Dave Ramsey, a well-known personal finance expert, has a conservative approach to car financing.
He often advocates for the idea of paying cash for vehicles instead of taking out loans.
Here are some key points from Dave Ramsey's perspective on financing a car:
Avoid Car Loans
Ramsey generally advises against taking out car loans, especially long-term loans with high interest rates.
He believes that car payments can be a significant drain on your monthly budget and hinder your overall financial progress.
Buy Used Cars
Ramsey recommends buying reliable, used cars that you can afford with cash.
He often suggests that new cars depreciate rapidly, making them a poor financial choice.
Save and Pay with Cash
Instead of financing, Ramsey encourages individuals to save money over time to purchase a car outright.
He suggests creating a sinking fund or setting aside a specific amount of money each month until you can afford the vehicle.
15-Year-Old Rule
One of Ramsey's popular rules is the “15-year rule,” which means that you should aim to keep your cars for at least 15 years.
By doing so, you avoid the rapid depreciation that occurs with new cars.
Emergency Fund First
Ramsey emphasizes the importance of having an emergency fund of three to six months' worth of living expenses before considering major purchases like a car.
Pay Off Debt First
If you have existing debts, Ramsey typically recommends paying off those debts, including credit cards and student loans, before saving for or buying a car.
Avoid Leasing
Ramsey is not a fan of car leases either, as he believes they do not provide good value for the lessee.
Average Interest for Car Loans
In the second quarter of 2023, the average interest rate for a car loan was 6.63% for new cars and 11.38% for used cars.
Average interest rates by credit score
- Super prime: 6.79%
- Prime: 8.75%
- 600-699: 17.16%
- 750: 3.5%
Average interest rates by lender
- Alliant: 3.24 – 18.19 percent
- CapitalOne: 3.99 – 13.98 percent
- PenFed: 1.99 – 18 percent
- PNC Bank: 2.79 – 14.99 percent
Other average interest rates
- New vehicle: 6.58%
- Used vehicle: 11.17%
- Refinance car loan: 10.09%
Generally, the lower your score, the higher your annual percentage rate (APR) will be.
My Thoughts
I think Dave Ramsey has a good point.
Generally, it probably is best to buy a car used with cash.
If buy it new, the car depreciates in value as soon as you drive it off the lot, even if you didn't finance it.
Now, if you bought a car used, there's a chance you could resell it for a similar price later on, if you take good care of it.
I've actually done this before.
If you finance a vehicle, new or used, you could pay an average of 6-11% more for the same car than if you had paid cash.
The Only Problem
The only problem with this thinking is what could you do with that extra money that you didn't pay out of pocket by financing it?
Buying a car can be very expensive.
If you pay cash, you could very well be paying $10s of thousands all upfront.
Now, if you stretch it out, you pay more, but you also keep more money in the bank in the short-term.
The question is, can you invest to get more than the 11% or so that would be the interest on the loan?
THAT'S the question.
If you can invest the money left over and get a better than 11% ROI, then it might be better to finance the car.
But, if you don't think you can invest that well, you should probably stick to Dave Ramsey's principles.