Hey focusshares.com readers !
I know this article might be a little bit off topic but still I think it might be interesting for some of you.
We all love that new car smell, but it has to be one of the most expensive smells. A car is not an investment, it starts losing value as soon as you drive it away from the dealership.
We have to get away from the idea that car payments are a way of life. We don’t need to pay interest to own a car. We can pay ourselves the car payment and use the money that accumulates to purchase cars that are paid for in full.
A new car loses a considerable amount of its value in the first year. This is terrible financial management, especially if you add interest paid into the equation.
For example a 2005 Honda Accord retails for $20,990. The Kelley Blue Book retail value for a 2004 Honda Accord is $20,000 (95% of retail) and the trade in value is $15,625 (74% of retail). Remember that the trade in value is what a dealership would tell you that your car is worth if you took it to them to trade in. The used car retail value is what a dealership would ask for the car.
Let’s assume you were going to purchase this 2005 Accord and financed it for 6 years at 5.95%. The payment would be $341.85 per month for a total amount paid over the life of the loan of $24,613.40. That includes $3,623.40 in interest paid.
You can see that even if you thought you got a good deal on your new car purchase, if you finance it you have lost your good deal.
Instead of paying $24,613.40 for the new car put up with your jalopy for another year and save the $341.85 each month (for example save by buying ETFs on shares instead) in a savings account and earn the interest yourself. In a year you would have $4,100 to purchase a car. This $4,100 would buy a decent used car for you to drive while you continue to save monthly. Since older cars do not lose value at the rate of new ones you can eventually drive relatively new cars by saving this monthly payment.
“The best way to own a car is to pay cash for a 2 or 3 year old car that has low mileage and has been well maintained. Let someone else take that large depreciation hit for the first couple of years. Then drive this car as long as you can while saving for your next one.”
Some would argue that repairs on older cars make them uneconomical after many years. This isn’t really true. How many repairs would it take to accumulate to $20,990? Usually it is the hassle factor that will force us to replace our cars. We all live busy lives and do not have time to have our cars at the shop. Another issue is safety and reliability. I do not want my wife and children to be broken down along the road very often but you don’t have to have a brand new car to get good reliability.
A good maintenance schedule will go a long way towards the reliability and longevity of a car.
Leases have also shown some popularity over recent years. Many believe that leases are the most expensive way to operate a car.
One lease on the market currently requires $2,038 down and $219 per month. This totals $9,922 over the 36 month lease. That is almost $10,000 to use a car for only 3 years and after that period you have nothing at all to show for your money. What will you do for another car once this lease is up? You would have to save up some more money to get into another lease and some of this would most likely be used to pay the penalties on the one that you just turned in. If you have saved up money by the time that the lease is up then just purchase a used car and get off of the car leasing treadmill.
The other problem with car leases is the cost when the lease has ended and you have to turn in the car. Most people end up paying additional charges either due to excessive mileage or scratches on the surface of the car.
Leasing is definitely not the way to operate a car.
- Leave the New Car Page and learn how to buy a used car without going into debt.
- Leave the New Car Page and learn how to get out from under an upside down car payment.
- Are zero interest loans the way to buy a car?