Long term auto loans, good or bad news

Long term auto loans, good or bad news.

For many people owning a car is as important as owning a house, a computer or a heart. It is true and honest to say that we live in a world that depends on fast and efficient communication and transport. Just the logistics of getting workers to a factory is a significant example of how the world we live in relies on fast transport.

An interesting historical anecdote illustrates this point. Just after the War of Independence the Republic fever had taken over the world and the American leaders saw a future where the entire American continent could be free of the control of European powers. However not even Jefferson, radical as he was, envisioned the whole of America as one Republic. Although it was talked about, Jefferson is quoted as saying that how was it possible that a representative from the far West could hold a seat in Washington if it would take him the best part of his term just to get to the capital. Because of this the founding fathers predicted a series of sister republics. Of course this didn’t happen, the United States is what happened. Why? How? One of the big reasons was the steam engine, the train, that connected this huge continent and made it possible for it to be under one government.

That is just one example of how transport has changed the way we live. Now most western households own two or more vehicles. This doesn’t mean they are cheap, or it is easy to buy and maintain a car. It just means we are dependant on them. Cars have shaped the way cities have grown, the sprouting of suburbs that force people to commute for half an hour just to buy milk. My in-laws would have to walk for an nearly two hours just to buy groceries and get the paper if they didn’t own a car. They actually own three cars, so there should be milk for coffee for now.

However, because cars are expensive more and more people have been pressured into getting car loans. Because cars (and out tastes) have become more expensive the loans have become larger. And because wages haven’t grown at the same speed, the car loans are taking longer and longer to pay. Some people might think this is no big deal, as long as the monthly payments are affordable there is no problem. However the longer the loan the higher the interest. Let’s illustrate this. Imagine we borrow 10,000 dollars to buy a second hand car at a 10% APR interest rate. If we pay it in one year we will pay 1,000 dollars in interest. However if we take two years we will be paying nearly double. It is not exactly double because by the second year you only pay 10% of the remaining capital. Nevertheless if you pay slowly it is going to cost you, and dearly.

Long term auto loans might seem the solution to a tight budget but must be avoided unless it is absolutely necessary.