Why Car Payments Are Always a Bad Idea

Guest Post by Eric Peters

People used to actually buy new cars – as in paid for them, when they acquired them. Money and title changed hands. The car was theirs. Now people finance cars, which  – interestingly enough – is probably the main reason why very few people can afford to buy a new car.

Or a used one, for that matter.

Financing is a way to spend more than you can afford and that’s why every new car comes standard with features that used to be optional, back when people had to consider whether they could afford to buy things like air conditioning, power windows and automatic transmissions. Let alone climate control and heated seats. All very nice to have, if you don’t have to go into debt for years to have them.

Now you haven’t got a choice – because most people are willing to go into debt for years in order to have those things. It’s also why the government gets way with imposing all the things it “mandates” – that buyers have to pay for but which most of them could never come up with the money to pay for.

So they finance them – and that makes it all seem “affordable.”

It’a arguably one of the best tricks since the devil convinced most people he doesn’t exist.

The result is an unprecedented crisis of affordability. The average price paid for a new car has gone up about $15k over the course of about three years to nearly $50,000. The wheels that have been set in motion will not stop turning until the wheels come off this ride. The manufacturers – that is, the car companies – have oriented their business model around financing ever-more-expensive cars rather than offering affordable cars, their prices (and roster of equipment) kept in check by the ability of their customers to pay for them. The government is no longer restrained by the costs it imposes – including the ruinous costs of “electrification” – because serial debt-financing makes it seem “affordable.”

And – for a time – it worked. The duration of the typical new car loan more than doubled – from three years (this was back in the ’70s) to six-seven years today. Many people were able to convince themselves (with gentle help from the dealership’s finance department) that they could afford a debt (and interest) load that would have made people blanche, once upon a time.

To understand why, consider what the monthly payment for the typical $50,000 new car would be if it had to be paid over three rather than six-seven years. It would cost about $1,400 per month, not counting interest.

Probably not one in 1,000 Americans could afford that.

And yet, almost every American car buyer is persuaded they can afford it, by spreading those payments out over six-seven years.

In one sense, this may be true. In that – yes – the monthly payments are more manageable. But it doesn’t mean you’re paying less. It only means you’re paying longer – to own a depreciating appliance, which is what a car (however appealing) is. It is not like a house, which will almost always at least retain value – and usually increase in value. It is reasonable to speak of a home as an investment. It is preposterous to believe a car is one. It isn’t – anymore than a new washing machine or microwave oven is an investment. All of these are things bought to be used for a time and – inevitably – thrown away after a time.

A financially smart person does not “invest” in such things. He buys them.

The trouble – now – is being able to, courtesy of all the people who’ve bought into debt. It is literally not possible to buy a new economy car, for instance – because none such exist. They have been replaced by what are styled entry level cars and these cars all come standard with equipment that used to be extra-cost, back when people who knew they couldn’t afford air conditioning or power windows didn’t have to finance these things. People who could afford the extras bought them. But because they were once optional, only the people who could afford them bought them.

Their cost, at least, wasn’t imposed on everyone else.

Now, of course, it is. Also the cost of government, which most people seem unable to see now that everyone is obliged to pay for it.

Debt is like cancer in that eats away people’s financial security – including people who think they’re doing ok because they can “afford” a car they can only pay for if they sign up for payments for the next six-seven years. At the end of which they’ll have an appliance with a residual value of perhaps 40 percent of its original selling price.

An appliance that is probably about to cost them even more, too – as all that equipment is now six-seven years old and time is not kind to power everything (and now, LCD everything). How much is a smartphone you financed today worth three years from today.

Some might say we were better off when a wall phone cost $30 and lasted for decades – and an economy car may not not have had power everything, air bags or AC but it was paid for after three years.

Or maybe even on the day you bought it.

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