Although I’m not a huge fan of Dave Ramsey, I think this video that he created is very valuable. Most people throw money down the drain every month on their car payments. When your mortgage is underwater, it’s a big deal. However, when you buy a new car and drive it off the lot, you’re immediately underwater on your car loan. The value of your car depreciates by about 25% immediately so even if you tried to sell it to pay off your car loan, you’d still be 25% short. Dave has some good points in this video, but there are still a few things that
I Disagree With…
1. Average car loan interest rate of 9.6%:
With the decline of interest rates over the past few years, car loan rates are no longer at 9.6%. National averages for a 60-month new car loan sit around 3%.
2. Average Stock Market Return of 12%:
Twelve percent is very generous. A better estimate is 7% for the coming years and that’s assuming we don’t hit a huge bear market during the next few years.[divider]
Granted, the fundamental principle of this video is great. By delaying gratification by a few years, you can easily afford free cars for life.
I Agree With…
1. Earmarking a car fund:
I’ve mentioned before the benefits of having a separate savings account for your car. While I agree with what Dave mentions about putting the difference of your car payment into a mutual fund (well, no…an index fund), you should keep some cash on hand for those emergency repairs.
2. Paying cash for cars:
Unless you are real savvy and intentionally lock in a 0% APR for x amount of months with the intention of earning interest through the stock market over those few months and then paying in full, I highly recommend paying in cash up front. This way you own the car outright, you don’t pay interest on the car loan, and you can negotiate lower price tags. You can read more about whether you should finance or pay in cash here and here.
How Quickly Does My Car Depreciate?
Here’s an interesting infographic about just how quickly cars depreciate in value. I think in many cases this infographic is too conservative.