After a home, a car seems to be the next must-have big-ticket item that is hard-wired into our modern psychology. The freedom offered by your very own set of wheels is very highly valued and, when combined with the wide range of purely emotional factors linked to car ownership, really makes the pull of a cheap car loan very hard to resist.
But again, for your own sake and for the sake of our economy, it would be very wise to tone down the emotions for a while to make room for some rational thought. Currently, the average yearly cost of car ownership in the US is almost $9000 according to the AAA. Your car is therefore likely to cost you nearly as much as your home every month.
The large yearly expenses associated with a car might sound a bit strange, seeing that cars are mostly about 10 times cheaper than homes. Both a home and a car have running expenses, but the big difference is the fact that a home appreciates in value over time while a car depreciates. This important difference is responsible for a large chunk of the $9000 per year pricetag of the average car.
You see, when you make the monthly payment on your home, the non-interest part is essentially an investment in a physical asset that will appreciate with inflation, but the non-interest part of you monthly car loan payment is eaten up by the depreciation. In essence a car is a consumable just like a hamburger – the only difference is that the car will lose its value over a few years of driving while the hamburger will lose its value over a few minutes of eating.
The first thing you therefore need to do is to honestly evaluate whether you really need your own car. If not, your car loan is guaranteed to be a consumer loan which (as discussed before) contributes greatly to the economic mess the developed world finds itself in today. In many cases, however, a car is mandatory for getting to work and just generally living your life. It is a sad fact that modern cities are built for cars and not for people and it is therefore often the case that a car loan actually qualifies as an investment loan (simply because you need a car to actually get to work and earn your living).
But even if a car loan is in fact an investment loan, it still does not mean that it is the best option. Modern cities offer many alternatives to private car ownership such as public transport and car-share schemes. If you just take the time to do the research, you will often find that a combination of public transport and car-shares can meet your transportation needs in a very practical manner and at a fraction of the cost.
The ultimate is of course to design your life so that you can work from home and/or use a bicycle as your primary mode of transportation. We will talk a lot about these healthy, economical and environmentally sound options in later sections of the One in a Billion project.