Chapter 4: Lesson 5 - Truth about Car Loans

Truth about Car Loans

Objectives

LEARNING OBJECTIVES

• Understand why car loans and leases are horrible ways to purchase a car.

• Understand why paying cash for cars and avoiding car loans is not only possible but also the best way to own a car

​Key Terms

Principal: the original amount of a loan; the total amount borrowed before interest
Interest: the additional cost a lender charges for borrowing their money​​​​​​​
Term: the amount of time, in months, that you’ll be making payments​​​​​​​
Depreciation: the loss of value of an asset over time​​​​​​​
Negative Equity: when the value of an asset falls below what is owed on it

How do Car Loan Work?

How Do Car Loans Work?

Despite what many Americans think, your car is not a status symbol. Yup, we said it. Too many people buy into the myth that they need a sweet new ride. Don’t get sucked into the idea that people will have a better opinion of you if you’re driving a certain type of car. Having a nice car doesn’t mean you’re a successful person—just like having an older car doesn’t mean you’re flat broke.

WORDS OF WISDOM

Paying interest on something that’s worth less and less every month is a terrible idea, no matter how much money you have.

So, what’s a car loan and how does it work? Great question. There are two major ways to finance a car: direct financing (a loan) and leasing. But let’s just say right up front that neither of these is a good idea. Why? Because each one just puts you into years of debt.

Never spend your money before you have it.

— Thomas Jefferson, 3rd U.S. President

Multiple Select

What are the 2 major ways to finance a car?

• Paying Cash

• Direct Finance

• Paying by Check

• Leasing

Direct Financing

Many people believe you just can’t have a car without a car loan. That’s one of the biggest money myths today! The truth is that using credit to buy a car (aka financing) will cost you way more than the car’s actual sticker price.

That’s because, just like with any loan, you don’t just pay back the money it costs to buy the car—you pay interest too!

A car loan payment is determined by three main things:

1. Principal: This is the total amount of the loan—the cost of the car plus any taxes and fees.

2. Interest: Just like with a credit card, this is an additional cost (or penalty) your lender charges for letting you borrow their money.

3. Term: This is the amount of time you have to pay back the loan. Usually, the more time you have, the lower your payment will be—but you’ll pay more interest over time.

Categorize

Options (5)

This is the total amount of the loan—the cost of the car plus any taxes and fees.

this is an additional cost (or penalty) your lender charges for letting you borrow their money.

This is the amount of time you have to pay back the loan

the more time you have, the lower your payment will be

you’ll pay more interest over time.

Organize these options into the right categories.

Principal

Interest

Term

Replace this text with your body text.

​Duplicate this text as many times as you would like.

Let’s say Amanda wants to buy a new car. She got a great job right out of college and wants to upgrade her wheels to match her new title (big mistake). So, she does what most people do—finances the car instead of saving up the cash and paying for it in full (we told you how to save up and pay cash for cars, for life, in Chapter 3).

Amanda got a ”good deal“ on a new car for $25,000 with no down payment at an 8% interest rate. She promised to pay the loan back over a six-year term (or 72 monthly payments). Yikes!

But if Amanda had known how car loans really work, she would have kept her old car. Instead, she ended up with a $438 monthly payment—for the next six years! That will put a huge dent in her budget. Plus, after 72 payments, she will have paid over $31,500 for a $25,000 car—that’s over $6,500 in interest payments! Don’t pay more for a car (or anything) than it’s actually worth.

Upside Down

​

Leasing

Leasing is the other main way to finance a new car. Leasing is the most expensive way to drive a car. But of course, your friendly neighborhood car dealer would never tell you that—that’s what this course is for.

A typical lease payment helps cover the depreciation of the vehicle. Your payment also includes a rental charge, taxes, and fees. And after all that, you don’t have a car when the lease is over—typically in three years—unless you decide to pay even more to buy the car at the end of the lease.

Leasing a car may sound like a great idea, but in reality, you’re paying to drive a glorified rental car. Sure, monthly lease payments are often lower than payments on a car loan. But your hard-earned cash is really just padding the dealer’s pockets until the end of the lease term.

​

WORDS OF WISDOM

Leasing a car is the most expensive way to drive a car.

Don’t forget: Lease agreements come with a mileage cap. If you go over the mileage cap (and most people do), you’ll pay a penalty. You’re also responsible for maintaining the car and keeping it in great condition—or you’ll pay for that later with an excessive wear fee. And there’s often a fee just to turn the car back in so the dealer can clean it and sell it.

​

Pay Cash for Your Car

Don’t fall for the myth that car payments are just a normal part of life. Your first paid-for car may not come with that new car smell (it’s overrated) or win any beauty contests, but you can upgrade your car—for cash—and end up with a sweet ride in a few years. Even better, you won’t have a huge monthly car payment. It feels great to drive a car when you own it!

​LESSON 6: GETTING AND STAYING OUT OF DEBT

LEARNING OBJECTIVE

Explain strategies to avoid and get out of debt.

MAIN IDEA:

Debt causes financial risk and stress. Avoiding debt—of any kind—is the very best way to win with money

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Avoiding Debt Is Important

All right—time for some real talk. Are you on board with the debt-free lifestyle you’re learning about? Or are you still asking yourself, If everyone around me is using credit to buy what they want right now, why should I be different? Well, here’s the deal. With 78% of Americans living paycheck to paycheck, most people only look like they’re living the American Dream.⁸

The truth is that they’re broke and stressed out about how much debt they have. That’s not the American Dream at all! But by choosing to avoid debt and learning good money habits now, you can give yourself a real chance to build wealth, give outrageously, and live a life of financial security—the real American Dream

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How to Avoid Debt

We get it. Deciding to avoid debt in this culture is like swimming against the current. You’ll have to ignore the barrage of credit cards offers, easy financing options, and those annoying buy now, pay later promotions. And that’s the easy part.

You’ll see people just like you—just starting out in life—spending money without a care on fancy vacations and new cars. They’ll think you’re weird because you’re not doing the same thing. At times it won’t seem fair. But that’s when you need to remember that huge credit card bill they’ll get a few weeks after their vacation or that hefty car payment they’ll have to pay every month—for five or six years!

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How to Get Out of Debt

So, if you do have debt—maybe a car loan, credit card debt, or even a personal loan from a family member or friend—now’s the time to tackle it. You don’t want debt following you into life after high school!

Remember, The First Foundation is to save a $500 emergency fund. Once you’ve done that, it’s time to throw as much money as possible at your debt. If you don’t have a job, get one. With your parents covering your living expenses, you can throw a lot of your money at debt.

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