Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Matt says:

“I guess car loans are acceptable and almost the standard these days, but carrying credit card debt is viewed as irresponsible and a means for overextending and living beyond your means, even if that’s not always the case.”

It’s interesting that carrying car loans is the norm now — much like carrying credit card debit — without much stigma attached. But do we really have to borrow money to buy cars? Is this not just another case of being “overextended and living beyond your means”?

In an earlier post I define Consumer and Investment debts. Where does a car loan fall? On the one hand it is a not an investment debt because 99% or more of cars lose value over their lifetimes and it is impossible to tell which ones will gain value beforehand, so it’s not exactly an investment. On the other hand, cars are indispensable tools to most of us that enable us to get to jobs that put money in our pockets so that we can, among other things, invest it. I think that a car is a little bit of both, and can certainly lean towards Consumer debt when you factor in $2,000 Navi/Info/Entertainment Systems.

So if it’s at least partly consumer debt, why doesn’t it carry the same stigma as the debt we accrue to buy other consumer items? I can think of a number of arguments:

  • Car loans have been around a long time — almost as long as cars have, according to this article.
  • Cars represent debt at which you can point to a solid item and say, “That’s where my money goes every month.” The same is not necessarily true for credit card debts where all too often people have a big bill and can’t remember what it was for.
  • Car loans typically have a lower interest rate than credit cards.  Right now, reports the average new car loan interest rate to be about 7% while the average Gold level credit card has a rate of about 12.5%.
  • Nobody could afford a car if not for car loans. I’m not sure that I agree with this one.

Are any of these arguments compelling?

Take the last point: What if there were no car loans? There would most certainly be fewer cars on the road, those cars would be older and less expensive on average, and far more people would use public transportation.  Everyone would know that there was no financing available for cars and would have to learn how to budget to save up for one.

Young drivers would not be able to own a car until they could save up to buy one or unless one was given as a gift.  Most likely (as is already the case for many young drivers) the car would cost in the low thousand dollar range.  Older drivers might trade in and out of cars more frequently as they moved from lower priced, lower optioned cars to more expensive cars with more features.  Everyone would pay far less for their vehicles — even if the only savings was on interest payments.

Those same cars that people would buy without cars loans are just as readily available now.  Open any newspaper to the Classified section and you will find dozens of cars available for relatively little money.  Not all of them will be as safe and reliable, and certainly not as indulgent as cars you can get for “no money down and $199/month”, but they will certainly be a lot cheaper.  Buy a cheap, but safe and reliable car up front (think mid-90s Honda or Toyota) and put the $199/month towards your next, much better car and you will save a serious amount of money.

I think that cars are similar enough to many of the other things we buy everyday that lose value (take J.D.’s encyclopedia, for example) that carrying debt on a car should be looked at no differently than carrying debt on any other consumer item.  The same stigma should apply to car loans as to credit card debt.  As such, my personal goal is to never have to take another car loan.

What do you think?

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6 Responses to “Whither the Stigma on Car Loans?”

  1. Matt Says:

    Good points. I agree with your conclusion that the same stigma should apply. As far as taking out car loans in the future, the only reason I would take out a car loan if I don’t have to, is the same reason to take out any “opportunistic” loan. If the manufacturer/financing company is willing to offer financing incentives to buy their vehicles, why not take advantage of it? They are going to give you the same price on the car either way. For example, I financed my last car at 1.9%, a no-brainer. My current loan is just over 5% and I’m reasonably happy with that too. However, at the average rate of 7%, I’d save up and pay cash.

  2. MITBeta Says:

    I don’t know, it’s a tough call. On the one hand it might be convenient to pick up a 1.9% loan, but on the other, I’d rather have my money working harder for me. I think, generally speaking, that in cases of buying depreciating assets with credit, it makes sense to have the cash on hand to pay off the loan in case it ever makes sense to do so.

  3. Lynnae Says:

    My goal is to never have another car loan, too. We paid cash for a minivan a year ago, and it felt good to own our car free and clear the minute we signed the check.

    Love the name of your blog, BTW!

  4. MITBeta Says:

    That’s great, Lynnae. I can’t wait for the day when I can ask the car dealer if he takes cash! (Like the scene in Wayne’s World when he’s buying a new guitar…). I’m glad you like the blog name, too!

  5. Energy Efficient Window : Says:

    i hate car loans because sometimes that interest rate is not very fair;:;

  6. Capricorn Compatibility · Says:

    i had my car loan last year when i bought a Nissan Murano because i really like to have my first car `’`