage, a car that’s 3-4 years old is still fine!
- Chonce says
That’s awesome how your car is still going strong! I’ve heard a lot of great things about Hondas regarding how long they run vs. other older cars that don’t last long at all.
I actually disagree with this and think financing a car makes a lot more sense than paying cash, at least from a purely financial standpoint (i.e. no emotion involved…which I realize is impossible when we are talking about debt). I financed two cars last year at rock-bottom interest rates (close to 2%). If I had used cash I would be missing out on the ~8-10% historical return that the stock market gives me. Why would I pay cash for a depreciating asset when I could instead invest that money and pocket the gain (i.e. 8 to 10% minus 2% = 6 to 8% return)? If you have good credit you can get a loan that isn’t tied to the car, too, which would have zero impact on your auto insurance rates.
While I realize financing a car can lead to buying one you can’t afford or wouldn’t be able to otherwise afford, I think avoiding financing a car like the plague isn’t good personal finance advice for a majority of people.
- Chonce says
I see your point, and there are definitely exceptions to my idea of avoiding financing a vehicle at all costs. If you have great credit and are looking to gain ROI from purchasing a vehicle, then financing may be an option (which I plan to explain in a later post) but if people are paying $350+ a month for a car payment when they could be saving or investing that money elsewhere that just doesn’t make sense to me. It really comes down to where your money can be best spent/utilized vs. the quality of the vehicle.
A car is not something you can build value in over time like a house. The more you drive it, the less it’s worth. Either way you have to pay something, either with buying a car in cash or taking out a loan (even if it’s low interest, it’s still interest). It’s up to each individual to decide what is best for them and their situation. But the majority in the U.S. don’t have awesome credit scores therefore they can’t take advantage of the ‘perks’ of financing and it often does more harm than good. So, I believe it is good advice to avoid financing or at least think twice if any of the factors I mentioned above apply to you. Like you said, involving debt may be more of an emotional decision, but it’s also financial too 🙂
We buy our vehicles with cash. They are always at least 10 years old, but they have to look new and, of course, run great. Then we run them into the ground. It sure beats having a car note, that’s for sure!
Love this post Chonce! You really took this subject and got all the meat off it. 🙂
- Chonce says
Thanks Kay! Your method sounds like it works very well. I don’t think you can beat a nice looking affordable car that runs well.
I financed my current car and will have it paid off in a little over a year. While I really wish I didn’t have the extra debt each month, my car has been extremely reliable and is MUCH better on gas (about 5x better) than the car I had prior. I have a Prius now and had an SUV before, so the difference in gas alone each month with my work commute (at the time of purchase) initially made up for the monthly payment.
I would definitely like to pay cash for my next car though if possible, although I have pretty good credit so my interest rate is low and I wonder if that extra money would be better spent investing at a higher interest rate. Such a tough call to make!
- Chonce says
That does sounds like a significant savings on fuel alone. I originally wanted an SUV but didn’t want to deal with the financial strain of filling it up with gas all the time because I’m a hardcore commuter.
Interest is one of the biggest pitfalls of financing but if you can manage a very low interest rate, I’d see your point. Regardless investing well and having a car whether it’s paid for in cash or financed is still very possible.
