Are car loans stopping you from reaching Financial Freedom?

Car loans cost you money

Global cars sales reached a historical high in 2018.  It’s estimated nearly 100 million cars will sell in 2018.  While for some owning a car is nearly mandatory for work and life.  For many it’s a privilege we are all too accustomed to, and may not have considered the larger picture in how owning a vehicle affects our ability to reach financial independence.

Financial Independence, Retire early (FIRE) on car loans

For many in the FIRE community, those determined to leave the rat race early and build up investments to live off of, sooner than later,  car payments are a deal breaker.  Many buy used, pay cash or forego owning a car all together.

The average car payment in North America is around $500 a month.  and many people are financing for up to 7 years now.  $500 invested per month in a total market ETF fund that yields an average of 7% would leave you with nearly $54,000.  And that doesn’t even take into account the gas, insurance and repair costs.

Is your Honda worth that much after 7 years?  And Honda’s hold their value..

Negative equity car loans

Not only do cars cost you lots of money in gas, insurance, repairs and interest on car loans.  cars are a depreciating asset.  Meaning every year they are owned they drop in value.  It’s estimated that a car losses 25% of it’s value the moment it’s driven off the lot.  It continues to lose 5-10% every year after.

So while typically the market rises in value every year, your car is dropping.  And your car does not pay dividends.


Car finance debacle

Now most people claim owning a car is not an option but a necessity.  Each and every one of you can only answer that personal question for yourself.  How do you keep yourself a set of wheels, without sacrificing your retirement plans?  Here are a few tips.

Pay cash for your car

Paying cash for a car avoids the ugly interest of every monthly payment.  In some cases you can buy a car with financing to get a more favorable deal.  Since the banks are hoping you won’t pay off the loan and keep it.  And keep making interest payments.  7 in 10 people hold their car loans.  be the quarter of the population that pays them off.  Just make sure you know the terms of when you can fully pay off the loan and make sure there aren’t any penalties.

Buy used cars

Remember I mentioned driving the car off the lot decreases the value by 25%?  Avoid this loss and capitalize on someone else’s mistake by buying used.  You would be surprised how many people upgrade cars every few years, and brand new cars at that.  Buy a car a few years older if you want the new feel and security of new car coverage.

Avoid long term car loans

Paying cash for a vehicle is not feasible for everyone.  Sometimes you may need to finance.  But try get a much shorter term.  You may much, much more over the long term agreements.  Don’t be fooled by the low monthly payment.

Buy what you can afford and need

Just because you can afford $500 a month doesn’t mean you need to max out your budget.  Remember that every car comes with insurance, gas and repair costs.  If wealth creation is important to you, a fancy car with all the bells and whistles should not be as high on the priority list, unless you can truly afford it.

Buy privately

You save money on taxes and fees when you buy privately.  With the rise of internet companies that provide a detailed history of each car, you don’t really need a dealership.  They also try and load on insurances and various other extras that most people never end up using.

How to negotiate a deal

As with all deals and purchases.  Be willing to walk away.  Don’t just impulsively and emotionally at the first choice you come across.

Car loans and financial freedom

If financial freedom is important to you, try going with you.  Public transportation and biking to work is becoming more and more accessible.  You deem a vehicle a necessity, but don’t overextend yourself.  Remember to get it paid off as soon as possible.

Cars are depreciating liabilities, the wealthy put their money into assets.  Not vice versa.

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