Weekly

This Car Fairytale Will Ruin Your Credit

Want to know the easiest way to save money?

Drive a clunker—that’s it.

The funny thing about cars is, people let their egos get tied up in the brand. They like to say they drive a “Benz” or a “Beamer.” Puke. You should have $1,000,000 before you buy a new Benz or Beamer.

The car you want is the car you can pay cash for. That’s the car you can afford.

Your Car Is Not an Investment

Maybe you’ve heard the fairytale that your car is an investment.

Unless you drive a Ferrari, it’s not. A car is basically a huge waste of money. Where else can you take $40,000 and set it on fire in 7 years? And pay a bunch of interest to the bank in the process? What a disaster.

I spend a lot of time in Miami Beach, a town where driving a Porsche is like driving a Honda. I get the sense that a lot of people who own those cars literally have no other possessions.

It’s all about priorities. If financial health is one of yours, it’s time to drop the fairytale thinking.

Bob the Credit Un-Builder

Here in Myrtle Beach, there’s a Mitsubishi dealership with a giant inflatable Bob the Builder out front. Except his hard hat says, “Bob, The Credit Builder.”

Guys, taking out a loan for a car you can’t afford is not the way to build your credit. It will probably make your credit worse.

Say you have a mortgage and some credit card debt. But you want a new car, so you trade in your old clunker and take on more debt.

The average price of a new car is $36,000. So maybe you take out a $25,000 or $30,000 car loan.

Sure, if you make all of the payments on time for four, five, maybe even seven years, then yes, all else being equal your credit score will go up. But all that debt increases your risk. That’s the part people don’t appreciate.

See, when you have lots of debt, you’re vulnerable to a bump in the economy. Maybe you lose your job and it takes six months-plus to find a new one. Your income dries up, you run through your savings… at that point it doesn’t really matter how well you’ve managed your debt, you won’t be able to pay it.

What happens to your credit then? At minimum, you’re going to miss a few payments. Or pay your credit card bills or mortgage late to get the car payment in on time. Basically, you’re juggling a bunch of little financial crises, thinking, “Wow, I should have kept that old Hyundai.”

That’s not going to boost your credit score.

Yes, People Like You Lose Their Jobs Sometimes

I’m sure you work your tail off. Even so, there are countless ways for people in the private sector to lose a job. It doesn’t just happen to screwups.

When a recession hits, a lot of diligent, hardworking people tend to lose their jobs at the same time.

In the old days, recessions happened somewhat often. We haven’t had one in 12 years, which is great. But one of the side effects is that people have grown way too comfortable with risk. They think, “Nothing’s gonna happen to my job. I’ll just take on more debt.”

People don’t appreciate how vulnerable this makes them. During a garden variety recession, unemployment might reach 6% or 8%. But it shot to 10% during the financial crisis. And it skyrocketed to 25% during the Great Depression.

Who knows what flavor of recession we’ll get next?

The Big Decisions Matter

I often say that your financial well-being is not the product of a million small decisions, but two or three big decisions. A car can bankrupt you. Or you could watch helplessly as the repo man tows it out of your driveway.

Car salesmen all say the same thing: “I can get you in that car.” They are pretty creative, financially speaking. They’ll find some way to make the sale, even if it puts you in a perilous financial position. That is not their concern. Their concern is selling cars.

The ideal scenario: Get a gently used Toyota, pay cash, drive it forever. You win the personal finance game.

No Means No

If you’ve bought a car at a dealership in the last couple of years, you probably heard a big long sales pitch about financing it. The car guys don’t want you to pay cash—because that’s how they make money.

People get screwed because they don’t want to upset the nice salesman. “Oh, he’s taking care of me.”

So they say, “Oh, $600 a month? Sure, I can make the payment.” Then they end up with a giant car loan, all because they’re uncomfortable saying no.

My advice: If you’re buying a car at a dealership, and they ask if you want a loan, the answer is “No.” Period.

This isn’t the time to worry about being nice. You may have to say no 75 times, but hold your ground. “No, I don’t want a car loan. I want to pay cash.”

The nice salesman will be just fine.

Jared Dillian
Jared Dillian