Due to variables including rising interest rates and rising automobile costs, the cost of car ownership in the United States is at an all-time high. Recently, financial expert Suze Orman brought attention to a big error that a lot of automobile purchasers make, which can put them in even more financial trouble. According to Cox Automotive, the average cost of a new automobile was $48,759 as of December 2023, while the average cost of a used car was not far behind at $25,638. It is more important than ever to steer clear of financial hazards when purchasing an automobile because of this rising expenditure.
Recognising the Actual Cost of Owning a Car
There is more to owning an automobile than just the initial cost. Over time, there are a number of related expenses that mount up, including gasoline, maintenance, and insurance. But the loan used to buy the car frequently causes the biggest financial stress. Considering the present high interest rates, these loans may end up being quite expensive.
The Danger of Inverse Equity
The 20% of new car purchasers in Q32023 who traded in their old cars still owing money on their prior auto loans, according to a recent Edmunds.com research. Referred to as “underwater,” “upside-down,” or “negative equity,” this circumstance denotes that the loan amount surpasses the car’s current market worth. Edmunds reports that these purchasers often had negative equity of more than $6,000.
Even though it’s not ideal, carrying negative equity may be controlled if you make your loan payments on schedule and pay it off gradually. The actual issue comes when you choose to take out a new loan to cover the outstanding sum from your previous one in order to purchase a new vehicle. This practice significantly increases your debt and extends the time you’ll be repaying car loans.
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Suze Orman’s View on Inequality
Suze Orman stresses how crucial it is to stay away from rolling over negative equity into a new auto loan. This, according to her, is heading into the “financially dishonest lane.” According to Suze Orman, carrying over negative equity basically entails taking out a new loan to pay for the shortfall, which makes your financial issues worse.
Orman issues a warning: new automobiles lose a large percentage of their worth the moment they leave the showroom due to quick depreciation. As a result, taking on additional debt for something that would inevitably result in financial loss is foolish. This technique lengthens the period you’ll be repaying your auto loans and dramatically raises your debt.
Automobiles Are Not Investable
Cars lose value over time, in contrast to real estate, which usually increases in value. They are not to be regarded as investments. Rather than going over budget for the car of your dreams, the objective should be to satisfy your mobility needs as cheaply as feasible. Orman suggests that you pick a car that fits your demands and your budget if you have to take out a loan to fund your automobile purchase.
Realistic Advice to Prevent Automobile Purchase Errors
- Determine Your Requirements: Decide what kind of car you actually need. Take into account elements like cost of maintenance, dependability, and fuel efficiency. Refrain from getting influenced by opulent features or the newest models.
- Spend Your Money Well: Set aside a reasonable amount of money for the purchase of an automobile, accounting for all related expenses. Adhere to this spending plan to avoid debt.
- Avoid Rolling Over Debt: Pay off your existing automobile loan in full before thinking about buying a new one if you have negative equity. Resist the urge to refinance this debt with a new loan.
- Find the Best Financing: To get the best interest rate, compare loan offers from several lenders. The total cost of your loan might be greatly impacted by even a little variation in rates.
- Think About Buying a Used Car: Considering how quickly new automobiles lose value, you might want to choose a used car. Used automobiles may be just as dependable as new ones and are sometimes more economical.
- Repay Your Debt Pay off your auto loan as soon as you can: This is your goal. To get the most out of your investment, keep driving the automobile for a few more years after the loan is paid off.
Conclusion
The advise from Suze Orman is very clear: resist the urge to transfer your negative equity into a new auto loan. This approach delays the point at which you can drive your automobile debt-free by increasing your debt and lengthening the period you have to repay loans. You may guarantee a more secure financial future by knowing the full cost of automobile ownership, making wise financial decisions, and bucking dealership pressure.
Disclaimer: The information provided in this article is based on available sources and may not be 100% accurate.
