Why You Should Never Finance a Car

The advice below is quite possibly the one of the best personal finance tips ever. Courtesy of Gary North…

"Whenever I see an ad for a new car, I think, 'Suckers!' There is no more economically stupid purchase than a new car.

• They are overpriced.
• They depreciate 20% the moment the proud new owners drive them off the lot.
• There is no interest payment deduction on your federal income tax for auto loan debt.
• They keep people poorer than if they bought used and invested the difference. [Very, very good point.]
• As a status symbol, the status they symbolize is "dumb consumer."
• They are a grown-up version of the secret decoder ring of my youth: "Be the first on your block to own one!"

You need to get from here to there and back again—cheap, reliably, and without further ado. A used car will do this at one-fifth the initial investment.

If you buy a lemon, junk it and buy another used car. There are lemon new cars, too. But lemon used cars cost a fraction of lemon new cars. You can afford to make a debt-free mistake."

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Bottom-line: If you can't afford to pay cash for a car, don't buy it. As a general rule, you should never finance a depreciating asset, unless you can take a tax deduction for the depreciation (i.e. You can take a tax deduction for financing business equipment, rental property). You can find cheap, reliable used cars on Ebay, if you buy smart. Your local paper is another good source.

The only possible reason to finance a car would be to build a positive credit rating with the credit bureaus…although building a good credit score would be better accomplished by making on-time payments with a new credit card.

Another option to build your credit rating: Put $1,000 in two different money-market bank CD's, and then take out two personal loans ($1,000 each) secured by the bank CD's. So, you'll have a total of $2,000 in bank CD's and a total of $2,000 in personal loans. Make on-time loan payments for six months to one year, and then withdraw the funds from the CD's and pay off your loans.

By federal law, credit bureaus don't have to report a credit score unless you have two open lines of credit, that's why I suggest taking out two separate personal loans (The second loan should be from a different bank/reporting source). This strategy can also be used to develop a credit history for a new business.