July 19, 2013

Buying a car is an expensive experience. What is the financially smart way to buy a car IF you need one?

2 thoughts on “July 19, 2013”

  1. Katherine Graham says:

    Get away from the monthly payment mentality, don’t just show up at a car lot and “look around”, pay cash, buy an older car (at least 2 years old; preferably 3 or 4 years old), research the vehicle you are interested in, prepare a savings plan to buy the vehicle, buy from a private party, take the vehicle for a test drive, take the vehicle to a trusted mechanic, add up the problems on a negotiating worksheet and subtract the cost of fixing them from the price, be willing to walk, don’t try to screw the other party, and detach your self-image from the car.

  2. Mike Finley says:

    Once again you have it right, Katherine. Let’s take a look at this situation as we review the best approach for most people and then gradually end up with the worst approach.

    Best Approach: Follow Katherine’s advice. Buy a 3 or 4 year old vehicle from a private part at or under the blue book value. Most of the depreciation on the vehicle had already occurred. The previous owner ended up losing the most on the vehicle, not you. Do this with cash and drive the car FOREVER.

    Next Best Approach: Do the same thing except buy from a used car dealer. You will pay more simply because you must cover the dealers costs to make it happen.

    Next Best Approach: Buy a newer vehicle (private party if possible) that is one or two years old. You will lose more in depreciation, but you will have a newer vehicle that could ultimately last a very long time with proper maintenance and care.

    Next Best Approach: Buy a car older than 4 years old. The car will be cheaper, but it will probably not be in as good as shape. You will probably have to replace it earlier than the others. Saying that, if this is all you can afford with cash, then this is the right approach for you until you can afford more car. This approach can be very effective if you do not put on a lot of miles per year.

    Next Best Approach: Buy a new car with cash. You will lose a great deal of money in depreciation, but you will have total control over how the vehicle will be cared for from day 1. This approach can work for people with plenty of money and who can afford to give away a few thousand dollars in depreciation. Most people cannot afford this option. This is why the car business came up with monthly payments. Don’t fall for it. You cannot afford it. Trust me.

    Next Best Approach: Buy a new car with a loan. Depreciation and interest will kill your net worth. If you choose to do this, pay off the loan as fast as you can and then hold onto the vehicle for as long as possible. The longer you own it, the less damage you will make to your net worth.

    Next Best Approach: Buy the new car and pay it off with the shortest loan you can afford. Extending the length of the loan to reduce your monthly payment is a net worth killer. Don’t do it.

    Next Best Approach: Lease a car. You are renting a car you cannot afford. This is an absolutely terrible idea and should be avoided at all times. The dealer loves it because THEY win with this type of agreement. YOU lose!

    There you have it, folks. There may be a few things that fall in between some of these approaches, but not many. Cars deplete wealth. Buy them as infrequently as you possibly can and drive them until they are nearly falling apart. Your net worth will thank you for it. All of this becomes infinitely easier once you detach your self-worth from your vehicle. Katherine had it right.

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