Crash Course in Car Loans

Dave Ramsey on car loans... Great stuff. Here is what he says:

Cars are exciting, but getting a loan to buy one can be a disaster. One of the worst money decisions you can make is to finance a car but, sadly, people are doing that more than ever. Not only is financing of cars up in recent years, but people are borrowing for longer periods of time. The Consumer Bankers Association notes that more than half of new car loans are for five years or longer, which is a first. The reason? People want more luxurious automobiles but want to keep the payments the same. As a result, they are stretching out the payments for years and, in doing so, take on more debt and more risk. How idiotic is this? If you buy a brand-new $25,000 car and finance it over 60 months at 7% interest, your monthly payments will be around $500 a month, and you will pay almost $30,000 for the car. But if you try to sell the car at the end of the term, you won’t even get $10,000 for it! What happens if you take out a $20,000 loan on a new car and you total the car in a wreck a year later? You’ll only get about $14,000 from the insurance (whose rates will skyrocket, by the way). You’ll also have a huge payment and nothing to show for it. You cannot afford this! The longer you borrow, the more you will destroy your chances of becoming wealthy enough to give new cars away. Only after you make a six-figure salary and become a multi-millionaire can you buy a brand-new car. Then you can afford to lose a little on depreciation and not notice. The average car payment today is about $378 a month. If you stuff that money under your mattress for 10 months, you can buy a $4,000 car (if you use cash, you can very likely get a discount). If you drive the car for 10 months and keep saving the car payment, you can trade up to an $8,000 car. Do it for another 10 months, now you have a $12,000 car with no car payment! The feeling you get from driving a nice car with no payment, and knowing that you worked and saved for it, is much more fulfilling that taking on an absurd payment for a vehicle that is dropping in value like a rock. Jack Nerad, editorial director at Kelley Blue Book, said it perfectly. "A lot of these people who are buying new cars shouldn't be buying new cars, period." Save up and pay for a car with cash. There’s nothing like it!