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Unless you live in a major U.S. city with public transportation, performing simple daily activities like picking up groceries or getting to work without a car can be challenging.
But even if you do live in the city, having a car can feel like a prestigious status symbol. Nearly every adult aspires to own a nice car at least once. But that doesn’t mean you should take a loan for a brand-new, fully loaded vehicle.
Maintaining a Car comes with ongoing costs that go beyond the initial purchase. From insurance and fuel to unexpected repairs and routine maintenance, these expenses can quickly add up. Whether you see your car as a milestone achievement or something that saves you from having to take the bus, cars keep you poor if you let them. Smart financial decisions about car ownership can make a huge difference in long-term financial stability.
4 Ways Cars Keep You Poor
Car companies spend billions of dollars on marketing and advertising. They pay those billions to convince people that buying a car will make them free, safe, happy, and the envy of all their neighbors.
The reality is a lot different. Here are four ways cars keep you poor:
1. Maintaining a Car: Financing costs
Car payments keep you poor. According to Kelley Blue Book, the average car price in the U.S. in November 2022 was $48,681. The price was $422 higher than in October and $2,250 higher than one year ago. The average person does not pay for a new car in cash and turns to auto loans.
When buying a car, lenders calculate your loan rate and amount based on several factors. The credit score is the most important measurement. It tells lenders how well you’ve paid off loans in the past.
Yahoo Finance published an article reviewing average care payments in 2024. Here are some highlights from that article.
In Q3 2023, loan rates offered based on credit scores as follows:
Car Payment Statistics
The average monthly car payment for new cars is $726.
The average monthly car payment for used cars is $533.
39.20 percent of vehicles financed in the third quarter of 2023 were new.
60.80 percent of vehicles financed in the third quarter of 2023 were used cars.
Of consumers purchasing new vehicles in 2023, 79.09 chose to finance their car, versus 82.25 percent in 2022.
Credit union financing comprised 23.11 percent of all auto loans during the same period.
The average cost of car insurance is about $168 per month.
New loan amounts are down slightly year-over-year in the third quarter of 2023.
Overall loan balances grew 5.4 percent in the same period.
SUVs and wagons increased financing share, hitting 60.84 percent of new vehicles financed in the third quarter of 2023.
Many people would consider those numbers a heavy burden. Vehicle loans cost you thousands of dollars in interest over the loan term. How much interest you pay over the life of your loan depends on several factors:
- Which bank or auto loan lender do you use
- Your down payment amount
- How much you borrow
- The repayment term or length of your loan
- Your credit score
- Your debt-to-income ratio
These things can affect the interest rate you get, your monthly payment, and how much you pay in loan costs. While there are a lot of variables, the one thing you can count on is paying interest will add thousands to the amount you have to repay.
2. Depreciation
According to the experts at Carfax, your car will be worth roughly 20% less than what you bought it for after one year. Your vehicle will continue to depreciate by about 15% annually until around year five. After five years, your car will have lost nearly 60% of its value.
The car you bought new for $40,000 will be worth only about $16,000 in five years. Other factors affect your car’s value, including mileage, make, model, and condition. However, one thing is sure: your vehicle will be worth far less than you paid over time.
You don’t see the cost of depreciation coming out of your checking account every month. You’ll feel it when you sell or trade-in your car.
Check out your car’s depreciation using this Car Depreciation Calculator.
3. Maintenance
There are plenty of things that can go wrong with your car. Buying a reliable vehicle and performing preventative maintenance can help decrease repair costs.
Review the owner’s manual and note the recommended schedule for:
- Oil changes
- Tire rotation
- Air and fuel filters
- Fluid flushes
- Replacing belts and hoses
- Replacing brake pads
Also, pay attention to signs your car needs work, like rough idling, your check engine light, or any issues with the brakes. Check your tires regularly and maintain them well for safety and fuel economy purposes.
The cost of car ownership is affected by how well your car runs. Every dollar you spend on regular maintenance can help you avoid paying much more for a major repair later.
4. Ongoing expenses
Even if your monthly car payments don’t cause financial stress and your car doesn’t need significant repairs, owning a car still results in several monthly expenses regardless of your driving habits.
You could be looking at thousands of dollars in driving costs per year between registration fees, auto insurance premiums, and gas. Fuel could be your most significant expense, depending on gas prices, how many miles per gallon your car gets, and your driving habits. Paying to park and buying a roadside assistance membership increases your costs even more.
Parking and traffic tickets are unexpected expenses you might not be prepared for. A speeding ticket could cost you a bundle of fines and fees. It could also affect your insurance premiums, especially if you can no longer qualify for a discount based on having a clean driving record.
Are New Cars a Bad Idea?
Buying a new car is a bad idea for most people. Borrowing and paying interest on a rapidly depreciating asset is not how you build wealth. Spending the least amount of money possible on a safe car that meets your needs will help you avoid being overwhelmed by debt and the cost of car ownership.
That’s not to say that there are no benefits to buying a new car. When you purchase a new vehicle:
- Things work
- You get all the latest features
- Lower maintenance costs thanks to the warranty
- The car looks, drives, and smells like a dream
- You feel good
According to the latest Quarterly Report on Household Debt and Credit, auto loan debt is the third-largest debt category behind only mortgages and student loans. Many people think the benefits of a new car are enough to justify taking out a car loan and possibly becoming car-poor for an extended period.
What Is Car Poor?
Being car-poor means spending a large percentage of one’s total monthly net income on car ownership expenses such as monthly auto loan payments, car insurance premiums, fuel costs, registration fees, and maintenance.
Car-poor people may be short on cash for discretionary spending or emergencies. They could also have trouble meeting other financial obligations, such as college loans or credit card payments, and cannot put money toward their financial goals.
People in a situation where car expenses cause financial struggles for the next 73-84 months can find a way out. Options might include getting a second job, dipping into savings, selling the vehicle, or refinancing the loan.
Buying a New Car Is Not an Investment
While there are benefits to buying a new car, such as reliability, purchasing a new vehicle is not an investment. That’s one of those dangerous money myths you need to ignore. Cars make you poor if you let them.
Investing is buying assets that increase in value and provide income over time. Borrowing money to buy an asset you know will be worth 60% of the original price in five years is not investing. It’s a poor choice.
That’s not what rich people do and not how you build wealth. Rich people aim to invest in assets with growth potential, maximize their rate of return, and minimize their liabilities.
Cars are depreciating assets. That means they lose value over time. New cars are the worst in this regard, as depreciation starts when you drive off the lot.
