Congratulations, You Got a New Car (Payment)

Congratulations You Got a New Car - picture of young female looking out window of new car

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Why are some people proud of going further into debt? It seems like every other week, someone I know is bragging about their new car on Facebook. Was I sleeping when borrowing money became some sort of accomplishment? “Look at me. I just restarted another six years of monthly payments!”

Pardon me if I don’t stand up and cheer.

Someone I know even took it as far as posting their new car payment along with their photo, with a claim that they actually saved money by buying new. “With zero percent interest,” she said, “it was a much better deal to just buy new,” adding that “it meant I could spend a lot more for the same payment!”

Pardon me while I vomit. I’m pretty sure I’ve got around $200,000 in open credit when you add up all of our personal and business credit card accounts, but it would be foolish for me to go on a shopping spree. Can you imagine if I went balls to the wall and spent it all? What if I bought a yacht? Took out an aircraft loan and bought a helicopter? Bought a private island? Would you pat me on the back?

“Hey, look at me, guys! I spent $200,000 and now I need to pay it back for like, the next hundred years. Hooray!”

Why Financing Stuff Obscures Reality

This, my friends, is why financing stuff is rarely a good idea. If you’ve got the money to pay cash for a car but opt to take advantage of a low APR offer, fine. I get it. But if you don’t have the money and need to borrow to make the purchase work, you’re not doing yourself any favors.

Because, when you focus on the monthly payment, and the monthly payment only, you’re losing track of how much money you’re actually spending on your car, your boat, or whatever else. Like my Facebook acquaintance said, she felt she could spend more because the monthly payment wouldn’t change that much.

And that’s where the danger lies. Financing stuff, whether we’re talking about cars, furniture, or that nose job you have always wanted, obscures the real cost. And when you focus on the monthly payment, it’s easy to justify spending a lot more than you planned.

And that’s how you end up with a $35,000 car that requires payments until your kid is ready for college.

Congratulations, You Got a New Car Payment

Personally, I think things like cars should be paid with cash – or at least only purchased if you have the cash in the bank. Like I said, I get it when people take advantage of 0% APR offers and stuff. Sometimes, it’s just a matter of doing the math.

But don’t fool yourself into thinking that car dealerships are offering awesome rates cause they like you; they’re banking on the fact that you’ll spend a lot more that way. And most of the time, they’re right.

Here’s the truth: When you finance a car, you don’t own it. The bank owns it, and you’ll own it after you make those 72 monthly payments whether you like it or not. You didn’t “get” a new car; all you got was a big, fat loan to service. That new car smell will be around for a few weeks, but that payment is going to last forever.

Do you think auto loans are a wise idea? Have you ever spent more on a car than you planned?

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  1. One of my old technicians at work had that mentality for years and l couldn’t break it. I made at least 4 or 5 times his pay, but when he had his first baby, he decided they needed an SUV to accommodate the carrier thingie. He bought a used ML500 Benz that got 11 miles to the gallon at an absurd price..his payments were Texas where driving 50-80 miles per day is the norm! He had it for 3 years and was still paying (purchased a used honda accord in the meantime cos the Benz was costing too much for gas). Just before we moved, they had a second child..and he switched to a honda odyssey. He had to beg the used car salesman to take the Benz with the payments left, and he got reamed on this one also..his interest is 12.8 because he owes so much. He is happy though because his payment is the same as the Benz :-). For six years, on a used car that was already 3 years old. Sigh..

  2. Financed 1st car with credit union. Four after in cash.

  3. Never owned a car, but probably did the same thing with my house (getting patted on the back for what is essentially spending a lot of money). That said, I probably will never finance anything other than my house. Especially a car– I’ll probably end up with something used if I do need to buy at some point. Weird how oblivious to debt burden some people are.

    1. At least your house will likely gain in value over time! A car will be worth nothing in 10-15 years! Your house could be worth a whole lot more!

  4. I couldn’t agree with you more. Debt really skews our sense of what money and possessions are worth. We have never had a car payment and never plan to. We’ve driven $500 cars while paying a “car payment” to a savings account until the beater died. I’ve heard lots of reasons people need financed cars…safety, they spend a lot of time in traffic (?), they don’t know how to fix cars, they have two children, etc. I think these excuses have all been validated by advertising but don’t make much sense logically. It really is sad that huge car payments have become the norm and go unquestioned and even congratulated.

  5. Just look at the depreciation number over the first 1-3 years on new cars. If that doesn’t change you mind not much will. Buying a great used car with cash saves you a ton of money and gets you out the the monthly payment game.

  6. Car payments are no fun! I’ll take my 2004 paid off Mini Cooper over a new car payment any day! One of my coworkers purchased a new car last year and she was telling me that when they went to the dealership, they asked “What kind of deal can we get if we take two?” Really?!? The 2nd vehicle was for the mother-in-law that lives with them, but still. They did, in fact, take two!

  7. I totally agree with this one! When I saw someone posting their pictures on FB with a caption “Got my new car, a reward for myself”, or should they say “Got my new car, good luck to myself!”. 🙂

  8. And that new car smell is actually formaldehyde. It nauseates me.

    I laughed when I read “finance a yacht’ because I did just that years ago…and of course now I’ve blogged about it. 🙂

  9. In general, I have an odd reaction when people get pumped about the new stuff that they bought. Whether its a small thing, or a new car or house, I always wonder, “Do you love that so much that you posted it on Facebook? My son has only gotten three posts this entire year.”

  10. My bf just bought a car. Paid 8k in cash, but what worries me are the monthly expenses- particularly parking in the winter. Street parking is crazy here, especially when it snows, now we’re gonna be paying a small rent to shelter a car.

  11. In general the heuristic is to never finance a depreciating asset. With cars, occasionally you are the appreciating asset. Which doesn’t mean to go hog wild and buy something way out of your price range, but that occasionally, and usually early on it makes sense to finance a reliable car if that is your way to get to work.

    1. My husband has a friend who drives antique cars. He always makes money when he sells them. 🙂

  12. One of the multilevel marketing companies “gives” you a car when you reach a certain level. I researched this online a few years ago. From what I remember, they are giving you $300 towards a car payment or you could choose to get $500 or $600 cash!!! What a farce! lol A savvy person would take the cash! You are still liable for the car payments even if your sales drop.

  13. I see a lot of those “my car note is only $300/month” posts on Facebook and I’m just annoyed with my car note. I got my car out of necessity but I hate having a note and I’m hoping this is my first and last when I pay if off in December.

  14. My husband and I bought a new car about a year ago, but we did the “have the money but want to take your really low APR” option. We got an awesome deal on the car though and we plan on driving it until it won’t let us anymore. I’ve had some bad experiences with used cars in the past so I really shopped around for something new that was affordable. If you decide to go new, try to find last year’s model that they are trying to get off the lot to make room for the newer, pricier models. And haggle.

  15. It comes down to 3 things: 1) lack of understanding how personal finances are supposed to work ; 2) the keeping up with the joneses mentality (hence the need to publicly announce/brag); and 3) the (short-term) pleasure gained from making such a purchase.

  16. Wes used to work at a car dealership and so many people would be happy with high interest rates (such as 20%) and car loans. It was insane the stories he would tell me!

  17. The car and finance industry has successfully changed our thought process about the true cost of a car. They turned it into a “payment” – with the latest trend of extending out to six and seven years. The salespeople start their qualification process with questions about how much payment you can afford.

    Once they know your budget, they work backwards to sell you the highest profit margin and longest financed term vehicle they can find. The deck is stacked against you if you do not do the math on the true cost of owning the vehicle for its entire life. Buyer be aware!

  18. Shirria @GDTH says:

    This was my mentality for a while. It wasn’t until our household income decreased by more than half that I reading my credit card and loan statements and realized the amount of money the bank was making just waiting for me to pay them. One finance charge is $60.00!

  19. My current car was financed (I hate to admit that). It was a different time. Thankfully the payments were only for 3 years and since then I\’ve had 5 years with no car payment. I definitely learned my lesson and now my wife and I have a \”car fund\” where we put $200 a month for our eventual new car purchase.

  20. I hate Facebook posts like that. It just highlights everything that’s wrong with our money priorities. I have a number of clients who all have older cars that are paid off and they talk all the time about getting a “new car” and I have to work hard with them to make them realize that they don’t just need a new car because they want it but that they should save and wait until they truly need it. It’s a tough job, and Facebook posts like this don’t help.

  21. I absolutely HATE when people say “I’m saving money by buying this.” Unless you can show me when you have a break even point (like when we switched to Republic Wireless but sold our old iPhones on eBay), y0u’re not saving money. You’re spending less than you could have on a new expense! Just cause something is on sale doesn’t’ mean that you saved anything.

    I’ve never had a car payment though. My wife and I shared her first car (it was a $3,000 beater that her father bought and let each of his daughters drive it for a bit), and then her second car. Then I paid cash for my Scion xB (which is the best car ever). I paid them a fair deal. I didn’t try to screw them but I also didn’t want to get fleeced.

    Although I really do want a Tesla Model 3 when those come out but I’m not dropping 55 grand on the fully loaded one that will charge 80% in 20 minutes.

  22. If there is any industry besides the diamond industry that has the whole world hoodwinked, it’s the automobile industry. Cars are supposed to be used for their utility, but people are willing to spend tens of thousands of dollars for something fancy. When it comes to car salesman, they will make you think that this is the best offer they can give (isn’t it curious that there is ALWAYS a sale at any dealership?). The most powerful thing you can do is walk away if you don’t get the deal you like. Cars are not going anywhere.

  23. There were lots of factor I considered before buying a car. But, one important reminder while I was shopping around was that I had to get a car that I planned for nothing less nothing more.

  24. I self – finance…I put payments into my savings account that is dedicated for car expense. I am commissioned sales so reliable transportation is very important. Once I get around the price of a lightly used Camry/Accord etc roughly $15,000 I sell (Never TRADE!!)what I am driving-a little more used Camry/Accord etc for oh about $11,000-12,000. Once they hit 60K I flip them. So I pay about 3000 net cash to me to drive a fairly reliable car for around 2 years-if need be I have the funds in reserve to do a major repair or just buy another but at such a low level of mileage that should never be a concern because of the remaining warranty and or age of the car . The mileage is a write off and that takes care of almost 100% of depreciation and fuel. Service and insurance end up being out of pocket.. The point is…you can drive a reliable car for not a ton of money if you are patient enough to buy a quality used vehicle at the correct mileage. I think for my situation I am doing it correctly.

  25. I’m with you, Holly! And you know what’s even worse? Brand new leased cars. I just don’t get it. I haven’t had a car payment in years and I’m going to keep my 2006 Toyota Corolla as long as possible. If I’m really lucky, I may never buy another car again.

  26. I’ve finances my share of cars and that is a huge, huge regret when I think about how much money we threw away. I wish I never had to buy another car, but it is inevitable unless we move to a more pedestrian friendly place. We did purchase our last one in cash and that felt pretty awesome.

  27. This had me cracking up –>“Hey, look at me, guys! I spent $200,000 and now I need to pay it back for like, the next hundred years. Hooray!”

    It’s definitely so easy to fall into the trap of thinking you’re getting a good deal! For me, I was incentivized to purchase my current car (Prius) because I had an SUV gas guzzler and was commuting an insane amount to work. So much so that by actually purchasing a new car and going from no car payment to a car payment, I was still saving money every month just on gas alone. Kind of crazy, right?

    I’m not justifying purchasing a new car just for that reason, especially now that I’m still making payments on my car but currently don’t drive it much more than for errands. But now that I’m so close to having it officially paid off within the next few months, I can’t WAIT to not have a car payment. It will be so freeing!

  28. I’m still shaking my head that there is even such a thing as a 6 year payment plan for cars nowadays. It is sad. And of course, the main reason is to make the monthly payments more “affordable” so people think it’s cheaper or can buy an even more luxurious car. People are looking at the monthly payment rather than the overall costs!

  29. Even if you get 0% APR, don’t you have to pay some sort of origination fee? I only got a car loan once — we got hit and our car was totaled, and we didn’t have the money to pay out of pocket for a even a used car — and I can’t really remember the details.

    We got in an accident right before FinCon last year. (Seriously, right before. Like 10 days.) My one edict was no car payments. At least that time we had a small car fund and some savings. A little help from a relative, and we got a cosmetically challenged 2012 Civic with less than 25,000 miles on it. And walked away with complete ownership.

    It was nice to know it was ours completely. Now if only we can keep this one intact!

  30. OMG I think the same thing all the time. I think I wrote a post once about how stupid it is to get a car as a gift. People are like “Hubby got me a lexus for our anniversary!!” — wow, congrats!

  31. When my daughter first started school it was at an elite private school (story for another day) and the car park was packed with every luxury car you can imagine – all shiny and new. And, financed. My little Audi was ‘mature’ and debt free. So, every time my daughter would mention the shiny new cars, I’d talk about how long those cars would last if their owners lost their jobs or their businesses… not very long.

    Cars here are a necessity but that doesn’t mean they need to be the top of the range Merc!

  32. I have never seen a FB post describing a car payment. I think a lot of my friends are super frugal or super rich (am serious) LOL!

  33. Hmm, this is a tough one. My parents helped me finance my new car after college. It was a big car payment for a few years…but that car has been paid off for nearly 7 years and still runs good. I didn’t have any other debt so it was really my only expense at the time. I don’t really have any guilt about it and it’s worked out well for me!

  34. I have a love/hate relationship with vehicles. I love cars – working on them, driving them and making modifications. But I also see what they do to a monthly budget – they aren\’t an investment as many car salespeople call them, they are a cash alligator that can easily eat up a large portion of any budget. I drive a toyota corolla and luckily it is great on gas and has cheap insurance

  35. You make some great points. I think what you’re describing is all part of the marketing-fomented approach many people seem to take to personal finance: “If I can make the payment, then I can afford it!” Among the first questions asked by realtors and car sales people is either 1) ‘how large a mortgage are you approved for?’ or 2) ‘how large a payment can you afford?’ The not-so-subtle underlying message: what kind of a loser would buy a home that doesn’t use every cubic inch of your borrowing capacity? The kind that will retire early and securely, that’s what. 🙂

  36. Sometimes financing a car payment is the smart financial decision but often times it isn’t. You’re correct that 0% interest doesn’t mean it’s a deal. The reality that most people forget is that they now have a monthly cash/time commitment.

  37. I have a car payment! It depresses me to no end. I won’t be done paying for it until the end of 2018!!!! I HAD to finance a car because at the time I needed one — lol — but also, I had zero savings to even have the option to buy a cheap car out right. I really feel like I had no choice. The one choice I had was to find the cheapest, most reliable used car possible and finance it. And I failed at that choice because I was stupid and got something a little more expensive than I should have (nothing luxorious though)UGH! I’m mad at myself.

    What would be your advice for someone who really has to have a car (bc they have work and children) but they don’t have any cash to buy one?

    And…for kick and giggles…what would you do if you were me right now ? Because now I do have a savings of about $5k and owe $9k on the car. Would you pay it way down with your savings?


    1. Hi Beth!

      Don’t worry – we all make mistakes!

      Personally, I believe in the power of the emergency fund, so I wouldn’t deplete it to pay your car off just yet. What I would probably do is add an extra $100 per month (or whatever you can swing) to your car payment in order to kill it as quickly as possible! You can’t change past mistakes, but you have the power now to limit the consequences.

      And I hear ya on the car. Most people need a reliable car to get to and from work! My best advice now is to pay that car off ASAP and drive it til the wheels fall off!

      1. Very good suggestion! Thanks.

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