The stats on how Americans pay for our automobiles are astonishing. Digging around the internet I found that the average new car costs approximately $28,400. The typical auto loan today, regardless of whether it is new or not, is financed over an average of 61 months. The typical car payment is anywhere between $375 and $450 a month depending on who you believe. It is easy to think that the real cost of having a car payment is just what you pay in monthly payments. But the real cost is much much more.
Obviously, cars lose their value over time. This drop in value is what we call depreciation. All cars depreciate but new car depreciation is the worst. A new car usually loses 20% as soon as you drive it off the lot! In addition, the average depreciation rate is about 20% a year for the first five years, with about a first five-year total of between 60 and 65 percent.
With that being said, let us take our $28,400 new car and finance it over 60 months at the interest rate of 5.23% and you come up with a payment of $540 a month. At the end of the five years you will have paid a total of $32,400 in payments and have a car worth approximately $10,500 for a total loss of $21,900 or $365 a month!
What if you had waited and saved your $540 for one year and bought a nice used car for $6,000 and invested the $540 monthly payment for the other 4 years and earned an average return rate of 10%? At the end of the five years you would have approximately $32,000 in the bank for a total gain of $26,000 or $433 a month! That’s a change in net worth of almost $800 a month than if you would have bought the new car. Imagine if you kept doing that over 30 years? You would have almost $1.3 million in the bank! You could buy any car you wanted to then.
Over time, car payments cost you big time. Obviously, you need a car, but by buying quality used cars with cash you are changing your financial future. Yes, I know buying a used car is not as cool or fun and you might even get made fun of by your friends, but you will be building wealth like crazy and imagine all the things you could do with your money when you have built wealth. The vacations you’ll be able to take, the shopping you can do, the nice cars you can buy later on, and most importantly, all the money you can give away to help those in need. So the next time you are thinking of taking out a car loan, just remember how much it really will cost you.
So what about you? Do you agree or disagree with me on taking out car loans? Let me know what you think in the comments section below.