Second to a house, a car is mostly likely the average person’s largest debt. Not all of us live within walking distance from work, or if we do, it might not be safe. In today’s society, a reliable car is a necessity. However, if you are already in debt, it makes financial sense (in fact, it’s crucial) that you honestly evaluate whether you can really afford that shiny new car, or should rather turn around to the Used Cars section.
We all want to drive a new car, but it is essential to remember that a car is never an asset. If you are already in debt, you cannot allow yourself to be fooled by the fact that you can afford the monthly payment on a new car. You will need to think long-term, and don’t forget the hidden costs.
Here are the main reasons why a car is not an asset:
- A car generates a number of expenses and liabilities over time. Ownership costs include maintenance, loan payments, petrol fees and insurance. These will have a significant impact on your month-to-month finances.
- A car depreciates in value. A new car loses about 20 to 25% of its value the instant you drive it out of the dealer’s store. Based on statistics, your car may lose about two-thirds or nearly 70% of its value after four years.
Buying a new car is not necessarily a good deal. Recent statistics show that one-third of car buyers sign up for a six-year loan at an average interest rate of 9.6%. Rather:
- Drive a dependable “cash” car for a year (or less) and save.
- If possible, consider using a lift club (car pool) or other modes of transport (bus, train, bicycle etc.).
- If possible, walk if you live near your workplace or a store.
Many people could buy property with what they spend on annual car maintenance. Imagine what you could do with the money you would have spent (monthly) on your new car. If you want to become debt free, rather opt for a reliable second hand car.