how much money do i need to buy a car
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I'm upside down on my car loan and need a different car, what can I do?
I purchased a used 2009 Camry back in 2012 after financing with Toyota Financial Services. The terms of the deal were 16k financed at 6% for 72 months. When I signed the paperwork however, I noticed that the amount financed changed to 18k something and the APR to 2.42%. When I asked the finance manager about it he said it added up to the same payment amount at the end, which it did. I didn't think too much about it because I confirmed that the amount paid at the end of the loan was the same. However, I failed to understand the long term implication this would have. V-e-r-y dumb mistake on my part. Yes, I was an idiot.
Now three years into the loan, I've moved to the North East, where I'm battling snowstorms and blizzards from hell. Due to the pains associated with driving to work in the snow, I'm trying to get an All Wheel Drive instead. Now seeing that the amount financed was more, the payoff amount on the car is of course more. Is there anything I can do with Toyota Financial (or anyone) about this? I'm way upside down on the loan right now; the car is worth 9k according to KBB and the payoff amount is 10,400.
My financial situation has improved a bit (from a FICO score of 593 in Aug 2012 to 701 right now) and I've gotten a few quotes for 0% APRs for new cars so I'm quite interested in pursuing those options if I can somehow settle this issue with my Camry's payments.
There are a few things you should keep in mind when getting another vehicle:
DON'T use dealership financing. Get an idea of the price range you're looking for, and go to your local bank or find a local credit union and get a pre-approval for a loan amount (that will also let you know what kind of interest rates you'll get). Your credit score is high enough that you shouldn't have any problems securing a decent APR.
Check your financing institution's rules on financing beyond the vehicle's value. The CU that refinanced my car noted that between 100% and 120% of the vehicle's value means an additional 2% APR for the life of the loan. Value between 120% and 130% incurred an additional 3% APR.
Your goal here is to have the total amount of the loan less than or equal to the value of the car through the sale / trade-in of your current vehicle, and paying off whatever's left out of pocket (either as a down-payment, or simply paying off the existing loan).
If you can't manage that, then you're looking at immediately being upside-down on the new vehicle, with a potential APR penalty.
I am new to the site and hope I can help! We just purchased a used car a few weeks ago and used dealer's finance again so that's not the issue here. I want to focus on what you can do to resolve your issue and not focus on the mistakes that were made.
1 - DO NOT PURCHASE A NEW CAR! Toyota Camrys are great cars that will last forever. I live in Rochester, NY and all you need is snow tires for the winter as ChrisInEdmonton suggested. This will make a world of difference. Also, when you get a car wash get an under-spray treatment for salt and rust (warm climate cars don't usually come with this treatment).
2 - Focus on paying this loan off. Pay extra to the monthly note, put any bonuses you get to the note. Take lunches to work to save money so you can pay extra. I'm not sure if you put any money down but your monthly note should be around $300? I would try putting $400+ down each month until it is paid off. Anything you can do. But, do not buy a new car until this one is fully paid off!
Let me know if this helps! Thanks!
Dealerships make a lot of money in the finance department. One of the thing they play upon is your emotional reaction of purchasing a new vehicle (new to you in this case). They perform all sorts of shenanigans, like adding undercoat, selling gap insurance, or extended warranties. They entice you with a promise of a lower interest rate, but really what they are trying to do is back you into a payment.
So if you can fiance 20,000, but the car you are buying is 16,000, then they will try to move that figure up to the 20K mark. In your case it sounded like some borderline (at the least) illegal activity they used to fool you into paying more. It sounds like you regret this decision which puts you a step ahead of most. How many people brag about the extended warranty or gap insurance they got included in the sale?
As mentioned in another answer the best bet is to go into the dealership with financing in place. Say you were able to get a 3% loan on 16K. The total interest would be
1600. If you avoid the finance room, you might avoid their dubious add ons that would probably cost you more then the 1600 even if you can get 0%.
If you are going to buy a car on time, my advice would be to not fill out a credit app at the dealership. The dealership people through a conniption fit, but hold your ground. If need be get up and walk out. They won't let you leave.
One thing I must mention, is that one feels very wealthy without that monthly pain in the a$$ payment for a car. You may want to try and envision yourself without a car payment, and make steps to making that a reality for the rest of your life.
NEVER buy a car based on the payment. When dealers start negotiating, they always try to have you focus on the monthly payment. This allows them to change the numbers for your trade, the price they are selling the car for, etc so that they maximize the amount of money they can get. To combat this you need to educate yourself on how much total money you are willing to spend for the vehicle, then, if you need financing, figure out what that actually works out to on a monthly basis.
NEVER take out a 6 year loan. Especially on a used car. If you can't afford a used car with at most a 3 year note (paying cash is much better) then you can't really afford that car. The longer the note term, the more money you are throwing away in interest. You could have simply bought a much cheaper car, drove it for a couple years, then paid CASH for a new(er) one with the money you saved.
Now, as to the amount you are "upside down" and that you are looking at new cars. $1400 isn't really that bad. (note: Yes you were taken to the cleaners.) Someone mentioned that banks will sometimes loan up to 20% above MSRP. This is true depending on your credit, but it's a very bad idea because you are purposely putting yourself in the exact same position (worse actually).
However, you shouldn't need to worry about that. It is trivial to negotiate such that you pay less than sticker for a new car while trading yours in, even with that deficit. Markup on vehicles is pretty insane. When I sold, it was usually around 20% for foreign and up to 30% for domestic: that leaves a lot of wiggle room.
When buying a used car, most dealers ask for at least $3k more than what they bought them for. Sometimes much more than that depending on blue book (loan) value or what they managed to talk the previous owner out of.
Either way, a purchase can swallow that $1400 without making it worse. Buy accordingly.
Here’s a list of new expenses we would have to fit into our budget:
– Financing (or worse yet – leasing) is on average $450/month in Canada. Every month an average family sends this much to the bank for the privilege of driving a new car. While our budget could absorb it, it would certainly mean less money being invested as per my New Year’s Resolutions.
– Insurance costs would go up – and once again would take a bite out of our budget. Our Donkey costs us less than $100/month to insure – mainly because it’s a fairly cheap car to replace. If it was a brand new vehicle, this number would undoubtedly go up into the stratosphere.
– Brand new car depreciates in value like a stone. If you buy a $40,000 car today, its value will hover around $20,000 three years later – which is an equivalent of burning a $100 bill every week while you drive your car to work. I’m sorry, but I have a better use for $100 bills which doesn’t involve burning.
– Increased running costs would punch our monthly budget further into unconsciousness. Most luxury vehicles these days require premium gasoline which costs more. Little engine on our Donkey burns very little gasoline, and doesn’t care about higher quality fuels.
– Maintenance costs would also go up because newer cars are more expensive to fix – considering how complex they are and how much training mechanics need to have. My friend’s BMW needed a new window mechanism, and between labor and new parts, he had to shell out almost $800! I haven’t paid this much for anything done on this car for as long as I owned it – even new radiator.
– Heck, even car washes would be more expensive – because newer car would command premium car wash complete with waxing and deluxe detailing. No need to do this with our old car, I can wash and vacuum it myself once in a while. No need to spend extra money and it gives me something to do with my hands on Saturday.
So, for now we’ll stick to our used car. It might be almost 20 years old, but it’s very reliable and makes sense for us financially at the present times. Sure, it’s not a head-turner. But we’ve gotten used to it and it gets us from point A to point B with a certain classic feel to it. One day it will be time for it to go (some sort of farm where all aged cars go, perhaps?) – and we’re already saving money for our next used car. But for now, I’m perfectly happy with it.
And trust me, I’m not against buying nice cars – or nice things in general. I’m not the kind of person who believes in driving old cars till the day I die and eating nothing but oatmeal just to save money. But I do believe that buying new cars only makes sense when your financial future is secure with enough investments set aside, your income can absorb all increased costs and buying a new car won’t put a dent in your budget. Unfortunately, we’re not quite there financially, and we’re making a conscious decision to drive with less flare, but more financial stability down the road.
REFERENCE: I don’t want a new car! Jan 14, 2014 / 5:00 am
Having read your CASTANET article, I was disappointed in what might be an unsearched report of partial facts. I have analyzed Lease vs Buy and your Donkey story has possible flaws. I could have let it pass but when you say Financing (or worse yet – leasing)
The points you made about your older car:
Donkey burns very little gasoline, and doesn’t care about higher quality fuels,
New cars are more fuel efficient, more environmental friendly and many do not need high test fuel.
Furthermore I doubt if Donkey gets better mileage.
You say you haven’t paid much for anything done on this car for as long as you owned it.
Donkey must be an unusual beast, because IF it has any extended mileage used cars often require new tire, fuel pumps, batteries, transmissions to name a few maintenance problems ,
You can wash and vacuum it myself once in a while.
As a lease owner, I do just that even though car washes do not distinguish between old or new cars.
Donkey burns very little gasoline, and doesn’t care about higher quality fuels.
Have you checked the new lease cars using regular fuel and the other energy saving benefits?.
You say you will stick to our used car. It might be almost 20 years old, but it’s very reliable. QUESTIONABLE
A lease comes with full warranty and routine maintenance at no repeated cost. Donkeys’ warranty was calculated to expire when your maintenance bills were about to materialize. Used cars are noted for unexpected repairs so Donkey must be a one off exception.
You are used to Donkey, it and it gets you from point A to point B with a certain classic feel to it.
Any new car and even a lease will satisfy this statement and the comfort, class and luxury exceeds riding a Donkey.
What would a brand new car mean to our finances?
I agree with you about financing a new car, but you might look at the Lease in another way as it can increase the larger financial picture. CONSIDER.
Yes Lease payments for a brand new ATS Cadillac would be approximately $450/mo plus tax and that tax bill is only on the monthly payment whereas buying Donkey you paid ALL taxes up front. When you sell or junk Donkey, you don’t get that extra tax difference back.
A new leased car is not much more than $120/ month to insure not to mention they have additional safety features that factor into insurance cost. Donkey is considered a possible safety risk.
Lease has a portion of the depreciation built into the monthly payment, one just shop and negotiate a reasonable “residual” price and length of lease. Interest rates are as low as 0.9 – 1.9 %. Try those rates on financing even a Donkey.
You mention increase running costs, well Leases now have full maintenance including oil changes and depending on lease period, one never has to buy tires. So your argument of new car maintenance costs are out the window with a Lease.
Morale of the story?
LEASE is FINE. Would it be possible to write an accurate story about a Lease? Considering that you probably could exercise a tax write off for a lease, leave that part out of the equation. It would be a bonus for some.
As I agreed earlier; don’t buy finance the purchase of a new car, Lease. Use your ready cash for other investments and if one was considering buying a car, why not borrow the equivalent dollars and invest the total sum. Then claim a tax deduction on the borrowed investment interest. Do the math, and it even gets with income splitting or later transferring investments into TFSA.
As you said about driving your Donkey, you are quite happy. Same here, I’m satisfied that Leasing is the route to go. Every two to three years I have a new reliable car, all the safety feature, no maintenance at a net over
Thank you for taking your time and responding to me.
At the end of the day, everybody does what makes sense for them as everyone’s situation is different; there’s no really “the absolute right way of doing things”, and I don’t pretend to express it. I talk about issues from my point of view as I might have different priorities than other people and my way of doing things might not fit other people’s choices.
From financial point of view (i.e. numbers), leasing is the most expensive way to operate a motor vehicle. There’s just no other way around it. But at the same time, it’s probably the most convenient – every three years you have a brand new vehicle where all mechanical issues are covered by warranty and maintenance in most cases is free of charge. I doubt you even have to change the tires inside of three years – except for seasonal changeovers.
Now, let’s go back to “everyone has different priorities” point. In my financial situation with fairly limited income, I prefer extra cash flow over convenience – leasing or financing a brand new vehicle would have a detrimental effect on our finances, so I choose to stick to my older car. But other people might have a different situation, and preserving cash flow might not be the top priority for them, so you can easily afford leasing and put convenience as your priority. And that’s just fine by me.
You have your personal choices but leasing is not necessarily the most expensive option. It ends up being more expensive because you replace the car after 3/4 years but a) that’s not required and b) other options can be the same cost or more if you replace you car that often.
Based on how you’re framing leasing, i get the impression you don’t understand how it works but I suspect that’s not the case, so you’re likely just being dishonest.
All things being equal, leasing is technically cheaper than financing.
Both leasing and financing of a brand new vehicle are terrible choices from my point of view. I was trying to communicate that buying a quality used vehicle and driving it for a number of years (or over a decade in my case) is a better option for me. I wasn’t trying to choose between financing and leasing You want to compare leasing/financing a brand new vehicle to buying a quality used car (3-4-5 years old)? Used car will win hands down.
Leasing is NOT the best for most people. I would suggest that, unless you can write the costs off to business use, it would be an unnecessary expense.
First, your monthly payments never end. If you buy a car, whether you finance or pay cash, you will eventually own the vehicle, which has some value, although it is a depreciating “asset.” However, if you keep the vehicle, as the author has done, the average monthly costs drop considerably.
Also, your assertion that ongoing costs for a car will overcome any advantage long-term ownership conveys is flawed. You suggest that the Donkey is an exception to the rule for reliability, when statistics demonstrate that today’s cars, in the vast majority of cases, will operate reliably for 250,000 Km or longer, without major repair work being required. Your examples of tires and other consumables is a poor example of the suggested bad ecinimy of older cars. Whether you realise it or not, you are buying tires every time you buy (or lease) a car, and you probably don’t get to choose what kind of tires you get.
Actually, it’s a good thing there are people like you who lease or buy new vehicles, for they increase the number and variety of cars to choose from, with a big chunk of the depreciation already taken care of – by the lessee or first owner.
Great article! I think it’s important to thank all involved in the new car infrastucture, and those that buy new, allowing others to buy used.
Agreed. I had a 15 year old car up until six years ago. It was still going good, with relatively low mileage, but I traded it in for a 60k luxury vehicle because I could (for cash). I do regret that decision as had I invested that money in an index fund instead, my now six year old car worth 25k or less would now be worth over 120k instead. Was my enjoyment worth a potential loss of over 100k? Looking back at it, I don’t think so. I’ll be driving this luxury car until it dies.
You got it. I think the key is starting to think in longer terms. “I can spend money on a very nice car and have some pleasure or I can invest this money and have much more money down the road”. When you only think in terms of NOW you tend to make a lot of stupid financial moves. When you start thinking in 5 year time frames or even 10 – you start making much wiser choices with money. Good for you on figuring this out, it took me years:)
Thank you for visiting
This is why I still have my 1999 Saturn… a good little car that costs me next to nothing.
Mind you, if anything serious breaks on it, it’s going to the junk yard. I don’t see any value in investing in a 14 year old car.
Thank you for your feedback and thank you for visiting my little blog.
You’re absolutely right, putting money into an old car doesn’t make sense, so if my Donkey blows up, we’ll just be buying another quality used car. But saving money by driving an old car is huge – allows you to quickly save money towards a new car, set it aside, and all the future savings can go towards investing knowing that if the car goes up in smoke, you can simply buy a new one without borrowing money.
I crunched the numbers on a new car recently in light of my slowly rusting 1998 Camry 165K km. I figured for a similar car, with 20% better mileage, my costs over a five year period would run to over $1100 per year. Factors include insurance (+25%), Repairs (+150%), Depreciation (-300%), Fuel (-15%), as well as lost income from tied up capital (high interest savings acct only.) So, I’d be paying about $5 an hour to drive the shiny one. Nah. I’ll splurge on the drive-through instead and buy a coffee and a muffin.
I love it. I’ve never actually crunched the numbers (though I should) on this, and always went on a general feeling of things. Sounds like you got it down to a science!
Thank you for visiting and leaving feedback!
I agree that an old car that is fully depreciated, yet still reliable, is the cheapest way to get around, but when comparing costs you should compare apples to apples.
Your article seems to compare your old car that doesn’t even have power windows with a new, well equipped Acura TL. A better comparison would be with a car with features and capabilities similar to the one you have now. Or, if basic transportation is your objective, you should compare with the cheapest new car available today (I believe that is a stripped Nissan Versa, at around $12k in Canada).
The old car is almost certainly still cheaper, but the difference isn’t as big as your post suggests.
I get where you’re coming from, but I hope you agree that it’s hard to compare cars that are almost two decades apart. Some of the features that comes standard these days weren’t even available back then. What used to be luxury back then is very common these days. Do they even make vehicles with no power windows these days?
At the end of the day, it doesn’t matter which features my car has. All it matters is that jumping into a new car would cost me more. And I get what you’re saying that it might not be as drastic as I think:)
I 100% agree with Broc. I think you need to research the difference between leasing and financing to see that you have a pretty skewed view on the difference. If the end goal is to own the vehicle outright after a period of time, and not give the car back, leasing is absolutely the cheapest way to buy a car. Considering that you are only paying interest on the portion of the car you’re using for the term, and not even the tax, there is no question it will save you money. Please set your “general feeling of things” aside for a few moments and look into it. Perhaps it would make a good future post.
I also agree with Dave, you’re being dishonest to compare a modern Acura TL to a 20 year old car. At least compare it to a newer fuel efficient compact car; it will still do donuts around Donkey, while not being that much more expensive.
And as Broc said, the interest rate should be a factor as well. If I were you, I would invest that money instead of saving it. Then, when your car is retired (hopefully after many more years of faithful service) you can buy (or lease) a new car for such a low interest that it wouldn’t make sense to sell you investments (which are probably making you 6%) to pay off the car. This also leaves more liquid cash/assets available for you in an emergency.
You have to make your money work for you.
That was my money ramblings…
I think I accidentally opened up a can of worms which I didn’t mean to open. Comparing leasing a brand new car and financing a brand new car wasn’t the topic of my post. To be honest, both of these options suck to me – financially that is. What I was trying to point out that acquiring a brand new car (leasing or financing – doesn’t matter really) would be detrimental to my finances as opposed to continuing to drive a perfectly good used vehicle. Once again – I wasn’t trying to compare leasing a brand new vehicle and financing a brand new vehicle. I was comparing a used reliable vehicle and brand new vehicle.
This car saved me a lot of money over the years, and yes, I’m investing a good portion of our income. Car with no payments gives you a lot of liquid cash to invest
PS: Awesome portfolio, by the way. I did some photography few years ago myself.
I get that it wasn’t the point of your post, but I feel it’s clear you missed that too, since all of the ‘points’ you listed were a bit of a stretch, as you can see from the other comments. And like I said, I hope your car lasts you many more years as we both agree that’s how to get the most value out of it, (that, I think, was the true ‘point’ of your post, but you buried it in misleading info and personal colour) but when it comes time where you need to buy a new one, it seems you don’t really know what the best approach is.
Maybe you should try this exercise, and write a post about it: what would you do if your car was instantly junked, and you needed to get another car today. How would that differ from what you would do if you had a year to prepare before needing a new car? Would you definitely buy used? Would you consider a new economy car? What would your argument be for financing vs. leasing vs. buying outright with savings?
Good article. The key point, I believe, is that many buy new cars not because they need one, but – as you mention – to ‘keep up with the Joneses’. I have a ’99 Subaru Outback – wonderful car. Full winter package – heated seats, windshield, mirrors, block heater. Other than a (to me) useless GPS and ‘infotainment’ screen, new vehicles offer virtually nothing I don’t already have. BUT – my other self! – I have been a sports car lover since back in the ’60s (Triumph TR3, nd have almost always had one as my summer fun car. I recently traded an older Mazda MX-5 for a brand-new 2013 top-of-the line version. I had studied prices (including US), and I paid cash. The dealer wanted to move it (it’s 2014 now, but who cares?) and I got a very good deal. Summary? There are arguments for and against buying a new car – but NEVER buy one on credit – the payments bleed you, and by the time you’ve finally paid it off it’s time for another one.
Chris, thanks for your comment.
Like I’ve mentioned before, there are many ways to skin a cat (that’s an awful expression if you think about it). If somebody can afford to buy a new car and they really enjoy it – good for them. Some of the new cars are fantastic. But you have to think what are your priorities and what’s important to YOU. If you can afford fun and buying a new car for you is no big deal, you should go ahead and buy one as it will give you tons of fun. But in my situation (I have to start highlighting this) a reliable used car is the way to go as it leaves us more money at the end of the month to invest and slowly build up our assets. Once we have plenty of assets, and cashflow is great – do you really think I’ll advocate driving a car that is almost 20 years old? Of course not.
Hope this makes sense.
I have a 13 year old VW Jetta with 108,000 km on the clock because in my retirement I have been travelling “fly and drive” rather than just driving. It’s engine is one that requires hi-test gas so a bit more expensive to run. Thinking of buying a new Golf coming out in March but your article gives me food for thought. My main concern is if something “serious” happens to this one. That is, transmission etc.
From my point of view, I wouldn’t worry about your car for a while, 100K isn’t high enough mileage for it as long as all preventative maintenance is being done. If it was 200K then I would start to look at your options. I’d put the money away for a new car, and keep on driving this one worry-free.
But hey, that’s me!
Len, your travel routine is similar to ours, but we extend it even for shorter trips by renting at home and putting wear and tear on the rental. We use Air Miles to cover the rental, although there are a few small costs out of pocket, but the benefit of keeping the 2000 Camry’s odometer from spinning too much is more than worth it. The Toy has about 220K on it, and the main concern, the timing belt, has been replaced on cue. Other wear items are looked after regularly, but the costs don’t come anywhere near $400 a month; it’s more like $75.00.
We may replace the car for one that we can get in and out of more easily (a consequence of aging, not the car’s fault) but will probably go for something with a few years of experience, and probably something a bit smaller, since we won’t likely be using it much for long trips.
BTW, if you have some loto winnings (ha!), a Golf Type R would be a fun replacement for your current VW. It’s more or less equivalent to an M-type BMW, a factory hot rod. Priced like one, too. Only a handful coming to Canada, as I understand. Seriously, a Golf with the diesel would be a good bet, with an incredibly strong engine and no smell. The current price of D might be a deterrent, though…
I agree with the general concept of your article in that new cars loose a lot of depreciation quickly however this is not as much a case as in years past. The quality of a vehicle allows it to run longer than ever before thus the value holds much longer.
Case in point: I bought a 2004 Hyundai Elantra GT for around 24k. Drove it for 10 years and 230,000km. Just sold it for $2500. First off my old cars never made it past 100k+ before needing new engines, Trannies. As well when they were at the end of their life you got $200 for them. New cars are lasting way longer and holding more value so the argument of driving a new car off the lot and depreciating 30+% doesn’t hold true.
However my biggest decision for buying a new car was cost. In my last year it cost me $4k to keep my car going (mostly environmental stuff to get through inspections). At a point in time your car starts costing you a lot of money. New cars are covered for 3-5 years.
As well the second motive behind buying a new car was reliability. Its a huge piece of mind knowing that when driving in a busy (worst traffic in North America) like Vancouver that my car is not going to break down on a bridge. Quality cars will give you 5-7 years trouble free now. That’s a lot of piece of mind.
You bring up some valid points. The overall quality of the cars is way better than it used to be.
Just like other poster said, it doesn’t make sense to keep putting money into an old car, and at some point it’s time to take it to proverbial backyard and shoot it with a proverbial shotgun. When this happens? I guess it depends on the model, how well you maintained it, and overall quality of the car.
And I hear on you on AirCare thing – we don’t have it here in Kelowna (yet).
Excellent article! At one time in history buying a brand new car was considered a luxury. When my dad was starting out in life a “well” used car was where everyone started and earned their way up something newer, but rarely brand new. With todays flood of financing & leasing options along side clever marketing plans by auto manufactures & finance companys it would seem the general consenus is “new” is the only way to go. These options were not designed to save us consumers money on car ownership…they were designed to move inventory and grow profits.
Over the years, I have tried all three options when buying a car (new with financing, leasing, & used) and have come back to the best bang for my buck: well maintained 2-4 year old vehicles. You are spot on about the depreciation, I now let someone else absorb this cost. There will always be someone willing to buy new and take this hit, leaving a nice pick list for us who prefer “gently used” at a cost effective price.
My last purchase was a 2010 Ford Fusion in late 2012 for 50% less than a new one. It was a low mileage lease return with a repaired slight rear bumper impact (this kept buyers away & the price low, but I had the car professionally inspected before signing the deal). It’s been a great car, very low cost to operate & maintain, and I am looking forward to another 6-8 years of ownership before a replacement is needed. I am already stashing away a little cash every month in a TSFA account to keep financing out of the picture.
Everyone will have a different set of needs and wants when looking for a new car, but for my money the “wants” stay off the table and I focus on what I “need” in a vehicle. It helps me keep perspective and focus on the best value for money.
Thank you for the kind words.
Yes, I think I’ll be following this for our next car as well – low mileage 3-4 years old car that hopefully is on warranty with no mechanical issues. Let someone else take a hit on depreciation and enjoy many years of paid-for worry-free driving.
Accidentally, recently I’ve read a book on financial habits of millionaires – people who have plenty of money invested and the ones making smart financial decision. Overwhelmingly, vast majority of them buys slightly used cars for cash and drives them for a number of years. They don’t lease cars, they don’t buy brand new vehicles, they focus on 2-4 year old reliable models. Once the car gets to the age where mechanical problems start to arise, they simply buy another vehicle for cash.
And these are millionaires – people who know what to do with money. If it’s good enough for them, it must be good enough for us
I think the article has a lot of merit. Get people to think about buying at a greatly discounted price when purchasing a vehicle. When you by a used vehicle you are taking advantage of someone else paying for most of it.
Example, I bought a 4 year old Benz for a third the cost of a new one. It is spotless, low mileage, looks like new and I was able to keep the rest of the new purchase price in my investments. I was told from a very wealth person, buy a car you can afford to pay off in 2 years. Sell it, then buy another you can afford to pay off in 2 years (Probably an upgrade due to you making more money). Do this about 4-6 times then you will probably drive a new car to 2 years old for the rest of your life.
A lot of people here seem to be missing the concept of the time value of money… Your money could be worth a LOT more 3-4 years down the road if it’s well (and safely) invested. If you buy something with your savings, you can no longer use that savings for other more productive things (investing), and you miss out on really ‘cheap’ money from a low interest financing option. Buying new/leasing/used has different merits and there isn’t necessarily only one way to do it ‘right’.
Let’s use this example:
It’s December, you have 20k in a TFSA making on average about 6% per year, and you need to buy a car (your current one just died), and you want to replace it with a car that has at least a bit of warranty left on it and not too much mileage (reliable).
Option A) buy a used car with your 20k in your TFSA. your contribution room will become available again next month, so that’s not an issue. You’ll avoid paying high interest for a used car loan, but you’ll lose the investment opportunity of that 20k @ 6%.
Option B) buy a new car (say a $30k car) through financing at 0-2% interest. you wouldn’t bother to use your TFSA savings to pay it down, because the interest rate you would get from the investment is much better than what you’re paying to buy the car. Consider it an investment loan. If you’re risk-adverse, and the interest rate is 0.9%, you’d still do better in a plain-jane savings account than using your savings to buy the car.
Option C) lease a new car (same car as above) with 0-2% interest. Again, you wouldn’t use your TFSA, but you would have an extra advantage that your payments would be less (you’re only paying for what you use), you don’t pay interest on the tax OR the depreciated value. In 3 or 4 years when the lease is up, you can buy that car for the depreciated value (probably around $15k or so) and pay for it using your TFSA which has likely grown significantly since then. You’re effectively buying a used car that you know the full history of, for a price that you’ve known 3-4 years in advance, with funds that have been accruing decent interest for the entire duration of the lease.
Option A seems to be what everyone here thinks is the only ‘right’ way to ever buy a car, but I would advise you look into it further. To say “NEVER buy one on credit” isn’t necessarily money-smart. It should be “Try to avoid buying one with a medium-high interest car loan” .. but if you can get it financed for cheaper than your home mortgage, why the heck wouldn’t you?
Personal anecdote(not necessarily a universal case): My first car was a used car. I thought I was doing the right thing by getting it used, and since I didn’t have savings I had to get it using a loan (at probably 8% or so)… my payments were about $250 per month. One day, about a month later, I looked at the prices of new cars like the one I bought, and I was shocked to find out that it would have cost me the same amount per month (for the same amount of time, 5 years) to buy the exact same car NEW, but using a 0.9% interest rate.. I was very upset with myself that I bought an old car for the same price as a new one. Obviously I could have shopped around and possibly gotten a better deal, but sometimes it just makes sense to compare apples to apples and see what the cost is to get into a brand new car, worry free. My second (and current) car was a brand new lease. I didn’t buy it through lease because that’s the only way i could afford it, i bought it through lease because it gives me the absolute most flexibility, and defers many of the payments to much later, without incurring needless interest. the interest I do pay on just the part of the car I use is only 0.9%. I’ll likely buy it with savings or a line of credit when it matures, and either keep it for myself (if I like it) or sell it for a profit (if possible). I’ll also have the option to turn that lemon back in if it’s giving me trouble and I don’t have prospects to sell it. Complete controls I wouldn’t have if I bought it.
Remember, there is such a thing as bad debt (credit cards, high interest lines of credit, department store cards, high interest car loans, etc.) and good debt (low interest mortgage, investment loans, ultra-low interest car loans, etc.). Look at all your options, and what the total cost is in the end for each option, but do NOT forget to look at the lost revenue you would face by using up your savings/investments to avoid paying a measly 0-2% interest.
This is why I’m in no particular hurry to pay down my mortgage at 3% and faster than I need to, and I have it amortized to 30 years. Instead, I max out my TFSA account as soon as possible and build up my other reg/non-reg investment accounts with the rest.
Reasoning: a) If you pay down your mortgage, you don’t get to use that money in an emergency unless you have a readvanceable home equity line of credit, so putting your money on your mortgage effectively locks it in property equity (not liquid) and b) you miss out on better gains from properly investing (and the mirror of the above statement, in an emergency it’s easier to sell those investments for cash than to try to get equity out of your house).
Look at the big picture people!
I see what you’re trying to say. Yes, if I pay cash for a car it takes away my ability to invest this money and earn a healthy return – be it 6 percent.
But by buying an expensive new car, I completely negate that return by buying a highly depreciative item – the loss in value over time is far too greater than say 6 percent I would have earned on my money if I was to use OPM. The low financing figure you mention is only available for brand new cars to encourage people to buy brand new vehicles as opposed to used ones, for quality used cars you’d have to pay much higher interest charges. With leasing it’s the same argument really – the loss in value is far greater than any return on investment I’d have received on my money if I was to invest it.
I had to think about this for a minute. My truck is a 1997 so it is about 17 years old already. It is still reliable and does what it should for my family. I have it well-maintained with low miles. I am considering buying a used truck while this one still has trade-in value. On the other hand, that would mean increased insurance costs and adding financing to our monthly budget. I would have to find a great deal all around to pull it off.
As someone pointed out, reliability for most people is an important issue. I don’t think you or anyone else pointed out SAFETY. It should be the most important value for all, and safety issues in a new or almost new car is generally far greater than for an older model. Newer or new cars if they have high or top IIHS ratings may have lower insurance rates than older cars.
How to pick the right car, especially if it is a used car, is a full time job and there are no shortcuts, if you do not do your homework, it may cost you dearly, on the other hand, if you do, the rewards are endless …
Buying used allows for a better equipped car than a similarly priced new car … but you have to do the work …
You may be surprised by the cost of insurance for a new car.
I’m in Australia so things are likely very different but I currently have a 1999 work truck worth approx. $4000.
I use third party insurance but a quote on fully comprehensive is around $800 p.a
I recently started looking at a brand new model worth approx. $55000 & insurance quote came in at $500 p.a!
The insurer tells me that being new all parts are easily available, the car is much safer & more secure, etc.
I respect your decision to not want a new car (this will be my first & likely only new car if I go ahead) but it seemed like you were only ASSUMING insurance would be more expensive without having checked…
Always wise to look into these things…
Wow, you have some cheap insurance out there.
Actually, prior to writing this I went online, and found an online calculator that estimates insurance premium based on some basic information and car model. First, I plugged in my car details, and the estimate was fairly close to what I’m paying right now. Then I switch to a new equivalent (2013 model, roughly same class), and the insurance premiums for that was roughly double. Mind you, it’s just an estimate but it gives you an idea. Overall, at least here in Canada, the more expensive car, the more expensive is insurance.
But thanks for your thoughts. Next time I’m comparing things like this, I’ll include some sort of estimate with numbers.
I came across with your blog and I am glad that I did.
It is an very informative and well written article. I purchased a 10 year old Honda Crv 2 years ago, and been driving it ever since by commuting 100km per a day from work to home vice versa, and to be quite honest it is still rocking. I would never buy or drive a brand new car by financing or leasing it. I am like the blogger, like to save my money for other expenses which are more important to me than cars. I maintain my car really well, it doesn’t cost me anything, fuel efficient, clean and wash it myself. I basically take care of it as if it is a brand new car. Yeah, my friend and relatives often makes fun of me saying “how come you are still driving this junk”, but who cares. it gets me from point a to b, and guess what? I am the one who is called if any of them need something to be hauled Based on what my mechanic guy(who is also a friend of mine), my CRV can go up 340 to 400.000km if i maintain it the way I am.
Thanks for your post and allowing us to share our thoughts on your blog.
Oh, I hear the jokes all the time. What do you expect when people straight out of high school or university have nicer cars than me.
When our friends get together, and all our cars are parked outside, ours always stands out. Last time we noticed it, I told my wife “Look, it kinds looks like somebody is delivering pizza to a party of middle class peeps!”
Personally, I would rather drive an early &0’s Acura Legend than a brand new one. They were AMAZINGLY reliable, and had a certain sense of sporty elegance about them. If I desired an Acura I would buy one of those to this day. You couldn’t give me a new one. No way. The new ones have all those gadgets and crap that you have to take to the dealership when they break. It is not a matter of IF they will break it is just when. My wife and I don’t do car payments. We pay cash for older, used, reliable vehicles. Recently, I needed a truck. I could have done the “keep up with the Joneses” move and bought a $50,000 Chevrolet Silverado at the dealer. Instead, I bought a 2003 Silverado with 92,000 miles on it from the original owner for very cheap and guess what? It does everything a new one will do, looks decent, and oh guess what….I still have money in my bank account
If you really want to make your broke friends jealous, drive a slightly older vehicle that you paid CASH for. They don’t hardly know how to respond these days because we live in a pay as you go world. Cash is still king. It is the only way you will be able to retire and do something you enjoy instead of being a slave to the bank and have to work an aggravating job until your 75 years old.