When auto credit is a necessary evil

The problem with financial advice is that personal finance is, ultimately, a zero-sum game. Pay off my credit card debt and put more in my 401(k), you say? I try! The reality is a little more black and white. You can’t spend money you don’t have, after all. That’s why we have car loans.

There are many financial advisors in this world, including Gizmodo Media Group clean excellent vertical Two Cents at pirate of life. I’ve been an avid reader of financial advice journalism for most of my adult life, but if you read enough of it, you learn to memorize its lessons, the most fundamental of which is that personal debt, at the root , is bad.

There are levels of bad, of course. There’s credit card debt with its insane interest rates, which is extremely bad. There’s student loan debt, usually not dischargeable in bankruptcy, which is also bad but not like wrong. There is mortgage debt, which could be the the least bad of all debts since you’re paying off a property that’s probably going up in value, but it’s still debt, and mortgages can only be considered good if you have one for 15 years, because if you have one on 30 year one year mortgage which is extremely uncollectible debt. (And if the last recession proved anything, it’s that housing isn’t a guaranteed nest egg like it was billed to an entire generation of people.)

Then there are auto loans, also bad debts, but ones that aren’t as obviously bad as the others. That’s because on the surface, car loans appear very good: the last time I had one, it was a four-year loan at 4.24% APR. These conditions were pretty decent, especially buying used. But consider that unless you’re buying something collectible (which you probably aren’t), your car loses value over the life of the loan.

In other words, you pay interest on a depreciating asset. In my case, that means I paid $900 in extra interest on top of the $9,600 purchase price (including taxes and fees) of my 2008 Honda Fit in early 2014. The car is now worth at most about $6,200 according to Kelley Blue Book, but it’s not in mint condition, so I’m guessing its real value is probably about $5,000, even with only 62,000 miles on it.

So, in the end, I paid $10,500 for a vehicle that’s worth half that and falls every day. Still, given the choice, I would take up that offer again if it came up, because in 2014 I had a job I needed a car for and I didn’t have ten grand in the bank. My situation was no different than most people, and I had also gotten used to having a car payment every month. It was just there, like my student loan payments, something that would always be there.

When I finally paid, I analyzed more numbers and realized what a bad deal it was. That’s why if you read (good) financial advice on the internet, the advice always boils down to a few simple things. Save for retirement, especially if you’re young, with the wonders of compound interest; prioritizing repayment of high-interest debt over low-interest debt; and pay for cars in cash if you can.

More and more buyers are turning to leasing as cars become more expensive, as this can often mean a smaller payment. Yet, as we have explained many times, leasing can be a great idea in certain circumstances, but it’s not for everyoneand when done incorrectly, it creates a permanent car payment instead of an asset you will eventually own.

Advice like this isn’t worth much if you get by and never progress, a category that more and more people will find themselves in if a recession sets in. It’s also certainly a situation I know all too well, and I think that’s why I’ve been obsessed with financial advice for many years. I was getting by, but here’s something that explained how I could be able go forward. Advice may be wishful thinking, but at least it’s free.

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