New vs. Used (Cars)

[Irish Cat]

Dave Ramsey's advice isn't bad and some people probably should follow it to a "T" if they aren't good with managing their money. If you have the discipline to follow his formula 100% and start it early on in life odds are you will end up wealthy, but you will make a lot of sacrifices along the way and who knows how long your going to live anyhow.

 

A payment for a car that you can't afford would be miserable, but I disagree that all car payments have to be miserable. I had know my wife was going to need a new vehicle at somepoint, so I had been putting some money away when I could. That combined with the insurance settlement, I was able to put about $16,000 down on our "new" used van. I did have to finance about $12,000 put the payment is not a burden, so I'm not that concerned. I've actually paid a bit extra each month, and I'm fortunate that through my employeer I usually qualify for a quarterly bonus which I'll like put on the car loan and pay it off early.

 

I could have paid cash for a $16,000 van, but it wouldn't be as nice as the one I bought, certainly wouldn't have any factory warranty remaining, and I probably wouldn't be as happy with it. Overall I can live with relatively small car payment for the next two to three years.

[All Blue]

I think a lot has to do with the type of vehicle you buy in terms of holding there re-sale value and if you are gonna keep the vehicle at least 5 years. With that said I don't think there is that big of difference between owning a new vehicle vs the same vehicle that's already 5 years old.

[MJAlltheWay24]

Because of the thousands of dollars in depreciation when you drive the new car off the lot.

 

My comment was more in regards to just in general for those that were saying they don't like credit at all for anything, but that was probably us getting too far off topic.

 

I have real mixed feelings. My scenario that I'm looking at right now is a brand new car for a few thousand more or an 18 with over 40K miles on it already. Or a 16, which is quite a bit cheaper with 60K miles on it and accident history. I feel like take the depreciation isn't all all that bad because it will take me 3 years or more to get 40K miles. I won't be getting rid of my car anytime soon, I'm one that will hold onto it for 12-15 years. So does depreciation really matter for someone like me?

[All Blue]

My comment was more in regards to just in general for those that were saying they don't like credit at all for anything, but that was probably us getting too far off topic.

 

I have real mixed feelings. My scenario that I'm looking at right now is a brand new car for a few thousand more or an 18 with over 40K miles on it already. Or a 16, which is quite a bit cheaper with 60K miles on it and accident history. I feel like take the depreciation isn't all all that bad because it will take me 3 years or more to get 40K miles. I won't be getting rid of my car anytime soon, I'm one that will hold onto it for 12-15 years. So does depreciation really matter for someone like me?

 

If your gonna own this vehicle for 10 yrs or more, depreciation is no longer a concern.

[MJAlltheWay24]

If your gonna own this vehicle for 10 yrs or more, depreciation is no longer a concern.

 

Thanks @All Blue. That's sort of what I was thinking. I've had my current car since 2009 and I bought it used with about 60K miles on it. Makes me think the next one, if I buy it new, I might have it for 10-15 years, if possible.

[rjs4470]

If your gonna own this vehicle for 10 yrs or more, depreciation is no longer a concern.

 

Really, it's not even 10 years. If you're going to hang on to the car for more than 4 or 5 years, depreciation isn't that big of a deal. The biggest hit comes in the first couple years. After that it slows down, especially if you have a car that holds its value. The biggest problem with depreciation is being underwater in your loan, which can happen with new or used vehicles.

[The Double Deuce]

So two examples:

1. You buy a $30,000 car, new, at 0% APR, and finance it for 60 months (easy math). $500 / month. In this example that is something that comfortably fits within your budget.

 

2. You buy a $30,000 car, new, and pay cash for it. If invested in a way that would have earned you 7% a year, that could have been: $30,000 in year one, $32,100 in year two, $34,347 in year 3, $36,751 in year 4, and $39,323 in year 5. So by staying "debt-free", you cost yourself $9,323 over the same term you would have been making payments on the car.

 

Now, since the average car is worth half of its value in 5 years:

 

1. The first example, you now have $39,323 in the bank (instead of the $30,000 you had 5 years ago), and you have $15,000 in equity in the car you have paid off. Deducting the $30,000 in payments you made (60 x $500), you have $9,323 in savings that you wouldn't have had otherwise plus the car's equity.

 

2. You don't have that $30,000 in the bank, nor the compounded interest, and now have only the $15,000 in equity in the car you're driving.

 

So which one makes more sense?

 

Now, the rub becomes if you aren't saving your money properly, and instead of investing that $30,000 chunk and saving the interest you blew it on things / habits / nonsense, and now of course you resemble about 75% of the population.

[rjs4470]

So two examples:

1. You buy a $30,000 car, new, at 0% APR, and finance it for 60 months (easy math). $500 / month. In this example that is something that comfortably fits within your budget.

 

2. You buy a $30,000 car, new, and pay cash for it. If invested in a way that would have earned you 7% a year, that could have been: $30,000 in year one, $32,100 in year two, $34,347 in year 3, $36,751 in year 4, and $39,323 in year 5. So by staying "debt-free", you cost yourself $9,323 over the same term you would have been making payments on the car.

 

Now, since the average car is worth half of its value in 5 years:

 

1. The first example, you now have $39,323 in the bank (instead of the $30,000 you had 5 years ago), and you have $15,000 in equity in the car you have paid off. Deducting the $30,000 in payments you made (60 x $500), you have $9,323 in savings that you wouldn't have had otherwise plus the car's equity.

 

2. You don't have that $30,000 in the bank, nor the compounded interest, and now have only the $15,000 in equity in the car you're driving.

 

So which one makes more sense?

 

Now, the rub becomes if you aren't saving your money properly, and instead of investing that $30,000 chunk and saving the interest you blew it on things / habits / nonsense, and now of course you resemble about 75% of the population.

 

While your example is simplistic, and optimistic (you won’t always make 7% back), it is the proper way to think about it, or any other large purchase. Interest free/really low interest rate deals are really free money that you’re silly not to take advantage of if you qualify. There are several other advantages than the ones you mention. First, you’ll have more cash available to you (rather than sunk into your car) should you really need it for something. If you need cash in an emergency, and your forced to borrow, it’s going to be more expensive than a 0% or really low interest rate auto loan. Also, you open yourself up to more, and nicer vehicles if you finance. You’ll get a much nicer car if you put $10k down than if you buy a $25k car with cash (plus you keep $15k in your pocket).

 

This example is why having good credit is important...it makes borrowing money cheap, which allows you to hold on to more of your money (as long as you manage your borrowing properly)

[UKMustangFan]

While your example is simplistic, and optimistic (you won’t always make 7% back), it is the proper way to think about it, or any other large purchase. Interest free/really low interest rate deals are really free money that you’re silly not to take advantage of if you qualify. There are several other advantages than the ones you mention. First, you’ll have more cash available to you (rather than sunk into your car) should you really need it for something. If you need cash in an emergency, and your forced to borrow, it’s going to be more expensive than a 0% or really low interest rate auto loan. Also, you open yourself up to more, and nicer vehicles if you finance. You’ll get a much nicer car if you put $10k down than if you buy a $25k car with cash (plus you keep $15k in your pocket).

 

This example is why having good credit is important...it makes borrowing money cheap, which allows you to hold on to more of your money (as long as you manage your borrowing properly)

 

If you pay cash for everything you won’t need to borrow money in case of emergency...:idunno:

[TheDeuce]

If you pay cash for everything you won’t need to borrow money in case of emergency...:idunno:

 

Maybe in a perfect world. If you never borrow money, you don't have the credit to do it when you really need to. It's naïve to think you'd NEVER need to borrow money.

[rjs4470]

If you pay cash for everything you won’t need to borrow money in case of emergency...:idunno:

 

If you pay cash for everything, you’re also saving less cash. In addition, the biggest chunk of your savings should be going towards retirement. If you’re spending big chunks on large purchases (such as cars, big home repairs, appliances) you’re limiting the amount you earn in interest, and thus the amount you are saving over time and contributing to retirement. Again, refer to Deuces example above. Again, I understand borrowing too much is a bad thing. But sometimes, borrowing is the smart thing to do as it actually allows you to hold on to and earn more off the money you already have.

 

Again, I commend you for being able to live debt free. It is truly an impressive accomplishment. But I think you are missing out on a lot of opportunities that could be financially beneficial to you in the long run.

[UKMustangFan]

Maybe in a perfect world. If you never borrow money, you don't have the credit to do it when you really need to. It's naïve to think you'd NEVER need to borrow money.

 

Again we’ll just have to agree to disagree. Outside of a mortgage, which you don’t need credit to get, what could I possibly ever have to borrow money for?

[UKMustangFan]

If you pay cash for everything, you’re also saving less cash. In addition, the biggest chunk of your savings should be going towards retirement. If you’re spending big chunks on large purchases (such as cars, big home repairs, appliances) you’re limiting the amount you earn in interest, and thus the amount you are saving over time. Again, I understand borrowing too much is a bad thing. But sometimes, borrowing is the smart thing to do as it actually allows you to hold on to and earn more off the money you already have.

 

Again, I commend you for being able to live debt free. It is truly an impressive accomplishment. But I think you are missing out on a lot of opportunities that could be beneficial to you in the long run.

 

How am I saving less? That $500 in car payments is instead an extra $500 a month I can invest in my retirement accounts.

[TheDeuce]

Again we’ll just have to agree to disagree. Outside of a mortgage, which you don’t need credit to get, what could I possibly ever have to borrow money for?

 

What do you mean you don't need credit to get a mortgage?

 

Paying all cash for everything, again, sounds good on the surface. That's until an unforeseen circumstance (or series of them happens), and the checking and savings disappear and you have nothing. I deal with it weekly. People with the "all cash" mentality that stumble on bad times and can't get a loan to cover them in the time being because they have little to no credit. "I make $100,000 a year!" Well, that's great, but you've never proven you can pay anybody back.

 

It's not the daily expenses where credit will save you, it's on the things you can't predict. A savings account is great until it's not there.

[Bobby Axelrod]

What do you mean you don't need credit to get a mortgage?

 

Paying all cash for everything, again, sounds good on the surface. That's until an unforeseen circumstance (or series of them happens), and the checking and savings disappear and you have nothing. I deal with it weekly. People with the "all cash" mentality that stumble on bad times and can't get a loan to cover them in the time being because they have little to no credit. "I make $100,000 a year!" Well, that's great, but you've never proven you can pay anybody back.

 

It's not the daily expenses where credit will save you, it's on the things you can't predict. A savings account is great until it's not there.

 

You can get a mortgage without credit. Any community bank will underwrite you without credit.

 

A strong personal balance sheet with a lot of liquidity and little to no debt > somebody with a good credit score leveraged to their eyeballs