DON’T BUY A CAR WITH FINANCING!!! Yes, I know, everyone else does, but you don’t have to be stupid like they are. Trust me, this is a pet peeve of mine as I see young couples buy vehicles they can’t really afford and show them off in the parking lot. Sure as shooting, in the next several weeks three or four others will be buying cars they can’t afford because they see the first person driving a new car.
This is one of the simplest and most fundamental financial concepts out there. Never buy a depreciating asset using funds borrowed at interest. You are getting screwed two different ways, the car is going down in value and the amount you are paying is going the opposite direction.
I worked in dealer-finance at a certain bank who shall remain nameless, but whose initials spell the name of a constricting snake that squeezes the life out of you (fitting, trust me). While working in that department, I saw the most awful, dirty, and underhanded tricks go on. Business wasn’t done in the interest of what’s in the best interest of the customer, it was done in a ‘I’ll scratch your back if you scratch mine’ collusion between the dealer and the banker. And who suffered? The poor dumb schmuck who was there to buy a car he couldn’t afford using money he didn’t have. For the record, I was that schmuck for years too. But, my wife and I own our the car we drive and will never use auto financing again.
The math is pretty simple. Let’s look at a $10,000 car. I want to buy this car. I need it. I’m driving a Kia and my manhood will be questioned if I don’t get rid of the Kia and buy this new Mega-Sportster with over-under headers, rear spoiler exhaust mounts, hi-temperature blinker fluid, and a 700 cubic acre engine! So, I trot on down to the dealer and test drive it and then go sit in the negotiating box. Let’s not even go into the evil mind games involved in that process. Thinking myself suave, I begin negotiating. After several hours, I finally sign on the dotted line, purchasing this $10,000 car at 10% interest for 5 years. That’s a $212.47 monthly payment. Dang, I’m smooth.
Those numbers are imaginary. Let’s be honest here. Most of you have rotten credit and aren’t going to qualify for the 10% rate and let’s not forget that the dealer gets a percentage point or two tacked on to make them some extra money. And, let’s not forget that most people feel it necessary to buy even more vehicle than they can afford, because all they look at is the monthly payment. Heck, I can afford more than $212.47 a month, right?
When all is said and done, after 60 payments on time, you will have paid $12,748.20 for a car that was originally selling for $10,000! You just got screwed to the tune of $2700 and change. That is, of course, assuming that you don’t make any late payments, don’t take advantage of skip-a-payment plans or otherwise screw this up, in which case you’ll end up paying even more.
Now, let’s look at buying that car the intelligent way:
Let’s make the wise decision and keep driving the Kia (that I own outright) for a few more years, taking any necessary jabs about my manhood. Instead of a loan, I’m going to save up and buy that car myself. I’m going to pay myself the interest instead of the dealer and the banker. So, I save $212.47 a month up for 5 years in an savings account that gets 3 percent interest. At the end of five years, through the magic of compound interest, I end up having $13,982.30 to spend on the car. I actually crossed the $10,000 mark in just under 4 years, but since I kept saving for that extra year, I can now upgrade and get the Super-Mega-Sportster. I get more car than I would have the other way. The best part is, I now have the fancy car with no payments, so I immediately can begin saving for my next Ultra-Super-Mega-Sportster!
These numbers are all basic and just used as an example. Most people buy more than a $10,000 car and tend to pay way too much, much more than they can afford in monthly payments. But, with a little discipline, a little extra time in the old car, and maybe taking the bus or walking until they can afford a car; they get a lifetime of freedom from car debt.
Other key points about car buying:
Never buy a brand-new car. You take an immediate and enormous financial hit in the first year from the drop in value. Let someone else take that hit and you buy it used when it’s a year old or so. Then, you get all the warranty and much less of the value loss. If you like losing money so much that you have to have a new car, consider giving your money to me. I’ll put it to good use.
Research, Research, Research. Never buy on a whim. What is the gas mileage? What do other owners of the car think of it? What about recalls? What is the functional life of the vehicle? How does it drive? How does it compare to similar models from other manufacturers? How does the AC work? Does the cigarette lighter pop out when you push it in? Are there more than 2.4 cupholders per person? Know the important things before you buy.
Don’t buy more car than you need and don’t over customize it. Do you really need a 1000 horsepower engine to get you to and from work? Do you really need a turbo to drive to the grocery store? Brushguards and KC lights for your SUV that never leaves the pavement? Really!?!?!? Sure these things are fun and they definitely ratchet up your sperm count, but you never recoup the cost and they can hurt you on your monthly insurance payment as well as any settlement you might get in an accident. Also, if it’s just you and your wife, you probably don’t need a Suburban, but if you happen to be Mormon or Catholic, a two-seater ain’t gonna work for you.
Don’t buy another car just because you are ‘tired of the old one’ or ‘want something new.’ That’s how toddlers think. You are an adult. Grow up and be wise with your money. Drive a car as long as it’s useful and keep saving and paying yourself interest.
Go car-shopping with a friend who knows exactly what you want and will slap you silly when you get distracted by the shiny Ultra-Super-Mega-Sportster with the turbo and brushguards.
Yes, I know this is an unusual idea. You have a car loan. You always have had a car loan. Everyone you know has a car loan. In fact, most people have more than one car loan. But, it is possible and not the difficult to be wise with you money here.
Finally, comes the greatest benefit of all. Negotiate with the dealer till you get a low price because he thinks he’s going to make it up in interest on the loan. Then, pull out your roll of cash and start whipping Benjamins down on the desk-top. Smile and look at him affectionately while you pat his cheek and say, “Who’s your daddy” *
* OK, I’ve never really patted a dealer on the cheek and said, ‘who’s your daddy, but I think it would be fun.
Disclaimer: I am not a trained financial advisor, I just play one on this blog. Seriously. Get good financial advice in life. My information comes primarily from personal experience, working in consumer lending in the banking industry, and watching friends, family, and parishioners struggle.
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