What's Wrong with a Car Payment?

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I met a family last week and, as soon as I walked in the door, the husband said, “I know you’re going to talk to us about our car payments.”

The family financed two cars at 5% interest and had $400 payments. They were saving $300 per month beyond their retirement contributions. Despite their car payments, they saved by cutting expenses in other areas such as eating out, buying new clothes, cable TV, etc. They made a conscious decision to prioritize the cars over other expenses. So what’s wrong with that?

Personal finance experts caution against car payments. I’m sure you’ve heard it before, "Buy with cash," "Don’t lease," "Drive your car into the ground before getting another one." But those generalizations may not always be true.

Here are a few reasons why there’s nothing wrong with car payments:

  • It’s not a depreciating asset, it’s an expense: Yes, cars immediately lose value when you drive them off the lot. So does just about every other expense in your budget. Remember the dinner you had last night? How much is it worth now? If you think of a car payment like any other expense, the fact that it depreciates is irrelevant to your long term finances.
  • Cars always have some value: Unlike last night’s dinner, your car always has some value. Once again, if you consider a car an expense, it’s potentially a better use of your money than any other discretionary expense in your budget. You can’t resell a night on the town, cable TV, or cell phone overages – they are all worthless!
  • We all have unique priorities: The family prioritized their cars at $800 per month over eating out or buying new clothes. I’ve seen numerous families that have no car payments but spend well over $800 on eating out, shopping, gifts, vacations, etc. In the end, it’s not about what you spend on, it’s how much.

If you have car payments and extra discretionary expenses (i.e., you prioritize everything), you may be headed for trouble. But, car payments alone are not the issue. As I told the husband, “We all have material things we want. I’m glad to see you only have one.

What do you think about car payments? Is there anything inherently wrong with having one?

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