Stop Living a Car-Poor Life

The average car payment is over $500/month, according to an Experian report from late 2018.¹ Another report, from the US Public Interest Research Group (PIRG), shows that auto debt has risen 75% since the Great Recession of 2009.²

The PIRG study showed some interesting insight into why auto debt and car payments have got so high…

“Auto lending rebounded from the Great Recession in part because of low interest rates (fueled by the Federal Reserve Board’s policy of quantitative easing) and a perception by lenders that auto loans had held up better than mortgages during the financial crisis. As one hedge fund manager noted in a 2017 interview with The Financial Times, during the recession, ‘[c]onsumers tended to default on their house first, credit card second and car third.'”

U.S. Public Interest Research Group

The study goes on the explain the ways auto lenders have preyed on consumers…

Auto-Lender Predators

Auto lenders have their tactics. They’re in a trillion-dollar industry, and their goal is to do whatever it takes to make you finance more than you need, and often more than you can afford.

Here are some of the tactics used by auto lenders, from the study…

• Providing incomplete or confusing information about the terms of the loan, including interest rates
• Making loans to people without the ability to repay
• Discriminatory markups of loans that result in African-American and Hispanic borrowers paying more for auto loans
• Pushing expensive “add-ons” such as insurance products, extended warranties and overpriced vehicle options, the cost of which is added to a consumer’s loan
• Engaging in abusive collection and repossession tactics once a consumer’s loan has become past due

There are plenty of “discount” auto sales companies we drive by every day. You know them, the ones with the “bad credit welcome” and “no interest for 90 days” signs. The places where used car salesmen get their reputation for being sleazy.

We’ve all witnessed the bullying tactics used by many car dealers, to include the “let me bring my manager in” tactic when you seem hesitant. And even the “I’m going to guilt you into buying a car that you already told me you didn’t want” tactic.

The New York Times published an article about Yvette Harris, a citizen of New York, who bought a used 1997 Mitsubishi for an outrageous price, and was still stuck with the payments in 2017 — over 10 years after the vehicle was repossessed.³

Nagham Jawad, a refugee from Iraq, bought a Chevy Tahoe in 2009. The transmission went out a few months later. It was so expensive to fix, the lender didn’t even bother repossessing it, but Nagham was still liable for the loan for the next few years.

These stories aren’t unique. The vast majority of America is uneducated when it comes to auto loans, interest rates, and ultimately… debt in general.

Car-Poor Americans

What keeps most people from financial freedom? What keeps people from having a solid retirement fund? What keeps Americans poor? It’s not lattes and impulse buys, more often it’s car payments.

$500/month, invested at an 8% interest rate, over an entire typical adult lifetime, would be over $2 million, but people would rather have a nice car than money. And I get it, you want a nice car, but there are ways to save and wait until you can actually afford a nice car. If you have to finance it, you can’t afford it.

A good rule of thumb is to pay no more than 5x your monthly salary for a vehicle. Figure out that amount, and save first, then buy once you have the money. The idea is to make car payments to yourself in an interest-bearing account (e.g. municipal bonds, high-interest money market account), instead of making car payments to a company and paying interest.

If you can break free of the mindset that says “you should care what other people think” or “you deserve a nice car,” you’ll be one step closer to financial freedom.

Why are People Living the Car-Poor Life?

When I say “car poor,” I’m not talking about the rare cases where someone needs a vehicle for a specific purpose, and gets a 0% interest rate for a few years. I’m not talking about financing a car for a year or so because an unexpected situation came up. I’m talking about people who have always had and will always have a car payment.

Why do people live this way? It really comes down to a handful of reasons:

1. They think car payments are [and will always be] part of life
2. They don’t want to be seen in an older, not-as-nice vehicle, so they spend their entire life paying for a car to impress other people who probably don’t care
3. They want a nicer vehicle than they can afford and they’ve decided that buying this vehicle is more important than having this amount of money for retirement

One of those reasons, in one way or another, encompasses the vast majority of Americans’ reasons for always having car payments. Once I first did the math on how much vehicles would cost me over my lifetime, I simply couldn’t bring myself to buy a new or really nice car. I just couldn’t let myself pay $50,000 or more for a vehicle I’m in less than an hour a day, on average.

Plus, I hate being so attached to an object. Especially one that I constantly put in situations to be damaged (e.g. parking lots, storms, driving in general). It’s easier to not care about material possessions when they aren’t worth much. We’d rather spend our money on traveling.

If your car is the most important thing to you, by all means, spend a lot of money on it. But for most people, it’s not.

Reframing Our View of Vehicles

Buying a new car is great… for a few months. The new car smell fades and you get complacent. It happens to everyone. You love your new car for a while, and then it’s just like your last car. Were those months worth the extra $50k?

Of course, if your primary goal is to impress people then you may still be happy a few years down the road. But if your primary goal is to impress people, you might as well stop reading now. You’re not going to reach any sort of financial freedom, general happiness, or wealth by trying to impress others.

How do you know if you’re trying to impress others? Ask yourself these questions:

• Do you think about what you look like when you pull up and people are watching?
• Do you constantly show your friends all of the features on your vehicle?
• Do you park in places where your car will get noticed?
• Did you buy your vehicle so your family would have a vehicle equatable to the other vehicles in your neighborhood?

Those are a few of the questions you could ask yourself to determine whether you buy vehicles for yourself and your family, or to impress others.

If you typically buy new cars and/or you’re used to having a large car payment, just ask yourself this question: “why do I choose to buy a newer vehicle over an older, reliable one?” And don’t use the “newer vehicles are safer and I don’t have to worry as much about maintenance” answer. First, that’s not always true (especially the safety part), and second, is that really worth $500k over your lifetime? Stop and think.

I’m not going to get into the weeds on finding a good deal and buying a good used car, because I did that in my guide to kids and cars, but I will say this… reconsider what you drive, if you drive an expensive car. Ask yourself “why?” You may be surprised at the answer if you really think hard. If you feel yourself getting defensive, you may need to search deeper for the answer.

Further Book Reading

• Stress Free Car Buying by Mico Silver
• The Rebel Negotiator’s Guide to Buying a Car by Grante Lange
• Everyone’s Guide to Buying a Used Car and Car Maintenance by Scotty Kilmer