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When Car Loans Are a Necessary Evil
When Car Loans Are a Necessary Evil-October 2024
2024-02-19 EST 22:09:45

The problem with financial advice is that one’s personal finances are, in the end, a zero-sum game. Pay down my credit card debt and put more into my 401(k), you say? I’m trying! The reality is a little more black-and-white. You can’t spend money that you don’t have, after all. Which is why we have car loans.

There are a lot of financial advice-givers in this world, including Gizmodo Media Group’s over at . I’ve been an avid reader of financial advice journalism for most of my adult life, though if you read enough of it you get to memorizing its lessons, the most basic of which is that personal debt, at its core, is bad.

There are levels of bad, of course. There is credit card debt with its attendant insane interest rates, which is extremely bad. There is student loan debt, generally not dischargeable in bankruptcy, which is also bad but not as bad. There is mortgage debt, which might be the least bad of all debts since you’re paying off a piece of property that is probably appreciating in value, but it is still debt, and mortgages can only possibly be considered good if you got a 15-year one, because if you got a 30-year mortgage that is . (And if the last recession proved anything, it’s that housing isn’t a guaranteed nest egg the way it was billed to a whole generation of folks.)

Then there are car loans, also bad debts, but ones that aren’t as obviously bad as the rest. That’s because, on the surface, car loans seem fine: The last time I got one, it was a four-year loan at 4.24 percent APR. Those terms were pretty decent, especially buying used. But consider that, unless you’re buying something that’s collectible (which you probably aren’t), your car is losing its value the entire length of the loan.

You’re paying interest on a depreciating asset, in other words. In my case, that meant I paid an extra $900 in interest on top of the $9,600 purchase price (including taxes and fees) of my 2008 Honda Fit back in early 2014. The car is now worth at the most around $6,200 according to Kelley Blue Book, but it’s not in perfect condition, so I’m guessing that its real value is probably around $5,000, even with just 62,000 miles on it.

So in the end I paid $10,500 for a vehicle that is worth half of that, and falling everyday. Still, given the choice, I would take this deal again if offered, because back in 2014 I had job that I needed a car for and I didn’t have ten grand in the bank. My situation wasn’t different from most people’s, and I had also gotten accustomed to having a car payment every month. It was just there, like my student loan payments, a thing that would always be there.

When , I crunched more of the numbers and realized how bad of a deal it actually was. Which is why if you read (good) financial advice on the internet, the advice always boils down to a few simple things. Save for retirement, especially if you’re young, thanks to the wonders of compound interest; prioritize paying off high-interest debt over low-interest debt; and pay for cars in cash if you’re able to.

as cars get more expensive, as it can often mean a smaller payment. Yet as we’ve covered here many times, leasing can be a great idea under certain circumstances, , and when done wrong it creates a permanent car payment instead of an asset you’ll eventually own.

Advice like this isn’t worth much if you’re just getting by and never getting ahead, a category an increasing number of people will find themselves in if a recession takes hold. It’s also certainly a situation I know all too well, which I think is why I was obsessed with financial advice for many years. I was getting by, but here was something that explained how I might get ahead. Advice can be wishful thinking, but at least it’s free.

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