29 Feb The Million Dollar Car? What your Car Loan is Costing You
What you need to know about your car loan.
You’ve heard it before. Car payments are a way of life. You’ll always have a car loan. You just can’t pay cash for a car. You should take advantage of low interest rates and finance your car. If you keep trading up, your car payment stays the same and you can keep driving a new car. But What is that car loan costing you?
Depending on the source, most reports list the average car payment today at around $400 over sixty months. Most people own five or six cars in their lifetime. Many trade up for another car at the end of the loan or before the loan is paid off. If you continually do that, you effectively have a car payment for life. Is this really just a fact of life?
Let’s take a look at what that car payment is really doing for you. If you own six cars during your lifetime, and you finance each for sixty months, you will have 30 years of car payments. Let’s take that $400 per month car payment and invest it in a good mutual fund that averages 12% return, which is the stock market average over the last 70 years. We’ll invest it for the thirty years that you would be making payments, say from age 25 to 55. After 30 years that car payment invested in your mutual fund would be worth $1,411,966.17. That must be one heck of a car to be worth over a million dollars! And don’t forget the hidden costs of the new car(s) you bought during that 30 years. There’s the interest rate you’ve been paying. Then there’s the cost of the loss in value of the car. The average car loses 50% to 70% of its value in the first four years. That’s a pretty huge loss of buying power just for the “privilege” of owning a new car.
But wait, you say. You can’t drive the same car for 30 years! It will never last that long. What if I told you it’s possible to have a free car for life? What if you took that $400 per month and saved it for twelve months. Without having paid any interest, you have just saved $4,800. Without looking too hard, you can find a reasonable car to suit your needs for $4,800. If you keep saving the same payment of $400 per month for another 48 months, you will have $19,200. Now, had you invested that money in a good mutual fund (again, assuming a 12% return), you would have over $31,000. All in the same amount of time your friends took to pay off their new car.
Now what if you bought a $21,000 used car that already suffered the mass depreciation of its first three years of life? You still have $10,000 in your mutual fund. Leave it alone and after five more years you have over $18,000. Your eight year old car is now worth somewhere around $13,000. Sell it or trade it in with $8,000 out of your mutual fund and, well, you get the picture. You now have a self-sustaining car buying fund. And you only made “payments” for sixty months. And, if you continue investing the $400 per month for the rest of the 30 year period, you’ll have the newer car every five years plus $669,000 in the bank. Give it a few more years and you’re up over the million dollar mark, as I mentioned earlier. I’d say that’s a pretty good deal, and well worth driving a used car for a few years!