Car Loan Basics – How Long is Too Long?
Everyone needs a new car every now-and-then right? I mean, don’t we all deserve it? [In case you haven't guessed, I'm cringing as I say the word "deserve"]. Just recently I had a client/friend/relative who said to me, “O.G., I’m just so used to having a new car every couple years, I had to get rid of my Cadillac and get a new one…I mean, it was soooo old.”
My response (under my breath and probably not even that loud): “REALLY????”
If you’ve thought about a new car, and you’re not paying cash [tisk tisk] then you’re thinking about a car loan or a car lease, right? What’s the best way to incorporate your personal finance goals while not killing yourself with a loan or a lease payment? A recent article in the WSJ discusses a growing trend: 7 year car loans. Whoa nelly! 7 years? You’ve got to be kidding me. If there’s one thing you can learn from me: Don’t do this. It’s the equivalent of financial suicide.
What about a car lease? Here I have to agree with Dave Ramsey. Here’s Dave’s take from a recent article:
Nothing says, “Please, sir, take my money. A bunch of it!” quite like a car lease. Statistically, leasing is the most expensive way to drive a car. But, according to CNW Marketing Research, nearly one in five people lease their cars. The National Auto Dealers Association says car companies make more money off leasing you a car than if you bought a car with cash. Don’t fall victim to the “fleece.”
Ok, so I can’t get a 7-year payment plan, and you say leasing is bad…what can I do? What about a home equity loan? Well, let’s first assume you can even get a HELOC or HE Loan (assuming your house is one of the 7 in America above water), you’re willing to subjugate the safety and security of where you live for a car? Gimme a break. Don’t do that either. So what’s a person to do?
This is where planning, patience, and persistence takes over. First planning: Think ahead for your next car purchase. As we’ve talked about repeatedly in our podcasts, I recently purchased a new(to me) car. As someone who’s really quick with decision making, to actually take an entire summer to research, plan out, and find my car was an eternity. I almost gave up…which would’ve been OK too.
Patience: You need to realize and be OK with the fact that unless you’re driving something that’s unsafe to you or others, you don’t need a brand spankin’ new Cadillac CTS – V turbo to be cool. No one really cares that much – and those that do care less than you think. In fact, we’re usually so busy being concerned about ourselves and being self-centered as human beings, we rarely consider anyone else. So face it – the only reason you want a new car is because you’re thinking other people are thinking about you. Sounds a little narcissistic, doesn’t it? Be patient. Work your plan and execute it on schedule. You’ll be rewarded in no time.
Finally, be persistent. Be persistent to yourself, your goals, dreams and your family’s goals and dreams, but also it’s OK to be persistent towards the things you want. For my recent car purchase, I was looking for a specific brand, model, year, and options. I finally found one, within my budget, that was in good shape. It was the only one I saw in all of the United States. But, it took a specific plan, certainly a lot of patience, and persistence to stay the course when a couple other “close-but-no-cigars” came by.
I’m not going to go so far as Dave Ramsey does and say “You can NEVER have a debt payment” but I do agree it’s silly to have one. What’s the best length of car loan? The best one is the shortest one you and your family can take out without impacting your family’s future financial goals. It’s important to realize a car’s a car. It’s a depreciating asset that you’ll forget all about 10 years after it’s gone. Don’t ruin your retirement over a SUV you just had to have. It’s not worth it.
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I could have bought my current car with cash but took out a 0.9% 3 year loan instead. I feel that was a good decision for me because I kept the cash separate and use it to pay the loan off. I got a stellar deal on the car and figure it will last me a total of 10 to 15 years… 20 if I am lucky!
Lance@MoneyLife&More recently posted..Six Ways to Make Christmas Shopping Easier
I agree that seven years is way too long. I guess nowadays with cars lasting longer and the average age being 11 years old, maybe it isn’t as far-fetched as it would have been considered, but that’s still a crazy length of time. Plus, that makes it more difficult to pay cash for a car down the road. I always look at a good strategy as get a 3 or 4 year loan, keep it for longer than that, and pocket the money you were paying once the loan ends as a down payment for your next car. That plus your trade in should reduce your next loan amount, and you can keep doing this until one day you won’t need a loan at all!
Money Beagle recently posted..I Guess It Was Bound To Happen
I admit I’m one of those suckers that did the 7 year car loan thing before I smartened up about my finances. I definitely regret that decision. At the same time though I fully intend to finance my next car down the road too. I figure I can get a better return on my money by investing the cash instead of holding it in some low interest savings account.
Jeremy @ Modest Money recently posted..5 Frugal Tips To Get You Through Hardship
Years ago I made the mistake of buying a car on a five year loan. The first year was fine but as it dragged on and on I started to think how stupid a decision it was as my circumstances changed. By year three or so I couldn’t stand it and just paid it all off in cash.
Since then I’ve crunched the numbers on loans, leasing and buying outright with cash and I vowed to myself I would never do anything but use cash ever again. For some reason I just can’t stand the idea of using something every day that isn’t really mine and it certainly doesn’t work out well financially.
So now my way of doing things is just buying almost new cars. 1-2 years old at most. Most of the higher end ones have a huge drop in price coming off the lot so you can get some great deals on something that is barely used and still highly reliable. Plus, the re-sale (assuming you didn’t buy new) tends to be great in that first 5-10 years if you go with a high quality and in demand make/model.
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seven year loans are just madness.. very few folks actually keep their cars that long.. knowing that, i dont know how folks can make that jump with any sense at all..
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I hadn’t heard of a 7 year car loan…squeezing every mile out of our 97′ Civic that we can.
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I bought my new car with a 5 year 1.99% loan. I can put the cash to work and earn much more than 1.99%. I am repaying the loan at a faster rat to have it paid off in 4 years.
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And, KC, if inflation rises, you’re actually MAKING money on the deal. Love that interest rate.
A 7 year loan is becoming essential for more and more people because auto prices have gotten so out of control that most cannot even afford the payments on a 5 year loan.
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