It is approaching the end of the semester at my university and it is a time for reflection for me as a I review the school year. One of the things that happened this past semester, much more so than in past years, were little side discussions about finances. These discussions would happen in my office, among my advisees, in the cafeteria, and after class as we are walking toward our destinations.
One of the things that I heard over and over again from a number of my students was how they were complaining about their cars and/or bragging about the new car they had just bought/leased.
I teach at a university that is primarily a commuter school so a lot of my students justify buying a brand new car because they commute and because they need a reliable car to get to and from school, work, etc.
I actually polled one of my classes and over 1/2 of my students were leasing a car. In that moment, you can imagine that I wanted to tear my hair out. I have written about the cost of cars here before in several blog posts. And when I communicated some of this knowledge I instantly got the typical reactions from students. Even when I did a back of the envelope math for them AND one of my students (who in a personal finance class) piped up and said I was correct didn’t stop them from their car buying journeys.
So I promised them (and actually several of my students wanted me to write this post) that I would create a post that would counter the arguments made by others regarding why they needed a new car or lease.
Messages to My Students On Buying/Leasing a New Car
First, leasing a car is the most expensive way to own a car.
I won’t go through the whole back of the envelope math. But if you were to take that car payment you would be making on a lease and/or new car and put it in an investment you are basically giving up tens, if not hundreds of thousands, of dollars in your life time in order to drive a new car. Plus, you never really own the car itself. So not only do you give up all kinds of money, but you also don’t have anything to show for those payments.
Second, buying the car at the end of the lease is also too expensive.
A number of my students said that they planned to buy the car at the end of the lease. The problem with that logic is that most leases are 3 years. Then they are going to have to get a loan to pay for the rest of the car, which will probably be another 3-4 years. In other words, it too them 7 years to pay off a car that isn’t even close to being worth 1/2 of what they bought it for. That is a bad financial decision.
Third, you don’t DESERVE a new car.
A number of my students said that they work hard and they deserve that car. I am sorry that is bunga. You don’t deserve anything. You are 20 years old. You have nothing to your name and you are going to go put yourself in “hock” because you deserve it. You don’t get a pass on math because you are a good student or because you work. Lots of people do that. You aren’t special. I don’t deserve a new car and I have more money than most of my students.
Fourth, used cars can be just as safe as new ones.
The average car in America lasts 11 years. A number of my students stated that if they buy an older car that they will have to do a whole bunch of repairs. Again, that is bunga. Is it true that you might have to do some repairs on an older car, but those repairs are STILL CHEAPER than the payments you will make on a new car per year. Very rarely will you have multiple thousand dollar repair bills for a car in a given year. So that is mythology. My students who say that are only justifying in their head that they deserve the car. The new car is STILL more expensive than a used car.
Fifth, older cars aren’t reliable.
Again, that is bunga. Same reasoning applies above. You most likely won’t be spending thousands of dollars on car repairs for a car in a given year. And if you do you should probably get a different car. If you car is worth $2k and the repairs are $5k then sell the car for scrap and get you another $2-3k car. There are plenty of older cars available that are reliable, cheap, and can get you from point A to point B. Besides you are BROKE college students. You don’t need to be in something that constructs a message of more than you are. It is ok to be a broke college student. Most of us were at one time. You can buy a new(er) car at a later date when you have more money.
Sixth, I can’t afford to buy a car outright.
Again, this goes back to point #1. If you add up the payments on a lease that is typically anywhere from $2-$3k per year. Well, you can buy a car for that amount and you can buy a reliable one. When you lease a car, your payment might be lower, but the accumulation of payments will be more than buying a used car. Also, most leases REQUIRE 2-3k down anyway to get the lease. Why not take that money and buy a car for cash. Yes, it might be the prettiest in the world, but who cares. You should just want something to get you from point A to point B.
Finally, if you are going to finance a car SHOP AROUND.
If I can’t convince you about the back of the envelope math and you insist of having a newer car then buy one that is at least TWO years old and one that you could pay off in about THREE years or sooner. If you buy a used car that is 2 years old than much of the depreciation has been squeezed out of the car. It won’t depreciate as fast. Additionally, it will a LOT more affordable in terms of sticker price. Then you should try to pay off the loan in less than 3 years. Most likely the payments on that loan would be similar for a new car, but shorter terms. That means you can use that money to invest or to pay off other debt and you most likely will have a car that you could drive to the wheels come off (which is what you should do anyway).
The Bottom Line:
To all of my students I know you think you need a new car, but you DON’T. It is more expensive to buy/lease new. There are plenty of used cars that are reliable. And frankly you don’t deserve a new car because you are in school and work. Lots of people do that. You aren’t special. You don’t get a pass on math. Don’t act like you have a lot of money. Don’t get into the habits of constantly financing something. Debt is dangerous. Debt can be an enemy and a destroyer of worlds. Don’t do it!!!!!