Last Week, Joe from Retire by 40 published an article, Why I Hate Auto Loans*. On almost every financial topic, I find myself feeling that Joe and I share the same brain. This appears to be the exception that proves the rule. That makes it a topic worth digging deeper.
Before I get into why I love car loans, I’d like to bring up some of the great points Joe made.
Psychology of Making Payments
“We could have taken out a car loan with near 0% interest, but we didn’t want to do that. I’ve had auto loans before and I despise sending in those monthly payments.”
I can understand the pain of making monthly payments. We got solar panels so we can avoid making electricity payments. However, a lot of the pain can be avoided with automatic payments. We pay off our house, our credit cards, kids’ daycare, and all sorts of things every month. I don’t feel that adding a car loan is any different. It’s not as if I hate our mortgage so much that I’m going to skip investing in order to pay it off early. I’m also not going to prepay a year of the kids’ daycare.
Looking at the Math
Joe does some math and concludes that getting an auto loan at a low interest rate (3%) might allow him to invest and make between $11,000 and $20,000 (with the $11,000 number being more accurate).
I agree with the math. From a high level, if someone is going to give you a loan at 3%, you are likely to do well investing in the stock market (except maybe not this market).
Joe turns his attention back to psychology, so we will do the same.
Psychology of Car Payments
The first thing that Joe mentions is that there’s a “temptation to buy more.” I can see how consumers could get wrapped up in that, but I don’t know if most consumers pick their car based on interest rate. I know that hasn’t been one of my top considerations in any of my car buying decisions. I created a budget first and then matched the car to that. Maybe I’m not like everyone else?
I will grant the “temptation to buy more” one valid point. In the northeast a remote starter is a great value. It’s great to get in a nice warm car that’s ready to go on the coldest of days. I was going to get an aftermarket one, which wouldn’t have been very expensive. I probably paid a little more to spread the payments out over 60 months. It was a relatively cheap upgrade that I was getting either way, so the difference was paying the dealer’s price vs. the aftermarket price.
The second thing Joe brings up is “are you going to really invest the money?” He reasons that most people would take the $15,000 and invest it in something fun like a jet ski**. I can definitely see this happening. However, I’d counter and say that most people don’t have the $15,000 sitting around anyway. If they do, it’s probably a large part of their emergency fund.
I have two auto loans, one at 0% and another at 2.5%. I can’t say that I’ve taken the leftover money and invested it in the stock market. However, being able to spread the payments has made it easier for us to manage other expenses such as my wife’s online master’s degree or some of our home maintenance.
Being able to manage those expenses has allowed us to max out Roth IRAs/TSP (government 401k) and things like that. So even though we might not directly take the exact same $15,000 and investing it, the flexibility of spreading out expenses does allow us to invest more.
Finally, I’m also not big fan of big sudden expenses. I’d much rather have them spread out over time. It makes it easier to budget when expenses are smaller.
Next Joe brings up that cars are “a depreciating asset”. I can’t argue that, but I don’t understand the significance. A car is necessity for our ability to earn income, so whatever the value is later on down the line isn’t a big deal to me. While there is a comparison to made towards another large expense such as a home, we have to remember that the home itself depreciates without maintenance and it is the land/location that is appreciating.
Lastly, Joe brings up how paying for the car upfront helped him lower his expenses while he plans for early retirement. While I can appreciate that view, I prefer to plan for a car payment… unless until the Uber gPod is invented. If buying cars do become a thing of the past the same money will be used for however the transportation works.
Final Thoughts and Your Turn
Everyone is entitled to their own opinion and I can certainly respect Joe’s here. Personally, I feel differently. I try to go with whatever reduces my stress, which means spreading the payments over a long time. It’s different things for people, so there’s no right or wrong option here.
Do you love or hate car loans? Let me know in the comments.
* I’m going to totally take credit for this article. His response to my comment a week earlier included the phrase: “I hate car loans.”
** This is really eerie. A jet ski is always the example I use with my wife. Like I wrote in the beginning, sometimes we seem to share a brain.