Good Debt: Car Loan
Good debt can be defined as money owed on things that build wealth or increase income over time, such as student loans, home loans, or business loans. Bad debt refers to high interest consumer debt such as credit cards, personal loans, etc. that doesn’t benefit your economic outcome. However, this is an oversimplification and on this post we’ll go over a study on how we came to the conclusion to finance a car and not payoff the loan early.
Car Loans
Debt is almost certainly unavoidable for many lower-to middle-income Americans who which to purchase a car. Dave Ramsey recommends saving around $500 a month until you have enough to buy a used car with no strings attached. However, my wife and I found ourselves in a situation where we needed a second vehicle ASAP, due to her job at the time being inaccessible via public transportation in a timely manner that suits her schedule.
We opted to finance a new car as opposed to used, the reason being that her commute was far and with the possibility of inclement weather in Hawaii, she wanted something safe, reliable, and 4WD. So we got a new at the time base 2019 Subaru Crosstrek and financed $21,000 at approximately $420/month for four years. Why do I consider this good debt? Because we financed it at a 0% interest rate. Not only that, should we sell our car in today’s environment, our Cosstrek’s private party value range $20,987 -$23,391 per Kelly Blue Book. With private sellers on Craigslist and Facebook Marketplace listing for even higher. We have a chance of “increasing income” or effectively renting the car for free for four years if we sell at the lowest price range.
I understand that today’s used car market is an anomaly and will probably never happen again in our lifetimes. The lesson for the story is that there is no one size fits all in personal finance. What some may view as bad debt can be pivoted into an opportunity. The key to getting ahead is to position yourselves to be able to take advantage of those opportunities when they present itself. When the car salesman was trying to close us, he kept on pitching the monthly payment. I told him I don’t care about the monthly payment. I wanted the lowest total cost over the life of the car which was the 0% interest rate they were advertising. Now we’re sitting on a potential asset while having met the personal and emotional needs of my wife required in a vehicle that most financial gurus out there will call bad debt.