Wednesday, March 26, 2008

Cars are not investments

When it comes to managing your debt, your car is not an investment. The value of a new car decreases significantly as soon as you drive it off the lot. Assets appreciate in value. For example, your house is probably an asset. In most situations it will be worth more 5 years in the future than it is now. Your car will be worth significantly less.

In generally you want to avoid borrowing money for things that are not assets. Since your car is going to decrease in value, you are often better off to buy a good used car that you can pay for with cash than finance it. In two years the car will be worth significantly less. In some situations it will be worth less than what you owe on it.

Borrowing money to spend on assets doesn’t have nearly the same risks. If you borrow $100,000 for a house and in two years the house is worth $15,000 more than it was when you bought it, then you are doing very well. Housing prices don’t always go up, but it is one of the lower risk investments you can make–as long as you don’t buy a house that is already overpriced.

It is much easier to consolidate any outstanding debts when most of your loans are for assets–things that are worth more than they were when you bought them. In fact if most of the money you owe is on items that are worth more than they cost, you probably aren’t going to really need to look into debt consolidation other than possibly refinancing to take advantage of lower interest rates.

Debt consolidation and debt settlement usually becomes necessary when people have taken out loans for items that are worth less now than they were when purchased. The $5,000 stereo someone bought last year, isn’t likely to be worth anywhere near $5,000 now. Lets say it is now worth $2,500. However it is likely that they still owe $4,000 on it. If someone does this over and over again, they end up in a situation that is ideal for the bank or whoever else is loaning them money. They have basically traded their money for an item that is now worth significantly less, but they amount they owe doesn’t go down as they value of their purchase goes down.

Delaying purchases until you can pay cash not only keeps you from needing to deal with debt settlement issues, but with most items it means your money will go further. The stereo you could have bought on a credit card 2 years ago for $1,000 is likely to only cost $500 today.

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