Should I Buy a Car in 2017?
About 90 percent of American households own a personal car. If we examine the remaining 10 percent of individuals that choose not to own one, you’ll find that many of them are a part of the millennial generation. Why are 20- and 30-somethings so reluctant to buy a car?
Well, studies show that millennials are much more worried about other aspects of their lives. Financially speaking, they don’t want to have to worry about monthly payments, repair costs, and the current price of gas. In addition, millennials are crippled by student debt, so taking out additional loans in order to buy a car isn’t always high on their list when it comes to large purchases. What’s more, millennials are concerned about the environmental impact that a car might bring. In recent years, younger folks that do choose to own a car are gravitating towards cheaper, more fuel efficient cars, that have a low impact on the environment.
Even so, as previously stated, 90 percent of all households still choose to own a car for one reason or another — and that includes millennials. So, if you’re reading this because you’re going back and forth about whether or not a car is worth it, I’m going to lay it all out there and examine both sides so you can make the most informed decision possible for your situation.
Owning a car is pretty much right at the bottom of the loan funnel. Not that it’s an unimportant financial decision, but that it has much lower risk than other loans. There are many aspects of an auto loan that you’ll need to think about. Although owning a car isn’t as large of a commitment as, say, owning a house or taking on student debt, there are still both short and long term effects that should be considered.
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How Will it Affect My Credit Score?
It should be no surprise that when you choose to borrow money for an auto loan, you’ll have to make monthly payments until the loan is paid off. As long as you make your loan payments on time, owning a car will undoubtedly earn you a positive return on your credit score. A good credit score will stick with you as long as you are managing your money well and making good financial decisions, which means it will be easy for you to borrow money again down the line.
On the other hand, you do have to be aware of the amount of interest you’ll be paying on your auto loan throughout its lifetime. A vehicle loan’s “APR” or annual percentage rate measures your yearly interest. An auto loan APR is commonly between 3 and 6 percent for people with good credit. Interest rates on brand new cars can be higher and someone with average to bad credit should likely expect a higher APR as well. This number can vary so you’ll want to discuss APR and your credit score with your bank in order to settle on a number you are comfortable with.
How Much Will I Pay in Interest?
With that being said, let’s take a moment to break down a normal APR. Let’s just say that you buy a $10,000 car on a five-year loan, with 5 percent interest. 5 percent of $10,000 comes out to an extra $500 in interest every year, on top of the cost of your loan, until the car is paid off. That’s $2,500, over the course of five years, that you pay the bank just to loan you the money for your car.
This isn’t meant to deter you from getting at car, but you’ll need to understand interest and APR before you sit down to sign the papers on your new auto loan. Interest is a very common thing and most of us choose to pay it at one time or another in our lives. However, just be aware of this if you’re planning on buying a new car every few years once you have your loan paid off. Think of how much you’re spending in interest over your lifetime. This might change your mind about the frequency with which you’ll be borrowing money from the bank.
Will I Save Money in the Long Run?
Sadly, buying a car just isn’t the same as owning a house or investing in your education. For example, when you buy a home you’re accruing equity with every payment you make toward your mortgage, and as your home’s value appreciates. When you buy a car you’re choosing to purchase something that ages — and depreciates — much more quickly than a house. A car is only in great working condition for about 10 years, depending on how many miles you put on it. After your car is about 10 years old, it’s harder to sell because people know that the car will require more work to maintain. So, when getting ready for an auto loan, you’ll need to know that you simply aren’t going to be able to sell it for what you bought it for. You’ll need to be able to see other value just outside of the price tag in the vehicle you’re buying.
Owning a car will give you a reliable, convenient mode of transportation for years to come. After it’s paid off you won’t have to worry about monthly payments and you can divert those funds wherever they might be more helpful within your budget. Although, you’re still going to have to budget for gas usage and regular tune-ups.
If you’re planning on having your car for years, you’ll also want to be cognizant of repair costs. One of the other benefits of borrowing money on a newer car is the fact that newer cars don’t require very much maintenance. However, once your car begins to age, usually around 100,000 miles, you’ll need to start thinking about more frequent oil changes, tune ups, and overall bigger ticket repairs in order to keep your car in good working shape.
Cost Effectiveness & Environmental Impact
As with most purchases, millennials are concerned about the environmental impact that goes along with owning a car. However, there are now more cars than ever that address these major concerns including a low price tag, fuel efficiency, and low emissions. These days, you can find a completely electric car at a decent price, entirely eliminating the nasty emissions and fuel efficiency concerns. If you look at it that way, borrowing money for an environmentally conscious car minimizes, if not erases, two of these three major concerns.
To sweeten the deal, as the law stands currently, energy efficient car owners can receive a tax credit and additional incentives just for owning an electric car. So, if you really want to buy an electric car, but you’re stuck on the fact that they can be a tad more expensive than their traditional counterparts, you might be in luck! Several cars are eligible for up to $7,500 in credit just for going electric.
For the moment, owning a car is necessary for many people across the country. Millennials landed right in the middle of a time where financial hardships, technological advancements, and environmental concerns are all making it difficult to make traditional life investments, like owning a car. The persistent financial concerns of millennials are slowly being met by car companies looking at cheaper, more environmentally conscious vehicles. Yet, many young people are still choosing to ignore the option of owning a car and are spending their money elsewhere.
For more information on how your credit score can affect your auto loan, visit the Fiscal Tiger credit score resource and learning center.
Image source: https://pixabay.com/
Trisha is a writer and blogger from Boise, ID. She is a dedicated vegan, an avid gamer, cat lover, and amateur SFX artist.
This post was updated February 28, 2019. It was originally published May 17, 2017.