Components of a Financial Plan
February 12, 2025
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Personal finance gurus seem to have differing opinions on many subjects. Some of them believe that mutual funds are good investments whereas others think the exact opposite. They seem to agree on very few things and auto loans are one of them.
Almost every personal finance guru in America believes that auto loans are bad for a person’s financial wealth and therefore advise against keeping one.
In this article, we will have a closer look as to what auto loans are and how they impact the financial health of the person carrying these loans.
The gravity of the auto loan problem can be understood with the help of a few statistics. Let’s have a look at some of them below:
As of now, the total value of auto loans outstanding is more than a trillion dollars! This number is alarming since it has never reached so high in the past.
Hence, it is likely that the situation would have worsened by now.
Hence, the number becomes much larger. Also, the $6000 is only towards car payments. There are other costs such as insurance, servicing, repairs, etc. which are not even being taken into the equation. If that is taken into account, cars stand out as the most wasteful expenditure in the household budget.
The automotive companies have marketed their product so well that many people believe that they will always have a car payment. They believe it is like a utility payment and hence they are supposed to pay it for the rest of their lives.
However, this is not true since auto loans are considered to be a predatory financial product that negatively impacts the financial health of the investor. Many financial planners are advising their clients against taking auto loans for the following reasons:
The auto manufacturing companies price cars in such a way that there is always a tendency to buy the next, more advanced model. Also, they tend to aggressively market products such as extended warranties and accessories which people tend to buy making the auto loan more expensive.
Hence, in 7 years, the borrower pays close to 1.5 times the value of the car. At the same time, after 7 years the car may not be worth even 30% of its original value!
Hence, in a way, it can be said that car loans are keeping people poor in America.
The bottom line is that auto loans are bad and should be avoided. When a person buys a car with cash down, they seem to be more mindful of the costs.
The financial logic about this is clear. However, as we know, personal finance seldom works on financial logic. Instead, it works on emotions.
This is the reason that people continue to take self-destructive auto loans in order to impress people that they don’t like with money that they do not have!
The bottom line is that the right thing to do is to buy a car with cash down and the value of the car should not be more than 5 times the monthly income of the person.
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