Debt: Auto Loans

There is no substitute for consistent, hard work. I had a business coach who taught me an incredible principle. She said, “Zach, you need to know when to take the stairs, know when to take the escalator, and know when to take the elevator.” It is very tempting to take the elevator as often as possible, but many times, when you are quick to jump on the elevator and get to the next level, you lack the muscle that would have been built had you taken the stairs. 

There are certainly times in life when the elevator is prudent and wise, however, when it comes to debt, beware. Just because you can easily acquire that car doesn’t mean that you should. And just because you can have it, doesn’t mean you shouldn’t simultaneously work hard to pay as much as possible in cash. 

I am a big fan of the book of Proverbs in the Bible. There are many short sayings that help teach wisdom principles that have been proven tried and true. Proverbs 13:11 says, "Wealth gained hastily will dwindle, but whoever gathers little by little will increase it." Proverbs 10:4, "A slack hand causes poverty, but the hand of the diligent makes rich." And again, Proverbs 14:23 - "In all toil there is profit, but mere talk tends only to poverty." Debt should not take the place of hard work. As you consider borrowing money, do so alongside hard work. Make sure that you’re acquiring the muscles, skills, and mindset that taking the stairs builds. 

I have taught you that debt is like digging a hole in your back yard. If you weren’t here for that, you can always visit my website at www.trumbleagency.com/moneytips to get caught up on the blogs. 

When you dig a hole and take out a car loan, the same dirt principle applies. Is your asset bigger than the hole you are digging? If you had to, would you be able to sell your vehicle and fill the hole back in? In other words, would you be able to pay off the loan by selling the car? Cars are tricky. Cars are depreciating assets. They are still assets, but the pile of dirt beside your hole keeps getting smaller and smaller, often faster than you are paying back the loan. 

First, if you do not have a full tank and every mark on your Fuel Gauge isn’t completed, then I do not recommend auto loans. In other words, if your New Zero in your checking and savings isn’t funded and you are not investing 15% into retirement, car loans are not recommended. 

Auto loans have notoriously been a financial trap that have taken up way too much room in people’s budgets. Having a $500 per month auto payment significantly slows your progress towards having a full tank, so if you’re considering buying a car with a loan before you have hit all 8 targets, don’t do it. If you don’t have a vehicle, then purchase a cheap one. If you have zero cash and feel you must get a loan, get a very small loan for the time being. In the future, you can get a better car. But don’t rob yourself of a sturdy financial foundation because you wanted a sweet ride. 

After you have a full tank, auto loans can be ok under a couple circumstances. First, you should always pay 25% of your vehicle in either a trade or in cash. Cars depreciate, and they often depreciate significantly right as you drive them off of the lot. We don’t want to have an asset that is smaller than the hole we are burying, so we always recommend 25% down. 

If you decide you’d like an auto loan, you should never take on an auto loan that is bigger than your New Savings Zero. If you have $50,000 in your savings account, then the loan should be no more than $50,000. Even though the vehicle is an asset and you are paying the loan off over a shorter period of time, cars can depreciate quickly or just stop working and be totally valueless. Our savings account provides the extra dirt, so in case of absolute emergencies, we still have cash to pay off our loan and fill in the hole we have dug. 

Next week, we’re going to discuss student loans and how they can be an asset back debt or a completely unsecured loan.

Subscribe for more Financial Health tips!

Zach Santmier is the owner of Trumble Agency, Inc. and the author of the personal financial course, Increase. He focuses on helping families escape paycheck to paycheck living so they can freely pursue their ideal future.