Debt: Auto Loans

There is no substitute for consistent, hard work. I had a business coach who taught me an incredible principle. She said, “Zach, you need to know when to take the stairs, know when to take the escalator, and know when to take the elevator.” It is very tempting to take the elevator as often as possible, but often, when you are quick to jump on the elevator and get to the next level, you lack the muscle you would have built had you taken the stairs. 

There are certainly times in life when the elevator is prudent and wise; however, when it comes to debt, beware. Just because you can easily acquire that car doesn’t mean that you should. And just because you can have it, doesn’t mean you shouldn’t simultaneously work hard to pay as much as possible in cash. 

I am a big fan of the book of Proverbs in the Bible. There are many short sayings that teach proven, tried-and-true wisdom principles. Proverbs 13:11 says, "Wealth gained hastily will dwindle, but whoever gathers little by little will increase it." Proverbs 10:4, "A slack hand causes poverty, but the hand of the diligent makes rich." And again, Proverbs 14:23 - "In all toil there is profit, but mere talk tends only to poverty." Debt should not take the place of hard work. As you consider borrowing money, do so alongside hard work. Make sure you’re developing the muscles, skills, and mindset that come with taking the stairs. 

I have taught you that debt is like digging a hole in your backyard. If you weren’t here for that, you can always visit my website at https://www.zachsantmier.com/blog to catch up on the blog posts. 

When you dig a hole and take out a car loan, the same dirt principle applies. Is your asset bigger than the hole you are digging? If you had to, would you be able to sell your vehicle and fill the hole? In other words, would you be able to pay off the loan by selling the car? Cars are tricky. Cars are depreciating assets. They are still assets, but the pile of dirt beside your hole keeps getting smaller and smaller, often faster than you are paying back the loan. 

First, if you do not have a full tank and not every mark on your Fuel Gauge is complete, I do not recommend auto loans. In other words, if your New Zero in your checking and savings isn’t funded and you are not investing 15% into retirement, car loans are not recommended. 

Auto loans have notoriously been a financial trap that has taken up way too much room in people’s budgets. Having a $500 per month auto payment significantly slows your progress towards having a full tank, so if you’re considering buying a car with a loan before you have hit all 8 targets, don’t do it. If you don’t have a vehicle, then purchase a cheap one. If you have zero cash and feel you must take out a loan, get a very small one for the time being. In the future, you can get a better car. But don’t rob yourself of a sturdy financial foundation because you wanted a sweet ride. 

After you have a full tank, auto loans can be ok under a couple of circumstances. First, you should always pay 25% of your vehicle's price, either as a trade-in or in cash. Cars depreciate, and they often depreciate significantly right as you drive them off the lot. We don’t want an asset smaller than the hole we are burying, so we always recommend 25% down. 

If you decide you’d like an auto loan, you should never take on an auto loan that is bigger than your New Savings Zero. If you have $50,000 in your savings account, then the loan should be no more than $50,000. Even though the vehicle is an asset and you are paying off the loan over a shorter period, cars can depreciate quickly or break down, becoming completely worthless. Our savings account provides the extra dirt, so in absolute emergencies, we still have cash to pay off our loan and fill in the hole we have dug. 

Next week, we’re going to discuss student loans and how they can be an asset or a completely unsecured loan. Stay with me, this eight-step process takes time, but it is so worth it as you fuel the life of your dreams.

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Zach Santmier is the owner of Trumble Agency, Inc. and the author of the personal financial course, Increase. He focuses on helping families escape paycheck to paycheck living so they can freely pursue their ideal future.