In this series I am covering the 24 tell-tale signs that you could be in financial trouble. Over the next few weeks I will be presenting these signs, how to identify them and tips on how to address the issue.
Financing the purchase of a car or truck for more than 5 years just so you can afford the payments is not smart money management. If you need additional time to make payments affordable you are only lying to yourself and likely purchasing more vehicle than you really need.
How long do you actually intend on owning the vehicle? Many people own their car or truck less than the term of the loan as it is so do you think you will own it for six years or more? Will the vehicle even last that long before it becomes more expensive to repair it than it is worth? Even with a standard four or five year loan it will generally take you at least three years before the car you are driving will be worth more than you owe on it.
Typically a new vehicle will depreciate 20% once the first owner pulls out of the lot. After that your car will generally see between a 10-20% depreciation per year depending on make and model as well as wear and tear. This is a significant loss each year, so stretching your financing out for five years or more not only costs more in interest, but you are continuing to pay for an asset that is constantly dropping in value to the point it is almost worthless once the loan is paid off.
Thinking Payment vs. Price
One of the biggest traps consumers fall into today is thinking of purchases as payments instead of the actual price. With people financing everything from homes to new clothes it is no surprise people think about what type of payment they can afford instead of what the item actually costs.
If you find yourself shopping for a vehicle and realize that you need to stretch out payments with a longer loan, stop right there. You are shopping on payment alone and are not taking into consideration what the true cost of ownership will be. It might be nice to finally afford that SUV with the navigation system but if it means you need to stretch payments out to 6 or 7 years you are making a foolish mistake.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.