Today's question was sent in by @f.i.ns_and_frags on Instagram: It seems no one talks about car loans in the FIRE/personal finance community. Is it ever ok to get a car loan? Is it frowned upon?
I can't speak to whether it's frowned upon, but I think there are real concerns surrounding getting a car loan. We don't have one ourselves and I'll share our own thought process that led us to this decision.
Interlude: This question was asked in the US context, I’ve opted to keep this as generic as possible so that it’s more widely relevant. This ignores any crazy car prices that might be elevated right now!
First, is a car something you need? A lot of this will depend on where you live and whether you need a car for work, maybe to go to and from clients’ venues. If it’s the suburbs or somewhere like LA or New Zealand, the answer is probably yes.
However, if you live in a city with decent infrastructure like Toronto, Tokyo or Taiwan. Maybe not.
If the answer to #1 is yes, calculate all the costs associated with car ownership, vs taking a taxi or Uber wherever you go. Don’t forget to include gas, parking, insurance, maintenance, taxes and the like. If you want to factor intangibles in like convenience, go ahead. But don’t forget it works both ways ie the frustration of finding parking etc.
If the answer to both questions points towards buying a car, you can still do your best to make it as sound a financial decision as possible. All my friends own cars, so I’m basing this off conversations with them.
1 - Buy used & drive it to the ground - a car starts losing value the day you buy it and their main job is to get you from point A to B. Buy the most reliable, safest option within your budget, and don’t get tempted to “upgrade” every few years.
2- Get whatever bells and whistles you need, but nothing more. Rear parking camera? Sure. Proximity sensors? Ok. Sun roof? Maybe not.
3 - Pay cash if you can, otherwise negotiate your loan. Do some research and know what financing options are available, as well as how competitive they are. Don’t be afraid to walk away from a deal - there’s always going to be another car at a better rate.
My final thoughts on this are if you need to get into debt for a car, I would think about it very carefully, especially if that debt is anything more than 10-15% of your paycheck. I don’t have a problem with debt per se, but if you layer that on top of mortgage or rent and it starts pushing up to 45-50% of income, things can get scary real quick in the event of a job loss etc. This isn't even taking into consideration any other debt like student loans or credit cards.
For us, a car would be a luxury. We could afford it, but the cost of owning a car would be between $1,200 - $1,500 a month, or $14k - $18k a year. At this moment, we feel that money will be better spent investing - maybe when our dividends start paying $1,200 a month, we’ll revisit this question!