Car Payments: Like Smoking $100 Bills

Pull a $100 bill out of your wallet. Now roll it up into a little money cigarette, set one end on fire, and inhale through the other side. The taste is exquisite.

That’s crazy, right? Nobody would ever destroy a bill worth that much money. And we all know that smoking is bad for you. But if you take out loans and make car payments in order to buy nice automobiles, you might as well be lighting up your c-notes.

We’ve talked about how America suffers from an extreme debt addiction. And while credit cards may be the crack cocaine of the middle class, car payments have become the financial equivalent of smoking: It’s no good for you at all, and yet it’s widely socially acceptable. In fact, one of the main reasons that people borrow money for cars is that all the other cool kids are doing it.

You may be asking yourself what could make car payments so dangerous. After all, everyone borrows money to buy cars, don’t they? And car dealers make it so easy for me to get financing when I shop with them. Certainly, they wouldn’t give so many loans if they were actually dangerous. Right?

Certainly, a tobacco company wouldn’t manufacture cigarettes if they were actually dangerous, right?

Wrong and wrong. Car loans are a bum deal for a bunch of reasons: Buying cars with loans can lead us into a payment trap, where low monthly payments trick us into a high overall price on a vehicle. And in the end, the interest that we pay on car loans makes the purchase cost much, much more than the price of the car. But the thing that makes borrowing money on cars so dangerous is the fact that cars always, always, always go down in value.

Never let anyone convince you that an automobile is an investment. Investments are always intended to go up in value, but the value of cars is always falling. Why? Because we drive them, that’s why. Every mile you put on your car destroys it just a little bit, and drags the value a little bit lower.

The falling value of cars in itself is an unfortunate fact of life. But adding debt to the equation makes the situation dangerous. Let’s look at an example, with round numbers for easy computation: You buy a car for $15,000, paying $2,000 down and financing the rest over five years (to make the monthly payments easy to afford). After three years, that car is only worth $10,000. But you owe $11,ooo because the payments are front-loaded with interest and only a small amount of your early payments goes toward reducing the principle.

Now let’s say that a distracted driver plows into your car in the middle of an intersection. Your vehicle is totaled. The other driver’s insurance company will pay you for your car… but only what the car is actually worth. You get a check for $10,000, but you owe the bank $11,000. That means that you’re $1,000 dollars in the hole. And you have no wheels.

This may seem like a worst-case scenario, but it happens all the time. Because the value of cars (especially new cars) drops so quickly, drivers often end up “underwater” on their vehicles, owing more to the bank than the care is actually worth. True, you’ll get right-side up again eventually when you pay off enough of the loan. But if you have a wreck while you still owe money on the car, you can end up in a world of hurt.

The worst part is that the dealer that sold you the car knew that you could end up underwater on the payments. But he didn’t care. He made his money when you bought an overpriced auto, and collected an extra bonus when he sold you a high-interest financing deal to go along with it. Once you drove the car off the lot, it was no longer his problem.

Like cigarette manufacturers, car dealers and the companies that finance automobile deals know that their products can get us into trouble. But they don’t really care, as long as they make their money.

Some people smoke for years and live into their 90s, and others die in their 50s from lung cancer. You might be able to gamble with car payments and get away with it. But you might also lose your shirt. The only certain way to win is to stay away from the stuff altogether.


Photo via Flickr, by user Herby Hönigsperger. Used under Creative Commons License.


  1. drewvancamp1980 says:

    Another good article to help put things into perspective.

    Question: Would you say that the only right way to purchase a car is to simply save up ahead of time for the entire purchase; to buy a car for a single cash payment? Or is there yet another approach out there? I’ve heard it explained that if you start purchasing inexpensive cars for cash so that there’s no car payment (something I’ve never managed for lack of savings to begin with) and then turning what would otherwise be a car payment into a car savings, you can effectively enjoy “free” cars for life by putting the new car savings toward the next car, and so on. You familiar with or a fan of that concept?

    • Yep, that’s my favorite strategy. It requires some discipline up front (namely, the discipline to save some money to pay cash). But over time, it really pays off.

      The idea is that you’re always making “car payments” — but instead of paying them to a lender(with interest), you’re paying them to yourself (and then earning interest on that savings account). Then when you’re ready for your next car, you can use that cash, in addition to whatever sale value or trade-in value you can get from the car that you’re getting rid of.

      The key to making this work is to get an idea of how quickly your current car is depreciating, and then to make sure that you’re saving more than that each year. That way, each car purchase pushes you a little higher up the quality ladder. You may have to start with a junker, but if you go through 2-3 cycles of this, driving each car for a couple of years and then selling it and buying the next one, you can end up paying cash for really decent autos.


  1. […] any vehicle sound incredibly appealing. And in many social circles buying your first new car (and signing up  for the accompanying debt) have become a rite of […]

  2. […] the end of two years, your are $6,000 poorer, and have nothing to show for it. I’m no fan of borrowing money for cars, but if you had made a $250 monthly payment on a loan for an affordable used car for the same […]

  3. […] think we should. We’ve already discussed how borrowing money for cars is a dangerous mistake, how buying brand-new cars is a bum deal, and how leasing is the most […]

  4. […] are for suckers, and car leases are an expensive illusion. And don’t even get me started on borrowing money to buy cars — that just makes an expensive purchase even more expensive. The only savvy way to drive is […]

  5. […] us. But if we don’t handle mortgages correctly, they can be just as costly as credit cards or car loans. As we’ve already learned, mortgages work best when you have a large down payment, and when […]

  6. […] clothes, food and utilities, but they often don’t have enough to build an emergency fund, to save money for their next car purchases or to be generous givers. Often, this leads to a lifetime of bondage to consumer […]

  7. […] also costs business owners a lot of money. Borrowing, of course, isn’t free. Just like borrowing increases the cost of a car over the length of time that you own it, borrowing increases the cost of whatever piece of […]

  8. […] for people to borrow money to finance the purchase of new vehicles. That’s too bad, because it’s always a bad idea to borrow money to buy a vehicle. It’s an even worse idea to do so at tote-the-note car lots, where the only person who really […]

  9. […] Car loans are always a bad deal, and the fact that cars often depreciate faster than you can pay down the balance makes these deals especially dangerous. If you have a small auto loan from a used car that you bought recently (or a new car that you bought a while back), go ahead and knock that sucker off. It will give you a lot more peace when you drive, and will protect you against going further in debt if you happen to have an accident. […]

  10. […] that you already know that new cars are for suckers, that leasing is a fool’s game and that borrowing money to buy a car is an expensive and risky strategy. We also hope that you’ve seen this day coming and […]

  11. […] being worn down, which means that any vehicle you own will eventually need to be replaced. Since borrowing money to buy a car is a bum deal, you need to be saving money to purchase your next vehicle, even if that purchase is […]

Leave a Reply

Copyright Brian Jewell, 2011-2018

All of the contents of this site and its posts are copyright of Brian Jewell. Any redistribution or duplication of this material, without the consent of the author, is strictly prohibited. Instead, please feel free to link to us. Thanks!


All content on this site is given on a general basis and is intended for informational use only. The content does not reflect any professional legal, investing, accounting or tax advice, and should not be used as the sole basis for making financial decisions. Always consult a certified financial professional before investing.
%d bloggers like this: