Car Loans

Another popular type of loan for young professionals is a car loan. In most cases, paying for a new car completely in cash isn't realistic, so many people finance their vehicle purchase.

The Basics

Usually, car loans have relatively low interest rates—often 3-7% for new cars with good credit. In the example on the debt page, we showed a $10,000 loan at 4% APR over 3 years.

However, there are important factors to consider beyond just the interest rate.

Cars Are Depreciating Assets

Unlike a house, which typically increases in value over time, cars lose value rapidly:

• A new car loses ~10-20% of its value the moment you drive it off the lot
• After 5 years, most cars are worth only 40-50% of their original price
• You could end up "underwater" (owing more than the car is worth)

Smart Car Buying Strategies

Buy Used (1-3 Years Old)

Let someone else take the initial depreciation hit. A 2-year-old car with 25,000 miles often has many years of reliable service left but costs 30-40% less than new.

Keep Loan Terms Short

Aim for a 3-4 year loan maximum. If you can only afford the car with a 6-year loan, you're buying too much car.

Save for a Down Payment

A larger down payment means:

• Lower monthly payments
• Less interest paid overall
• Less risk of being underwater on the loan

Consider Total Cost of Ownership

The purchase price is just the beginning. Factor in:

• Insurance (often higher for newer/fancier cars)
• Fuel costs
• Maintenance and repairs
• Registration and taxes

The Best Strategy

If possible, save up and pay cash for a reliable used car. No loan, no interest, no monthly payment. The money you would have spent on car payments can instead go toward investments.