Someone Tell Me: Why Do People Take Out Long-Term Car Loans?

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:

  1. 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
  2. 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.

Readers:

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?

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