Over the last couple of days, we’ve looked at debt that we’ve been told since we’re little is OK or even desirable. Incurring student debt or a mortgage is a great thing, right? It means we’re achieving the American dream and moving on up.
Well, not really. It’s definitely possible to be house-poor or end up with unmanageable levels of student debt, with the unfortunate result that these debts hold us back from achieving other important life goals.
Today we look at our final entry in the “good debt” fallacy highlight list: the auto loan. Although not as big as student loans or a mortgage, auto loans really aren’t your friend.
Autos:
Most people today finance cars rather than paying cash. Our autos are an asset and enable us to get to work so aren’t these an investment? These are true, but autos are a depreciating asset. When you buy a new car, it immediately starts to depreciate and can lose as much as 40% of its value in the first 3 years. So a new car buyer is paying interest on an asset that will lose value over time.
You can mitigate this buy saving up and paying cash for a car. One technique for people who find it difficult to purchase their ideal car with cash is to work up to this over time: save what you can and purchase an inexpensive used car with what you can save in a year or so. Purchase this car and continue saving. If you would have paid $400 per month in a car payment, in just a year you can save close to $5000, enough to buy a passable used car. Continue saving and when you have enough accumulated, sell the car you’ve been driving and trade up to a better used car that meets your needs. Yes, you’ll have driven a beater for a year, but you’ll eventually own a good car, paid for in cash, that will not depreciate as quickly as a new car. You’ll save in both interest and depreciation.
Labeling certain types of debt as “good” can give us a rationale to take out much more debt than we can handle. Make sure that you plan and evaluate these debts carefully to ensure that they don’t become a future burden.
Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
