Why your car loan cost you $5.2 million dollars

John Cook
John Cook
Dec 11, 2018 · 6 min read

I am about to share a scary story. A real story, that happened to me, and is probably happening to you. A mind-numbing 107 million Americans owe in aggregate $568 billion in auto debt. The aggregate amount borrowed has increased year/over/year, 7 years in a row.

The purpose of this post is not to diminish or harp on the 1/3rd of us who have a auto debt. We all already know its a terrible idea.

I’m going to show you why auto debt is a limiting factor to wealth creation, a mechanism to keep the middle class in the middle, and the upper middle class from climbing the economic ladder.

More specifically, i’m going to show you why my 2003 Nissan 350z which I financed for $16,000 really cost me $5.2 million, and why your car loan probably cost you the same, if not more.

In 2007, I was offered a job at the age of 21 making $22/ hour full time. I thought I was amazing, positioned to climb the career ladder. My first order of business, go buy a car to show people that I didn’t know just-how-awesome-I-am.

My car of choice at the age of 21 in 2007? A Nissan 350z. Not just any 350z, but a 2004 Nissan 350z enthusiast edition. Complete with custom leather trip, an upgraded Bose sound system and custom rims.

I drove my beater at the time, a 1989 Mitsubishi Galant to a local Sacramento dealership and swore to myself it would be the last time I saw that car. In hindsight, getting rid of the Galant was one of the worst financial decisions i’ve ever made.

2. Can I afford the car payment?

I think a big mistake I made was asking the wrong question. I didn’t ask ‘If I could afford the car’, instead I asked — can I afford the car payment? This stupid question is what sets most Americans, including me, into what we call the perpetual rat-race: buying things we can’t afford to impress people we don’t like which forces us to stay at a job we hate.

A couple test drives and a quick discussion with the finance manager, I was approved for an $18,000 48 month car loan with a $2,000 down payment + trade in. The economics of this deal sucked, and looking back, it was a complete rip-off. $15,000 cash in hand would have taken the car off the lot, but instead, I was ripped on two fronts:

  1. On the front end — The total purchase payment of the car was higher than the book value
  2. On the back end — aggregate interest required to pay off the overpriced car payment

Most consumers think this is where the pain ends. Oh no, car loans, MY car loan, cost in aggregate $5.2 million dollars in lost opportunity.

3. Where did the $5.2 million go?

Let’s run some numbers to prove out the $5.2 million dollars in lost opportunity. As a recap, my monthly payment was $368. At the age of 21, full coverage insurance for a sports car ran ~ $240 / month. In aggregate, the $608 represents approximately $7,296 a year.

What if, instead of financing a car, I took the $608 / month or $7,296 / year and invested it for 4 years (the duration of the car loan)….and then NEVER invested another penny.

Let me recap that, for 48 months I save $608, and starting at month 49 I never save or invest another PENNY.

By the age of 65, How much would I have? $500,000? 1 million? Try again. How about $5.2 million.

How is this possible? The answer is compound interest. Compound interest is where your money makes money. Don’t believe me? You can calculate it yourself:

  1. Year 1 Take the “Additional Amount Invested”($7,296) and multiply it by 1.12. In this example, I assume a 12% rate of return.
  2. Year 2 — Take the year 1 year ‘Total Amount”, add it to the year 2 “Additional Amount invested” and multiply that result by 1.12
  3. Year 3 and beyond: Take the year 2 ‘Total Amount”, add it to the year 3 “Additional Amount invested” and multiply that result by 1.12

You can see what’s happening here: the interest from year 1 is being added to the principal amount invested at the end of year 1. Compound interest is then applied to that result, which produced in aggregate 5.2 million dollars over this 44-year window!

4. But JR 12% is super unrealistic!!!

I challenge and disagree with the statement that a 12% return over an aggregate period is unrealistic. The SPY has produced ~ 11% ROI over the past 18 years and using a quick fund scan, here is a simple portfolio of 4 mutual funds which have exceeded the Vanguard 500 Index and produced an arithmetic average > 12% (back-tested from 1/06 to 12/18):

Equity breakdown of 4 mutual funds
Hypothetical $10,000 growth chart compared against the Vanguard 500 Index Investor Fund
Average return of 4 mutual funds compared against the Vanguard 500 Index Investor, yes the highs are higher and the lows are much lower.

But alas, let’s say that 12% is not possible in today's economic climate…so what. If i’m only half right, you’ll still have $2.5 million in your savings account by the age of 65!

5. Hope you like the car!

Was your car worth it? Was my baby, Lindsay Lohan, my Nissan 350z enthusiast edition worth it? Not by a long shot. If I could undo the hands of time, I would have re-allocated $2,000 or so on the Galant and pocketed the rest. That’s unfortunately not the card I dealt myself, but going forward, I will never make this mistake again, especially as I try to pay off $170,000 in student loans.

What about you? Are loans a necessary evil, a financial instrument which keeps the middle class, or not that big of a deal? Is it possible to create wealth AND have a car loan?

Educated and Broke

Eliminate student loans, escape the debt trap and create wealth

Medium is an open platform where 170 million readers come to find insightful and dynamic thinking. Here, expert and undiscovered voices alike dive into the heart of any topic and bring new ideas to the surface. Learn more

Follow the writers, publications, and topics that matter to you, and you’ll see them on your homepage and in your inbox. Explore

If you have a story to tell, knowledge to share, or a perspective to offer — welcome home. It’s easy and free to post your thinking on any topic. Write on Medium

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store