Is It Ever Wise To Buy A Car On Finance?featured

An old friend of mine posted a photo on Facebook recently of her new BMW. Although I don’t have a clue what model it was because I’m not particularly big on cars, I’m going to be completely honest here and admit I did feel ever so slightly jealous. These are the thoughts that went through my head:

“She must be earning so much money”

“I wish I could afford a car like that”

“I thought I was doing okay financially. Am I not?”

“Is everyone else earning more than me?”

“What have I done wrong to be earning so much less?”

It’s rare that I compare myself to others. It’s also rare that I long for flashy things. So these bizarre feelings of inadequacy felt really out of character for me.

After a few moments, I had to give myself a dose of reality. Sure, there’s a chance she bought that car outright (if so, a huge well done to her - she deserves it), but there’s also a chance she got it on finance. So many people do.

Despite passing my test at the age of 19, I’ve never had a car. I’ve thought about buying one on numerous occasions, usually when my bus is stuck in traffic or a stranger’s armpit is in my face when I’m on the tram. But after doing the sums, I’ve never gone ahead and bought my own set of wheels. I don’t need to be a mathematician to see how much worse off I’d be if I drove instead of getting public transport.

So, after seeing my friend’s car update on Facebook, I started thinking about whether or not financing a car can ever be considered a wise move. Scroll down for more…

Financing a car is sometimes unavoidable

US money expert Dave Ramsey argues that if you drive cars you can’t afford, you will stay broke. And although I do agree with him, I think it’s important to note that financing a car is sometimes unavoidable.

In a perfect world, you’d buy the cheapest car you can find until you can afford something better. But let’s be honest now. Even used cars often cost upwards of £1,000. If you don’t have that kind of money to hand and a car is vital to get you from A to B, you may need to get one on finance.

Driving could help you make more money in the long run

Assuming you can’t afford to buy a car outright (not even a second hand heap of junk), I suppose getting a car on finance could help you improve your finances in the long run. But only if you’re smart about it.

For example, let’s imagine you live in a small village south of London. There aren’t many jobs nearby and the jobs that are available are badly paid and have little opportunities for progression.

If you’re in this situation, you may be better off getting a job in the centre of London where salaries are higher and there are far more career options.

Considering how ridiculously expensive it is to live in the capital, travelling into the city each day may be a smarter move than relocating to London.

If public transport isn’t a realistic option and you don’t have the money to buy a car outright, you’ll probably be left looking for one on finance.

Thankfully, if you get a cheap car on finance rather than a flashy one, and you work hard to progress your career, you could see your finances improving significantly over time. You’ll still be in debt and will have to pay off your car each month - which is rubbish - but at least you’ll have a good job and better career prospects than if you were to focus on finding a job closer to home.

In a strange way, you could consider your car as an investment. I’m extremely reluctant to use the words ‘car’ and ‘investment’ in the same sentence though. It’s bizarre to even think of a car as an investment because cars depreciate in value really quickly. This leads us onto my next point….

Cars are pretty much always a poor investment

Unlike houses which tend to increase in value over time, a car is never again going to be worth as much as you paid for it.

A car you buy outright is a bad investment. A car you get on finance? 10 times worse.

Dave Ramsey explains: “Your awesome new car loses about 25% of its value the moment you drive it off the lot.” And although your car’s value will continue to depreciate over time, if you get it on finance, you’ll still be making the same repayments you always have done. That’s insane!

Financing a car is only worth it if you really need one

I used to know a guy who had a car on finance despite working and living in Manchester city centre. He also earned a pretty low salary.

The only time he’d use his car was to get from his place to the supermarket (a 20 minute walk away) or to the pub. He’d drive to the pub, get hammered, leave his wheels in the car park, GET A TAXI HOME and then get a lift back to the pub off his friends to pick it up the next day. The pub wasn’t even far away. He could have walked.

I’m all for people doing what they want with their cash but this was a guy who’d regularly complain about how little money he had leftover at the end of each month while also insisting he’d never be able to save for a deposit on a house. When I pointed out how much money he could save by not having a car, he was adamant that he needed it.

Getting rid of his car was just unthinkable to him. But it’s this very attitude that stops people building their wealth and getting better financially.

So many people are in this situation. As Dave Ramsey puts it: “The problem is our mindset. We’ve been bombarded with the notion that we’ll always have a car payment. It’s as though car payments are just a way of life.” Dave argues that “car fever” is sabotaging our chances of success.

If your circumstances change, you debt could become a big problem

A former colleague of mine once got a car on finance. A few months later, her hours were cut at work. A couple of months after that, she was made redundant.

If you lose your job and you’re unable to make repayments on your car, you could find yourself in one of these situations:

• You may be forced to give the car back (in the grand scheme of things, probably not the worst case scenario)
• Your credit rating could take a big hit
• You may be expected to keep up with repayments - even though you can’t afford to
• You may see the amount you owe increase due to interest
• You may be offered a settlement figure - which you might not be able to pay

The outcome will all depend on the type of finance option you selected and the terms and conditions in your contract.

Perfect world scenario - Live Within Your Means

Since cars are such a ridiculous waste of money and debt is best avoided, let’s look at the best options for getting around.

If you need to get from A to B but you don’t want to mess up your finances in the process, here are my thoughts. #1 being the best option and #5 being the least preferable option. You could argue that this stuff is common sense -but so many people aren’t doing it!

1. Instead of driving, walk or cycle everywhere. Walking and cycling not an option? Go to step 2.
2. Find the cheapest method of public transport and purchase the most cost effective season ticket. Can’t do that? Step 3.
3. Buy a well priced used car that costs less than you can afford. Not possible? Step 4.
4. Borrow money from a relative to buy the cheapest car you can find. Not gonna happen? Step 5.
5. Get the cheapest car you possibly can on finance. Read the Ts & Cs thoroughly to make sure you’re getting the best deal and do your sums to work out how much you’ll be paying overall. Don’t want to get the cheapest one? You’re getting yourself into unnecessary debt over a car…

If having a flash car brings you joy and you can afford to drive one without screwing over your finances, go right ahead and do it! But before splashing a ton of cash on such a bad investment or getting yourself into debt over a car, question whether your money could be put to better use. Perhaps you could use that money to buy your own home, travel the world, fund further education, build your wealth or improve your chances of financial freedom.

Ask yourself: Is your car worth it? Are you okay with throwing so much money away and sacrificing other things for the sake of a pile of metal on wheels? At the end of the day, if you need to borrow money to buy a car, you can’t afford it. And if you go through life only buying things you can afford, you can’t go far wrong.