Thursday, February 1, 2018
Buy, Lease or Loan? Avoid Auto Finance Disasters
Buying a car can be fun and exciting but also terrifying. After your home, your vehicles will most likely be the biggest expenses in your life. When taking the plunge and buying a car, it is important to understand what you are up against. Many people get caught up in the excitement of the experience and end up getting in over their heads. It is no wonder that there is an abundance of auto loan debt in Canada and the United States. Transportation is a necessary evil, but getting in over one’s head over a car is just foolish. I personally think that our obsession with automobiles is overblown and being fiscally responsible requires examining that cost. In today’s post, I will consider the pitfalls you may experience when buying an automobile. Avoiding these might make you a lot wealthier and much less stressed out.
Avoid cash back loans
You will see some auto loans have the option to get cash back for which you can use to pay other debts off. While I do think the mortgage refinance loan can be useful in some situations, the cash back car loan I do not. Here is the reason. Your car is not your home. (It might be if you go broke…) It does not go up in value, it only goes down in value. Dramatically I might add. Adding to the purchase price of the car is foolish as now you have just prolonged the payment process for the car and the original debt as well. You might say, “The interest is lower on the car loan, so I am actually saving money.” While that might be true, the question you must ask yourself is this: If you have other debts that need erasing, why are you buying a car to begin with? You may need a car for work or for the family, but do you need a new one? Do you need one that is so expensive that you need to get a loan? Do you need one right now when you are in debt and clearly don’t have an emergency fund because if you had one, you wouldn’t need the loan? Again, proper personal finance answers a lot of these questions and maybe paying down the debt is a better exercise than roping it into a car loan. Every answer you have for it being a good idea, I can counter with how it is a bad idea.
Always truly understand your payment
Do you ever wonder why they always advertise cars in terms of monthly payment? Do you ever wonder why that shifted to many offering bi-weekly or even weekly payment options? Do you know what a $109 weekly payment is every month? Sure Joe, it’s $436 every month, (109 x 4). Wrong! It is $472.33 every month, (109 x 52 / 12). They advertise weekly and bi-weekly payments because the number is always smaller than the monthly payment. They advertise monthly payments because it is easier for you to think about what you can afford every month than if you are actually getting a good deal or not. What would you rather pay: $19,500 for your new car or $200 bi-weekly over 5 years? The bi-weekly option ends up costing you an extra $6,500 over those 5 years. Always understand the total number when you buy big-ticket items. Don’t let slick salesmen work calculator magic to get you into a car you can’t afford.
Top 5 Biggest Mistakes to Avoid When Buying a Car – The Balance
Avoid the upgrades
I love tinted windows, sound systems, heated seats, and navigation systems. I don’t like how the advertised sticker price for the car does not include a fully loaded auto. Before you know it, you are paying for upgrades on basic stuff. Extra money for rustproofing, no chip paint, floor mats and a gas tank cap. While there are some essentials that a car needs, other items are just pure vanity. Many of these upgrades you can do on your own and get them cheaper. Don’t fall for the nonsense and get roped into paying interest on rims for your car.
Buying new in general
I always wondered why we drove around in such junk cars while I was growing up. I remember my Dad actually bought a car when I was a kid for $50. That’s right, $50! The 1982 Dodge Omni was a beast. Sadly, that car only lasted for one summer as vandals smashed the windows and my pops wrote it off. These days my parents still don’t buy new cars, they look for almost new ones that only have a couple years on them. Buying a car new is foolish because they depreciate drastically in the first few years. Many cars lose 40% of their value after just a few years. Coming in and buying that car at the 2-year mark puts that loss on the previous owner, not you. If you are using your car for travel only, why waste money having this year’s model. Let us all remember that a car is not an investment, at least not a good one anyway.
I’m Not Cheap……I’m Frugal!!! – Budget Boss
The $50 Car! Sadly couldn’t find a picture of its actual color, Banana Yellow
Think practical
Many beautiful cars are also not very practical. I love Range Rover’s as much as the next guy, but do I really need one of those to get around the city? Am I going to encounter some treacherous terrain in Downtown London on my daily commute? If you are using your car to get to work and back, why would you spend lavishly on a massive SUV or truck? These gas guzzlers can cost upwards of $50,000 and everything else will be more expensive as well including repairs and insurance. I am not saying that these cars aren’t nice. What I am saying as that transportation should be just that, getting from point A to point B. If you are financing a vehicle you obviously aren’t rich, so you obviously have no practical use for vanity in your life.
In the grand scheme of things, I don’t think I will ever take out a car loan, ever. The reason is simple. I do not want to pay interest on a depreciating item. It is like getting a loan for a haircut; you know you are going to need one soon so why bother. I would prefer to buy outright, but if I cannot I would rather lease than get a loan. The reason again is simple. I would have less hassle with maintenance, selling the vehicle and depreciation. I look at renting a car the same way as renting an apartment. I always get what I want and can move when the lease is up if I want to. Loan terms can be locked in for 72, 84 or even 96 months! I don’t want to be tied down with a car loan for 8 years. Some people are even paying off older cars while they are paying off a newer car. Don’t be like them, be smart!
Thanks for tuning in today as Loan Week continues at Budget Boss. Tune in tomorrow as we wrap up the week with some Loan 101. If you have any questions regarding loans or debt, please do not hesitate to contact me at joe@budgetboss.ca. Have a great day Bosses!
“Vanity can easily overtake wisdom. It usually overtakes common sense.” – Julian Casablancas
Email – joe@budgetboss.ca
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