“It’s always an investment!”

That’s how Daniel Rivera justified buying two cars using high-interest auto loans totaling $30,638 — seemingly unaware of the fact that most cars depreciate as soon as they’re driven off the lot.

The 22-year-old auto technician from Lubbock, Texas, detailed his dastardly debts on Caleb Hammer’s YouTube series “Financial Audit” earlier this year.

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At the time of recording, he had a $19,042 loan for a 2016 Scion (now Toyota) iM, with an interest rate of 13.06% over a 72-month term. He took out this loan for his mom, who was trying to get a mortgage and didn’t want to take on the extra debt.

Unfortunately, he was roped into a two-for-one deal by the car dealers, which meant he took out an additional $11,704 loan to buy himself a 2016 Ford Focus, with a shocking interest rate of 24.39% over a 72-month term.

“I didn’t know I got screwed over until the end,” Rivera told Hammer during the episode.

“I think that’s a minimum if we’re keeping it … and that is 72 months of death, my dude," the host replied. "You can’t afford either of these cars the way you’re doing it.”

Sadly, Rivera’s struggle is one that millions of Americans are facing. Auto loan balances increased by $13 billion in the third quarter of 2023 to $1.6 trillion, according to the Federal Reserve Bank of New York. This figure has been on an upward trajectory since 2011.

But with some careful money management there are ways to hit the road without racking up damaging debts

Drowning in expensive car debt

With new and used car prices locked in a painfully high gear, financing has become indispensable for a growing number of Americans.

But even after spreading the financial load over several years — the most common auto loan terms are 60, 72 and 84 months — many car owners still struggle to make their monthly payments.

In October, Bloomberg reported that Americans are falling behind on their car payments at the highest rate in nearly three decades: the percentage of subprime auto borrowers — those at least 60 days past due on their loans — has risen to 6.11% in September, beating a previous high of 5.95% in January.

This is, of course, due in large part to the cost of borrowing money, which has increased markedly thanks to the Federal Reserve's aggressive hikes of its benchmark interest rate, which rose from near zero in the spring of 2022 to over 5% in late 2023.

In this higher-rate environment, the average APR for new and used vehicles sat at 7.4% and 11.6%, respectively, as of November, according to data from Edmunds.

That shows just how much of a bind young Rivera was in with his 13.06% and 24.39% loans, which Hammer described as being “absolute death” to his financial health.

The 22-year-old said he does plan to refinance his auto loans to get a lower interest rate. But that’s only possible if he can keep up with his minimum monthly payments and avoid defaulting on his loan — a hard feat after they worked out that over 80% of his $52,000 annual income is going towards his debts and vital living expenses.

Of course, lenders don’t just hand out 20+% interest rates willy-nilly, though it may feel like it these days. Rivera had racked up credit card debt, student loans and he’d borrowed money to buy tools for work. He also had debt collectors chasing him for an unpaid medical bill, which would have damaged his credit score.

It’s important to note that Rivera wasn’t seeking help because he’d missed payments; the concern was more about the sheer amount of high-interest debt.

But as Hammer pointed out during the episode, the 22-year-old had hardly any savings and no emergency fund, so if he found himself in a situation where he had to drop $2,000 in cash, he could easily fall delinquent and potentially default on his loans.

Read more: 'It's not taxed at all': Warren Buffett shares the 'best investment' you can make when battling inflation

Crunching the numbers

The average listing price of a new vehicle at the start of November was $47,251, according to Cox Automotive, while the average used-vehicle price was $26,533.

And that’s just getting the wheels. Then you need to pay for your vehicle registration, insurance, gas, repairs and more. So, if you don’t have thousands of spare dollars stashed in your savings account, you’re likely going to have to borrow money to buy a car.

Hammer advised Rivera to consider the Money Guy 20/3/8 car buying rule. To follow this rule, car buyers need to pay 20% of the total cost upfront and have the ability to pay off the car in three years or less, with the monthly car payment being no more than 8% of your income.

“If you can’t do that then you can’t afford a car,” said Hammer. He also said “you have to shop around for a car that fits that criteria by looking in more than one lot” — jabbing at Rivera, who didn’t shop around due to his “tight schedule” at work.

He also balked at Rivera’s latest plan to buy a third car — none other than a Tesla (TSLA), with a starting price of $47,490 — which will see the car technician drive himself further into debt simply to “save on gas.”

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.