Before I begin let me just say that I don’t necessarily enjoy buying a car. I have owned five in my lifetime. My very first one was a car I bought when I was 25 which my dad told me about a 1986 Ford LTD Wagon that leaked oil. I bought it so I could haul all of my belongings out to Oregon to be with my partner at the time (although that quickly went south). Since that time I have owned an Oldsmobile Achieva, a Ford Taurus, Dodge Challenger, Ford Focus, and now I own a Nissan Sentra. I have also been with people where we agreed to be a one-car family and that is why there is somewhat of a gap in my car ownership experience. I either drove my partner’s car, my parents car, or a friend’s car.
So I have never really owned a fancy car and I have never owned a brand new car, which have certainly influenced my thinking on this subject. I have done a fair amount of homework and these principles pretty much guide me on what my plans are for future car purchases. Although I am hoping my Nissan Sentra will last another 10 years (it is a 2009 bought in 2011).
Here are some of my car buying principles:
First, it is almost always better to own than lease. Yes, I know leasing can come with a lower down payment and you get a new car every three years or so. However, you also have to deal with the hassle of keeping it within a certain number of miles, the car is never yours, and in the long-run it actually costs MORE to lease than buy. This scenario from cars.com is a good one. This other analysis from the New York Times also illustrates my point. But let’s break down the numbers. Let’s say there is a brand new car that costs $20,000. You put $2000 down and have to finance $18,000 at about 3% (based upon current interest rates and good credit score). Your payment is about $323 per month.
Let’s say you then lease the same car for $199 per month and you also have to put $2000 down (most leases require you to do something like that). And let’s say you lease another car during that 5 years for the same price (most leases run 3 years so that would make sense). So you have $199 a month for 5 years. You would’ve spent about $14000 for the car lease compared with the $19500 that you would need to buy the car . So you come out $5000 ahead if you lease right? WRONG!
The problem is that people forget that after 5 years that car is probably worth about $9-11000 and your leased car is worth NOTHING! Plus, I get to drive my car for the next five to 10 years without a car payment while you are still paying another $14000-$28000 just because you want a new car every three years. In other words, it is almost ALWAYS BETTER to buy than lease.
Consider this as well. Let’s say I take that $323 car payment I was making and I put it in an investment account for the next 5-10 years (let’s say 10). After 10 years of investing at a conservative 8% I will have over $60,000. So at the end of the 15 years or so with a car you bought you have a car that is worth just a little bit, but $60,000 in investments. The person who leased has a car that is worth NOTHING and no savings. Moreover, if I just leave that investment money in for another 20 years I will have over $280,000. I am giving up a quarter of a million dollars so I can lease? Does that sound smart to you?
Now leasing can have advantages if you are on a really tight budget or your company is paying for it. But most of the time leasing actually COSTS you money than saves you money. Therefore, I will be buying a car not leasing.
Second, I will drive my cars into the ground. I don’t really care about the status that a car brings. Don’t get me wrong I like to look at them and they are nice. I would love to drive a high performance car, but I don’t get my rocks off from owning one. Today, I went to the gym and I noticed someone had a Lexus sports car. I initially thought to myself they must have bucks, but then I thought what a waste of money. I have come to value experiences over stuff. I hate clutter. I don’t need that kind of stuff. My Nissan Sentra has 86,000 miles, plenty of scratches and some paint scrapes. Do I care? NOPE. It is paid for and if it lasts me another 5-10 years it will be well worth it. I hope it lasts me until I hit 200,000 miles.
Now you may ask well what about the maintenance? Cars will cost more in maintenance as they get older. But the average car on the streets of the US is 11 years old. Cars last longer today. They are better built and replacing a hose or two and if you properly maintain a car there is no reason why spending a few hundred to $1000 a year for a car isn’t a better deal than spending THOUSANDS of dollars on a car.
Third, I will never buy a NEW car. I have mentioned before that Mrs. ROB has a brand new car, well it was brand new. She bought a Nissan Rogue last year that is nice. She made that choice and if it makes her feel better fine. However, she also makes the payments on that car. If she wants to buy a new car that is fine, but I firmly believe in buying used.
The primary reason is the immediate depreciation. When you drive a car off of a lot it IMMEDIATELY loses about 10% and after the first year the value goes down about 25%. Currently, Mrs. ROB’s loan balance and the value of the car are about even. Her car hasn’t retained its value that much. I don’t like losing money. So why would I personally invest in a depreciating asset? Answer: I won’t. It is not worth it to me.
To me the best way to buy a car is if you can afford it buy something that is used that is 2 or 3 years old. There are plenty of cars that are 2 years old that have only 10-20,000 miles. Mine did. And it has been a fine runner so far. By buying a car two years out you get rid of a lot of the quick depreciation and then it doesn’t descend quite as fast.
Fourth, I will only buy a car I can afford. The truth is that I can probably afford a much nicer car. But I don’t want too. And so many people get into trouble because they get out of college or they get their first car and it has to be brand new and their payments are as much as their student loans, etc. For example, they might buy a $30,000 car and only making $40,000. I mean the average car loan in this country is currently 74 months (six years). That is just DUMB! I think Dave Ramsey has a good formula for this. The value of your car should never ever be more than 50% of your income. In other words, if you earn $40,000 then your car value should be no more than $20,000. Personally, I would have it even lower than that maybe 25-30%. But your car value should NEVER be worth close to your salary. Paying all that money for a depreciating asset, particularly when you are just out of school and should be saving and investing. You don’t DESERVE a new car because you graduated or the like. That is what you were supposed to do. I don’t think we should get a reward (if that is what someone calls a new car) because they did something they were supposed to do (e.g. do well in school, graduate, get a first job, etc).
Fifth, I will always put at least 20% down for a car. Throughout my car buying history I have always bought the car outright or put about 20% down. Probably it stems from me hating debt so if I have to finance the car then I want to finance it for as little as possible. I mean the best thing to do is to save up and pay cash for a car even if that car is a hooptie. Who cares. It is paid for. Cars are meant to take you from point A to B. They are depreciating assets. If you care more about your car than your partner or loved one than I think you have some serious screws lose.
Sixth, I will maintain the car as best as I can. I fully admit I don’t know much about car maintenance. I don’t change my own oil. Hell, I am not sure I could even change a tire. However, I am extremely faithful with oil changes, scheduled maintenance, etc. So many people try to extend the mileage on an oil change or don’t do the flushes, etc. When there is a scheduled maintenance I make sure to take care of it. Sometimes it costs me my budget, but I just try to tighten other places. I had a friend of mine once who told me his car died on him in the middle of the highway. The reason was that he never changed the oil. He never brought it to a place or anything. The engine had no oil in it. It was so hot that it basically melted together. Maintaining a car will go a long way in keeping its value, keeping repairs down, etc.
Finally, I will NOT accept the extra warranties and other items offered by the dealership. Let’s just say I have personal experience with this (not me personally). However, my partner ended up buying a new car, an extended warranty, and a maintenance/repair package that added an extra 3500 onto the price of the car. We had a dent in the car and the dealership said that the dent wasn’t big enough for them to repair the car. In other words, my partner spent all that money for nothing. The only exception I might consider from the dealer would gap insurance. Gap insurance usually covers any kind of gap between the value of the car if you get into an accident and the loan amount. For example, if the car is worth $15,000 and you crash it, but you own $20,000 then you are out $5000. Gap insurance covers that gap in coverage. That might be worth it. Other than that all of those extra items aren’t worth the money.
The Bottom Line: For me a car is not a toy. It is a means to get me from point A to B. I want to drive something safe and I don’t want to drive a rust bucket. That said I do have some basic principles. It is better to buy than lease. Cars depreciate and I don’t care about what my car says about me. I would rather have experiences than things. I will always try to buy a car that I can afford, finance as little as possible, and maintain the car with scheduled maintenance. What do you think of this philosophy? Good/bad? Agree/Disagree?