Thursday, 24 November 2016

How To Escape The Car Loan Trap

Nothing quite as irresistible as a shiny
new red car - until the loan repayments
start.



Car loans - everyone has them apparently.  It is just part and parcel of the new consumerist culture. Mostly everyone I know has a car loan or lease...or two. Sometimes three.

It is totally normal these days for a young person to buy a new or near new car using a car loan soon after they get a job. Car loans are usually over a five year term. Incidentally cars seem to start to need serious mechanical attention by the five year mark and this normally prompts folks to flog it off and buy a new one....using yet another loan or lease.  This cycle repeats every five years for the rest of their working life, each five year loan playing 'tag' with the next.


My first car - a 1976 Alfa Sud Ti.
 Lemon in colour, lemon all round really!


It seems totally normal.....so what?

So what? Here's so what - let's do the math.  If you took the average amount of a car loan ($395 per month) and invested this amount conservatively for your working life....guess how much you would have at the end of your working life?

Answer:  At least 4 MILLION DOLLARS.  

That's so what!

Double that if you are running two car loans/leases.


If only my father had never sold his 1961 barn-door VW Kombi !
Worth a mint these days I am told.



Folks, not only is planned mechanical obsolescence prompting us to replace a car every five years or less, so is the pressure of fashion, the illusion of safety-in-newness, the unspoken 'success' markers of a new car and the relative simplicity in getting a car loan.

Those that turn their back on this sinister car loan racket are wise.
Those that take the equivalent amount and invest it over a working lifetime are wise and wealthy.


My grandfather's Chrysler (1937??) with a broken axle.  This happened in
the 1940's as he and Nan were driving to Brisbane Queensland.
That was back when the Pacific Highway was gravel all the way.



If you need a new car  - do this instead.

1. Put away $20 per week for five years into a high interest bearing bank account
2. At the end of 5 years you will have about $5600 saved
3. Purchase a low mileage car for $5000 or less (use a local car sales internet site and sort by mileage lowest to highest with a filter on cars maximum price $5000 - you be surprised what you'll find)
4. Use the $600 to pay for stamp duty, rego transfer, insurance etc
5. Continue to put away the $20 per week and repeat this process every five years


One little boy socialised very young on the excitement of owning a new
shiny car of his own.



Paying off your car loan is NOT enough

If you have budgeted and scrimped and been frugal and paid off your car loan - WELL DONE.
But beware, you are still at HIGH risk of falling back into the car loan trap.  As soon as your car hits the point where it is needing lots of endless repairs, you will be (by pure necessity) lured back into a car loan/lease cycle because you do not have a choice.

Start TODAY to put away for a replacement car. The weekly amount required to replace your car (paying cash) every five years should be ABSOLUTELY part of your budget - no matter what.

99% of folk fail to write into their budget that weekly amount required to replace their car every five years, paying cash.

Without that money sitting there saved, you will be at extremely high risk of falling back into the sinister never ending whirlpool of a lifetime of car loans.

Don't lean into this one folks - jump in both feet.


Take care and stay nice folks


Mr HM

14 comments:

  1. I had a car loan in my 20's. The car was a very good second hand laser that cost $11000. With the car loan interest I actually paid $17000. When I worked out that I had actually paid $17000 for the car I decided never to use a car loan again. We replaced our old four wheel drive last year and it was over 22 years old.

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  2. Just a note on your maths, you might be assuming a higher (say 8%) annual return on investment to get $4 million over a working lifetime. Even at a lower annual return it's not chump change though!

    My goal in 2017 is to purchase a new(er) car. I am saving for it now. The bank has recently tried to tempt me to get a new credit card (seeing as I paid off and cancelled the last one in June). It was so very tempting to sign up and then I could 'have the new car now!' but I resisted, and then this post came up and reminded me that it will be far sweeter paying for it in cash :)

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    1. 10% return over 45 years - this is considered a conservative level of investment. Bank accounts interest rates are NOT investments IMHO as they rarely exceed inflation post tax.....normally you are still going backwards with bank account deposits.

      Well done on resisting that car loan - well done. That takes courage to say "no".

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  3. No car loan here. In our garage there's an old ute that used to belong to our well respected mechanic before he retired. Runs really well! Great for driving to train station and back and for carting garden stuff (and taking the dog to the river). Our other car is a basic sedan that we paid cash for a long while ago now. We'll keep driving it for as long as needed with no plans to replace it anytime soon. It will be a happy day here when we only have one car parked in our garage, a couple of years away from that goal yet. Meg:)

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  4. No car loans here either!
    We've never bought a brand new car, the newest car we have owned was 12 months old.
    We used our mortgage equity to buy it at the time (since paid it back) but the interest rate was way cheaper doing this than taking out a specific car loan. All our life we've mostly bought privately rather than car yards, way better value for money.
    My car is a beat up old Subaru, that is so old I didn't even take out comprehensive insurance on it this year. We had to drop a reconditioned motor in it a year ago, but it goes like a dream, it's was worth it. I never have to worry about dirty dogs and kids it it, or dints and scratches at the supermarket! I love old cheap cars!

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  5. Hi Mr H, I sold my car about 2 years ago, I now ride my bike to work or to do small errands. Lovely hubby has his beloved Nissan patrol, that is looking a little worse for wear but we are in no hurry to replace it. Great advice, as always. Have a wonderful day.
    Fi

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    Replies
    1. Ah - I long for the time I can go back to a bike. It will certainly happen too.....it is part of the grand plan.

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  6. We have 2 cars- both freehold. Been there , done that with car payments and then we got a brain. Car Number 1 - we have had for 9 years and Car number 2 we inherited when our son passed away and he only had it 2 weeks and a right lemon it was . I sold all my quilting fabric and fixed it and there is no way it is getting sold as I would not get my money back from repairing it and for sentimental reasons to. I said to husband yesterday that all the money we spent over the years buying cars on HP we could have brought a home of our own!! We love being freehold.

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  7. I actually loathe replacing cars, almost as much as I loathe getting them fixed. We've done loans before, but have been able to save up for 2nd hand cars, only in the past few years. But I do have a few thoughts about how much you should be prepared to spend on a vehicle.

    The reason I loathe anything to do with cars is, we aren't mechanics and that's what really hinges on how much bang you get for your buck. We've bought lemons before, in the $5,000 and under price range. By the time you've gotten the 5 years use out of them, you've spent that again, and more, in repair bills.

    So for us, we don't look for anything under $10,000. Living in the sticks, it takes a lot of time and inconvenience having cars in the shop for extended periods. So that's one of our weaknesses in our frugal existence. We're completely illiterate when it comes to knowing where problems in cars lay. So we can't buy cheap cars and find solutions ourselves. We have to buy mid range, and take care of them.

    My last thoughts on buying cars is, know what you're going to use it for and get the best deal in that price range. We ended up spending $12,000 on a car this year, paid for in cash. It does sound like a lot of money, but it's actually a really decent price for the vehicles we were looking at. They can range anywhere from $15,000 to $20,000, for low mileage.

    Having owned two Fords previously, and knowing their track record with regular repairs, we went with a Toyota this time. More expensive because they design their engines better, so you'll get longer use out of them. We also needed a 6 cylinder model, to cope with the mountain which has to be traversed every day, into town. Locals know 4 cylinder cars die quickly. We also needed that power to pull a trailer up our steep driveway. We could have purchased a 4 cylinder at a cheaper price, but it wouldn't be designed mechanically, for what we needed it to do.

    So while I fully support buying in cash, be prepared to save extra to pay more. Because if you don't know your way around cars, or have someone who can do things on the cheap, it could end up costing you just as much (often more) than your original purchase price. This is why I loathe replacing cars, lol.

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    Replies
    1. That is good advice and great insight Chris. Yep, the system needs to be tweaked to suit individual circumstances for sure.

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  8. Great advice Phil! I will be passing this on to my son to read, I think he could do with hearing the facts from someone else :)

    We do not have car loans as we worked out the added costs a long time ago. We pay cash these days and only buy good second hand not new.

    xTania

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  9. What good advice, my hatchback was 5 years old when I paid cash for it, with regular services it was still going strong 15 years later,so I bought another one the same....Oh what a feeling.no debt!

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  10. So glad for this post Mr HM. Like most folks, there was a time when I thought I had to get a car loan, but after the first few months of steady payments I sat down and calculated just how much that $7k car was going to cost by the time I paid it over 5 years. The next week I went to the bank and paid it out in full, never another car loan for me. Living in the country and for our needs we need to spend approx $12,000 to $15,000 to get a reliable second hand car. Our current Honda is 10yrs old and will hopefully last us for another few years, with regular servicing by a fantastic small mechanic who doesn't rip me off. The man of the house is fortunate to have a company car (ute), which is invaluable for towing the cattle trailer, but when he retires, we will own one car (a ute) that both of us will have to share. My stepsons both paid cash for their cars, but only after some financial educating on our part. I'll be urging them to read this post, to show them that it's not just us old fogies who disagree with car loans. :)

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  11. Probably, this is so you can't compare the rates outright, no credit check car loans

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