Who doesn’t love that new car smell? And who doesn’t like the idea of owning a brand new car? I have written a couple of different posts on car ownership. I have provided what my specific philosophy is for buying a car. Moreover, I provided a rant about the length of car loans a couple of years back. But I think an even better way to think about car buying is what are the costs associated with it. Now I am certainly talking about how much car you should buy, but we often don’t think about the extraneous costs of a car.
Have you ever thought about how much your car is actually costing you?
So let’s consider a few observations about Americans and their cars.
First, I believe we put WAY too much emphasis on an item that goes DOWN in value. Don’t get me wrong I love the look of a new car. In fact, some times I do the “I wish” I could afford a car like a BMW and/or a Mercedes, etc. But then I have to think about what happens to that car over time. And the fact is that it goes down in value. In fact, when you drive a new car off the lot the value almost instantly goes down by 10% or more. And if you don’t believe me try to buy a new car and then within a couple of months see if you could sell it back to the dealer and see what they would buy it back for. I can almost guarantee that they will not give you even close to what you paid for it. Cars go down in value, yet we seem to put a lot of emphasis on what kind of status a car says about our lives. Those that have luxury cars MUST have money. Those that do not, must be living paycheck to paycheck and/or poor. What this does is that it translates into the desire for Americans to have a bigger, better car, to demonstrate or at least give the appearance of affluence.
Second, the terms of car loans are at an all time high. According to a CNBC report last year, the average car loan is now over $30,000 and it takes us 68 months to pay it off. Consider a couple of things. The average median household income in America is just over $59k. WE have finally gotten past the top for median income, which was set back in 2007. However, we are also spending much more money for our cars than ever before. The average car payment is $503 per month. That means if you are in that median income range you are spending potentially 10% of your budget on a car. And that doesn’t include gas, insurance, etc. Doesn’t that seem a bit insane?
Consider also that 68 months it is taking you to pay off that car. In other words, by the time you pay off that car it will probably be worth about 40% of its original purchase cost. In other words, you spent over 30k, plus your interest rate to have something that has less than 1/2 of its value? Huh?
Third, subprime car lending is also at an all-time high. Our current car loan debt stands at about 1.2 trillion dollars. However, more Americans are behind in their car payments than ever before. Of that $1.2 trillion dollars more and more of it is part of the subprime loan industry. Subprime loans are given to people who might have bad credit or who have had money problems in the past. Those subprime loans often come with HUGE interest rates (e.g. upwards of 20% or more for a car, which is higher than a lot of credit cards). And those loans are becoming more delinquent by the month. According to experts, we haven’t passed the point of no return for delinquent car loans, but it took a while for the subprime mortgage lending problem to catch up with us as well. This potentially has disaster written all over it.
Fourth, car leasing is at an all time high. Currently, there are over 4.03 million cars leases in the United States. People lease cars for a variety of reasons. They want to keep their payments lower than with a traditional auto loan. They want to have a “new” car every 3 years. They may get a deal from their workplace where they get reimbursed for their car. That said, car leasing is still the most EXPENSIVE way to drive a car. Part of that logic is because of the constant payments you have over the life of leasing vs. owning a car.
Finally, you may be giving up tens, if not HUNDREDS, of thousands of dollars because of your car. So you maybe reading that and thinking to yourself how in the world is that possible. Well, if you lease consider this. Let’s say one person leases a $20k car for $2500 down and a payment of about $200 a month. Let’s say the other person puts $2500 down and finances the car for $17,500 at 3% interest for the next 48 months. Their payment will be $387 per month. On the surface it seems like the person who is financing the car is winning right? I mean they have an extra $150 in their pocket each month. Let’s say that person invested that money at $150 per month for 30 years. After 30 years they would have about $220,000. Not bad.
However, let’s say that person who bought the car. Paid off the loan and then took that $387 and invested for the next 8 years. I get that idea because the average car in America lasts about 12 years nowadays. After 8 years they would have $53000. If they left that money in their for the next 18 years and NEVER added another thing to it they would have over $213000 (I am factoring in an average of 8% return for each scenario). Now if that person were to take out car loans over the next 18 years, pay them off in 4 and invest the difference they would have about another $100k to $150k on TOP of the $213000.
And here is the bigger catch. Most likely the person who took that original car payment would probably not just stop investing because they bought a new car. They would probably continue to just sock $387 away per month. If that were to occur then that person would have over $400,000.
In other words, having constant car payments in your life is COSTING YOU TENS OF THOUSANDS OF DOLLARS!
The desire for a new/er car is costing people money.
Does that make sense?
To me it doesn’t.
P.S. And I haven’t even gotten into the issue of whether or not commuting and the cost of gas is worth it. That is a separate issue to tackle.
What Should You Do?
Well, I fully admit I don’t care about what my car looks like and Mrs. ROB kind of makes fun of me for it. A car, for me, is something to go from A to B. I would rather have the money than a car. I would rather invest in things that go up in value. So what should you do if your car is costing you money.
First, buy cheaper cars. A newer car isn’t an entitlement. I mean most people do need some form of transportation, but a car that is 5 years old will often do just as good a job as that brand new car and will be a lot less.
Second, don’t finance your cars for long periods of time. For me, financing a car for more than 4 years is WAY too long. I don’t want to have a car payment that long. Hell, I wish our car payment was gone now. Just think about what we could do with that extra $625 per month (it is that high because I changed the terms of our loan and shortened it).
Third, if you can don’t lease a car. I get why some people like leasing cars. But generally they are a BAD deal for the consumer and a great deal for the dealer. Frankly, I don’t care about making them money. So while it might increase your payments BUYING a car is better.
Fourth, take your car payment and invest it. This, I think, is key. Whenever, you pay that car off you will instantly have a few hundred bucks per month extra. I would take that money and put it into savings, particularly investments. Just make a car payment to your IRA or 401k or whatever. You will have MUCH more money in the long-run.
Finally, drive your cars into the ground. I drive a 2009 Nissan Sentra with just over 124,000 miles on it. Mrs. ROB is not a fan of my car. But as I like to say it is paid for. Over the past couple of years I think I have put in about $2000 to $3000 dollars EXTRA in maintaining the car. That would be for a new muffler, shocks, struts, on the car. Now, some of those items I would have to probably do anyway on any car. However, that $3000 is still CHEAPER than buying a new car. It is cheaper than LEASING a new car. It may not be the prettiest person at the ball, but it gets me to where I need to go. I hope to drive this car until it hits 200,000 miles and beyond. I personally don’t care. As long as I take care of it, it is a safe car that has no real issues except for the scratches and the like. Also, I should detail the inside because it is kind of grody in there. However, I don’t car. I will drive this car into the ground. And when it is done, I will take Mrs. ROB’s car and she can get one that she likes.
Are your cars costing you money? What is your car buying philosophy? What do you think about the items I have listed here? Leave your comments below.