According to a 2023 survey of over 1,000 Americans conducted by GOBankingRates, 40% stated that they had a monthly car loan payment. To that end, Trump’s OBBBA (tax reduction act) now allows eligible taxpayers to deduct up to $10,000 of annual interest payments for loans made on new U.S.-assembled vehicles. It’s no surprise that the government and the auto industry are promoting auto loans in an effort to boost economic growth. But is it a good idea to use one to purchase the car of your dreams?

In my experience, no. I’ve written before about two rules that I’ve learned are necessary to ensure that you can safely manage debt. It seems this would be a good time to review them.

Rule #1: Avoid borrowing money for non-appreciating assets.

Real estate, stocks, and bonds are examples of assets that generally increase (appreciate) in value over time. Commodities such as industrial metals and energy products, as well as artworks, jewelry, and other collectables, may see either appreciation or depreciation depending on varying supply and demand. Most other household items – furniture, clothing, appliances, electronics, and especially cars – decline in value after purchase due to lower-priced or better-performing substitutes that will be developed in the future as technology improves.

Debt should not be used to purchase depreciating assets such as these. Why? Because you cannot utilize the asset to help defray the cost of the loan should an unforeseen circumstance arise. Even with a tax break on interest paid. Suppose you are holding a car loan that is only halfway paid off. The amount owed at that point might be more than the current value of the car. If you were to lose your job or encounter unexpected healthcare expenses, for example, you might find yourself stuck with a car that you don’t have enough money to operate (gas, license fees, etc.) and that would not eliminate the loan payments even if you sold it.

Using debt to pay for appreciating assets such as homes is safer. If you were forced to sell such an asset, there’s a much higher likelihood that the sale would enable you to fully pay off the loan. I would not recommend borrowing money to invest in stocks and bonds, however. Although their prices historically increase in value long-term, they can fluctuate over the short-term. If you needed to liquidate them at a time when the markets are down, you could have the same problem as with the example above for the car loan.

I mentioned two rules. The second is even more important:

Rule #2: Avoid borrowing money without having a well-developed plan to pay it back.

This is where some of the biggest borrowing mistakes are made. When applying for a car loan, do you borrow the maximum amount the lender offers to provide you? Or before visiting the dealership, do you create a financial plan to determine how much principal and interest you will be able to pay back? By limiting the amount to be borrowed based on your anticipated ability to maintain the payments, you can avoid the likelihood of getting squeezed should something unforeseen occur to your income.  

When it comes to cars, the better approach would be to find a lower cost new or used car that you can purchase with cash. If you have no choice except to use a loan, at least make sure you can cover the future payments as per the approach above.

Managing debt is simply about making realistic decisions about what you can and cannot afford. If you follow these two simple rules, you will protect yourself from having debt overwhelm your lifestyle. 

(Artie Green is founder of Cognizant Wealth Advisors dba Perigon Wealth Management, LLC, a registered investment advisor. For more information visit cognizantwealth.com. More information about the firm can also be found in its Form ADV Part 2, which is available upon request by calling 877-977-2555 or by emailing compliance@perigonwealth.com).