5 Reasons why you shouldn't get a loan to buy a car

5 reasons why you shouldn’t get a loan to buy a car

We had a young man, in his early 20s call us this week.

He was stuck.

It felt like he was chasing his tail, trying to keep his head above water.

Quick Snapshot:

Early 20s, single, lives at home, works full time on $50k pa, $50k ute, $50k loan on ute, $6k in credit card debt.

I thought I would share our response, as it may be able to support others.


When looking at your financial situation there are few things that stand out:

1/ You have debt that is worth more than your yearly salary

2/ You are driving a call worth more than your yearly salary

3/ You are living week to week and struggling to keep up with debt repayments

There are two levers we can look at pulling;

1/ Increase your income

2/ Reduce your expenses

In relation to income - for a <insert occupation> you are at the lower end of the spectrum.

The average <insert occupation> earns between $70-80k per annum.

So there is an opportunity to consider other employment opportunities to increase your potential income.

In relation to reducing your expenses - having a $50k loan on a depreciating asset will ensure you remain in a cycle of living week to week.

Until you have a cash reserve, investments and greater income, this loan is too significant for your personal circumstances.

Why car loans can be a bad idea:

1/ Depreciating Asset

Most people do not understand how costly depreciation is.

Depreciation is a fancy way of saying that something loses value over time.

Depreciation for cars is steep (generally)

"Some people love the new car smell, to me, it smells like burnt money."

The average car loses 25% of its value in the first year, nearly 50% in the first 3 years.

Therefore, a $70,000 ute is worth $35,000 in three years.

Now different cars depreciate at different rates, but the point is borrowing money for a depreciating asset is almost always a bad deal.


2/ Lengthy Loans

The average car loan term in Australia is 7 years.

The longer the loan, the more interest you pay and the more likely it is that you will be upside down on your loan,

meaning that you owe more money than the car is worth.

I hate car loans in general, however if you cannot repaid the loan in 3 years, you honestly cannot afford the car.


3/ Credit Risk

It is also a credit risk to have a car loan.

Within a 5 year time frame, it is very likely that you will have at least one financial emergency.

Whether it is a job loss, health emergency, car repairs, accommodation issues, or a combination.

If you are ever in that situation, where money is tight and it is an emergency, the last thing you want is a bulky

car loan repayment. It makes it dealing with a financial emergency all the more difficult.


When you are short of cash during an emergency, it is much more likely that you will damage your credit by missing or being late on a repayment.

One missed or late payment can affect you for years to come, which may affect your chances of purchasing a home in the future.


4/ Killing Wealth

The truth is car loans are wealth killers.

We have somehow normalised going from car loan to car loan.

That is a recipe for staying BROKE!

Your car loan repayment could be as much as $160 per week.

Over 30 years that is $252,000


$160 per week invested over 30 years with a 7% return is $841,000.


So you can either give $252,000 away to the banks,

or earn yourself $841,000.

The choice is yours.


5/ Borrowing Money to Get To Work

For many people, the use of the car is primarily to get to work (however in your case we could get to work in a cheaper car).

Think about how insane that is that you are paying over $8k per annum to get to work.

On your $53k income that is close to 16% gone before you even start working.

That is not even including petrol, insurance, maintenance.


If you are still questioning if you should keep your ute - calculate how many hours you need to work to make your car payment for the year.

What Can We Do

By reducing your loan, your loan repayments would be reduced which would free up more cashflow to:

1/ Enjoy life and stop chasing your tail

2/ Start investing and secure your financial future.


Therefore, I would consider selling your ute and repaying your loan.

During our brief discussions, it was highlighted that this is the one asset and one liability that is financially holding you back.


An immediate action would be to consider consolidating your credit card debts by using a balance transfer.

There are banks that are offering 36 months interest free on any amount of debt you transfer to them.

This ensures you can repay the debt without it accumulating interest and snowballing out of control.


Furthermore, I highly recommend you sit down and work out your budget to understand where your money is going.

Don't stick your head in the sand, take control of your financial future.


We are here to support in any way we can.

However, you may not hear the answers you want to hear, but the answers you need to hear.

Matthew McCabe