There are many people who simply have a love affair with cars. Frankly, I like cars too. The difference between a really nice car and a functional, no-frills car can be pronounced.
That being said, I have a practical, basic car I bought used a few years back. I could have taken out a loan and bought something really nice, but it’s not a need. Rather, it would have been something I simply wanted. There are other things that can be classified as needs as well, so why burn through available funds on a nice car?
Even more perplexing: why take out a long-term loan to buy car you really want but don’t need?
Let’s say a person has $10,000 in cash available to buy a good enough used car. Obviously this won’t be anything upscale, but suppose it’s in good enough shape to last 4 years. Your effective annual cost is $2,500.
On the other hand, let’s say you buy a brand new car for $20,000 but it can last 8 years. You’re still looking at an effective annual cost of $2,500. So, might as well buy a new car, right?
Here are 2 things that I think come into play when many people make such decisions:
- Loan costs. There is a cost to them. So, the second example isn’t going to have the same cost. Keeping in mind that the person only had $10,000 up front, the other $10,000 would have to be borrowed. Thus, interest charges will likely occur. However, many folks don’t think of this to the extent they probably should
- Payment procrastination. If payment isn’t required right away, it’s almost like people don’t feel accountable for their actions. That is, until the payments drag on. But that initial feeling, I suspect, causes folks to feel like they can buy way more than what they actually can afford. So that $20,000 financed car might end up being a $35,000 financed car.
There’s no way around it, we can only buy what we can afford. Sometimes, it can be necessary to take out some kind of loan for a car. If someone can’t take any public transportation, has kids, etc – you need to have wheels depending on where you live. In such cases, I can see how a short-term loan for a modest vehicle can be a no-brainer.
However, doesn’t it seem like many car loans are for cars beyond what a person really needs? As in, way more than what a person needs?
I say that paying all cash for a car is a nice way to handle this. What you have allocated for a car, through diligent saving, is what you can spend.
What do you think about paying cash for a car vs. taking out a loan?
Do you agree that it’s best to pay cash and only take out a loan unless necessary?
Or, do you think that a car loan for a new car that the buyer really likes is totally normal and just a standard course of action?