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Think long term (for models)
Buy the car you want – but only after it is at least two years old, and three would be better. By doing so, you automatically save hundreds of thousands of dollars over your lifetime.
When I was 23, I wanted to buy a nice four-door sedan, and I was drawn to the Cadillac STS. The base price for the new model was over $50,000, and with any small extras the sticker was around $55,000. I was doing great at a young age, but I wasn’t doing well enough to blow 50 grand on a new car.
I was looking through my local paper (yes, this was before the internet changed everything) and I saw an ad for a 2½ year old Cadillac STS for $19,500. This car had less than 40,000 miles on it and came with a 90,000 mile extended warranty. It was grand, shiny and just serviced.
It was an attractive price because the first owner was eating up the depreciation.
The average car will lose 11 percent of its value when you roll it over the lot and an additional 15 percent to 20 percent the first year you own it. The second year’s depreciation (loss) is another 15 percent, for a loss of at least 45 percent in the first two years.
Depreciation is usually calculated from the base price, not additional. It could be the Sport package that increases the price by $10,000 but only sets you back $2,000 after the first year or two. So it’s still quite possible to find beautiful cars with manufacturer warranties and pay 35 percent to 50 percent less than a first owner would have paid if bought new.
I drove that car for four years, did very few out-of-pocket repairs, and sold it for $3,500.
So what kind of deals can you get today? When I was young, one of the dream cars was a Ferrari Testarossa, and it cost around $200,000. You can buy one now for around $50,000, and most don’t have that many miles because they’ve been impounded by owners.
Think short term (for loans)
If you finance your auto purchase, you can save a lot of money by keeping the term to no more than 36 months. This builds equity in the car faster and saves on interest.
This can be difficult because the monthly payment is higher than the six-year finance, and it is higher than the monthly lease. If you finance $25,000 at 5 percent interest for three years, your monthly payment would be $749.27, and your total payment would be $26,974. If you extend that loan to six years, your monthly payment drops to $402.62, but your total payment increases to $28,989. That’s $2,015 more out of your pocket to own the car.
Assuming you bought the car with a small down payment, by financing it for six years, your loan payoff is happening at a much slower rate than the depreciation on the vehicle, creating an “underwater” situation on the car. doing. -Go. Over the course of the three-year program, you’re paying off the car’s depreciation faster than you get options if you want to sell the vehicle.
If you really can’t afford that three-year payment, take out the five-year option and send a little extra every month to pay off the principal quicker.
Leasing a newer model is tempting because of the lower monthly payments, but you may not want to do that. In the next post I’ll explain why, while I introduce several other ways to save money when buying an automobile.
Believe it or not, you may be better off buying your own car instead of funding your 401k or IRA!
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