When they buy a car, people are “dumb”. here’s why
Your approach to buying a car can say a lot about your commitment to strengthening financial security, says Suze Orman, former CNBC host, bestselling author and award-winning financial advisor, in a recent blog post. And, she writes, “from what I hear and see these days, a lot of you are downright dumb when it comes to financing the purchase of a car.”
This is because, unless you buy a car right away or it was offered to you, the time you plan to take to pay it off is probably too long.
Data from the main Experian credit bureau shows that in 2016, the average auto loan lasted 68 months, or more than 5 years. The average loan amount: More than $ 30,000, more than the Typical millennial done in a year. This means that the average monthly payment is $ 503, a considerable amount, if not shocking, if you are paying off student loans and juggling other essential high living costs.
“Are you kidding me?” writes Orman.
Instead of falling in love with a car, fall in love with a retirement or savings account, or a house. “These are assets that over time can increase in value. A car will never, ever increase in value,” she writes. “It’s a depreciating asset that loses about 20 percent of its value in the first year. And keeps going down from there.”
Of course, you may need a car to get to and from work, as well as elsewhere. Still, Orman suggests finding a shorter loan: “A 36 month loan is financially smart. I’ll even give you a break if you go for a 48 month loan. But 70 months or more? That’s crazy.”
Having said that, she writes, you should aim to buy the car, not rent it. She knows it from experience. In an interview with CNBC, she said she hired a BMW 750iL in 1987 to show off to whoever she was dating and that decision was “the dumbest thing I have ever done with money.” Her monthly payments were $ 800 and “the truth is, later on, I didn’t even like that person.”
Self-made millionaire and car enthusiast Jay Leno also advises against leasing. “I still think it’s better to buy a car,” he said. says CNBC. “Everyone seems to be renting now. Everyone thinks you can write this off and write that off. But at the end of the lease you have nothing.”
While monthly lease payments may be lower than loan payments, they also add up. And once you’ve paid off a loan, it’s gone for good, so if you lease, at the end of your term, the monthly payment will be lost, and so will your car.
Cars can be expensiveOrman writes, but you have options besides taking out a long-term loan: “The car you want may be too expensive,” but “the car you need can be very affordable. All it takes is the willingness to only buy cars that make financial sense. “
A new or used car that you can pay off in three years is a smart way to live within your means, she writes.
If you already have a car and a signed loan, consider some refinancing options, especially if you have good credit. A “first” or “super first” score could help you with funding. And if you’re still working on your score, stick with your current car “as long as you can,” Orman writes.
The less money you have to spend on a car, the more money you can spend on other important financial responsibilities. And it’s a good step towards building financial security.
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