Cars provide necessary transportation for most Americans. But they can also quickly become one of the biggest drains on finances, so consumers must be more careful with the expenses involved in owning a car. Taking on auto loans and buying brand-new vehicles is one of the fastest ways to destroy your ability to build wealth over your lifetime. The expenses of a car are wide-ranging, from monthly payments, financing fees, insurance, and maintenance costs to the overall cost of depreciation. Most people look at the payment price, but that is only a piece of the large puzzle of costs.
In this article, we’ll look at how cars purchased emotionally and financed improperly can hold you back financially for decades. You’ll see how auto loans are trapping people, how rapid depreciation destroys value, and why the costs associated with car ownership prevent wealth building. We’ll also discuss how to change your approach to auto purchases so that vehicles move you toward your financial goals instead of becoming the obstacle that prevents them.
Here are the key reasons cars are the #1 wealth killer:
- Rapid depreciation on new cars
- Car payments made continually are a drain on finances
- Long-term auto loan debt payments
- High maintenance and operating costs
- Encourage additional unnecessary spending on accessories
- Distraction from other financial goals
- Purchased for ego/status, not financial reasons
- Trap people in a debt cycle
- Prevents investing and wealth-building
Car Loans Are at All-Time Highs
There are currently over 107 million auto loans in the US, totaling $1.56 trillion in debt. Since the pandemic, Americans have embraced taking on auto loans, especially those under 40. The average monthly car loan payment is over $700, up from about $620 last year. On top of that, 2 out of every 13 people with a car loan today are paying over $ 1,000 a month. One in five Gen Zers say their auto loan costs them over 20% of their after-tax income per month. This demonstrates how prevalent auto loans have become and how much they are burdening Americans.[1] [2] [3]
Depreciation Makes Cars Terrible Investments
A significant reason cars diminish wealth is their rapid depreciation. A new car can lose 20-30% of its value in the first year and 60% over five years due to depreciation. So, you are paying interest on a loan for an asset quickly plummeting in value. The money spent on a new car provides little long-term value compared to investing that money elsewhere.[4]
Long-Term Car Loans Trap You in Debt
The average new car loan term is over six years, with a moderate amount borrowed of $40,000. This long-term debt obligation eats away at cash flow for years that could have been invested instead. Auto loans trap people in a cycle of debt as they continually trade in cars for new ones and replace auto loan debt.
Car Costs Drain Your Finances
In addition to the auto loan payment, cars have high maintenance, fuel, insurance, and other operating costs. AAA estimated the annual cost of operating and maintaining a new car at $12,182 annually — $1,015.17 monthly — to drive for five years at 15,000 miles per year as of 2023. Sample costs factored in are fuel, maintenance, full-coverage insurance, registration, taxes, finance charges, and depreciation at each mileage level. That’s thousands of dollars a year spent on a rapidly depreciating asset. More money is spent on a vehicle with a declining value rather than on building wealth. [5]
Cars Distract From Sound Financial Decisions
The money spent on auto loan payments and operating costs could be invested and compounded into significant wealth over time. But cars often represent ego, status, and instant gratification, distracting people from making sound long-term financial moves. That new car smell can be a wealth destroyer if you can’t afford to make the payments and invest simultaneously.
Break the Habit of Car Payments for Life
Very few things will keep you broke, like a lifetime of car loan debt. It is essential to break the habit of continually having a car payment if you want to build wealth. View cars as only transportation, not status symbols warranting debt. Save up to pay cash for quality used vehicles. Then, invest the money you would have spent on a monthly car payment. Or at least finance a used car.
Should You Sell Your Car?
If the total value of your vehicle equals over 50% of your gross annual income, it may be time to sell your car and get a more affordable used one. Keep vehicles from overtaking such a large portion of your finances.
Cars Are Purchased for Ego, Not Financial Sense
Cars are often purchased for emotional and status reasons that make little financial sense. People buy more vehicles than they need for the ego boost and status symbol. Approaching cars as just transportation is critical to avoiding wrong financial moves. Keep ego and emotions out of the car-buying decision. Focus on the vehicle you need for transportation, not what you want for ego gratification.
A Lifetime of Car Payments Keeps You Broke
Making car payments continually from early adulthood through retirement is one of the worst financial life patterns. It robs you of the ability to invest and build wealth. The costs associated with cars, including loan payments, maintenance, insurance, and more, prevent you from investing that money and compounding it into more incredible wealth. Cars provide transportation, but large car payments and high insurance rates are wealth killers over the long haul. Breaking this cycle is essential for financial freedom.
Key Takeaways
- Auto loans have reached astronomical levels as Americans take on more car debt
- Depreciation causes cars to lose value rapidly, making them terrible liabilities
- Long auto loan terms trap borrowers in debt for years
- Maintenance, insurance, and other car costs are massive wealth drains
- Cars often represent ego and status, distracting from wise money decisions
- Break the lifelong habit of having a monthly car payment
- Sell your car if it costs too much of your income and size down your car
- Approach cars as transportation only, not emotional or ego-based purchases
- Paying cash for used vehicles sets you up for financial success
- Invest the money not spent on cars to build wealth instead
Conclusion
Cars provide necessary transportation but can quickly become massive obstacles to building wealth when financed improperly due to the size of the payments and high-interest rates. By avoiding debt-driven emotional car purchases, paying cash for affordable used cars, and investing the rest, you can break the cycle of wealth-destroying auto loans. View cars simply as transportation to get ahead financially. And be intentional about your purchasing decisions so your vehicles move you towards your goals, not away from them. It’s essential to be intentional about car purchases and avoid debt-fueled emotional purchases. Buying only affordable transportation allows you to invest the rest and secure your financial future.
