It is so easy to find a used car that will be good enough for $10-$15K. Even though I know we probably pay slightly more, we always go to CarMax. Just not dealing with slimy car dealers makes it worth it. We have never had an issue.
Six months later, a major electrical issue damaged a significant portion of the internal computer system, which cost almost as much to fix as the car was worth.
Almost $8k down the drain in 6 months. You’re always rolling the dice on an old car, no matter how much research and prep you do.
For most people, over a lifetime of buying cars (say 60 years) buying the $15k car (at today's prices) every 5 years vs $30k new car every 5 years will save them $180k. You can replace a lot of computer systems with the savings (ignoring even more savings with insurance, etc.)
If new cars cost $30k and last 10 years, and used cars cost $15k and last 5 years, you break even.
Alternately if you always trade-in your car after 5 years to buy a new car, you'll end up paying a lot less than $30k each time.
Of course, lots of people make better (in my opinion) decisions than that. But then they aren't the ones that need to understand where rationalizing spending money isn't actual logical.
You buy a reliable used car with ~30k miles for half of the cost of buying new and then drive it until you hit 150k+ miles.
Where are you buying cars where you're only getting a 50% discount from new with half of the cars useful life spent?
Without concrete data to support this, it's absurd to suggest that any vehicle has a mean failure rate of just 1-2% after 10 years on the road. Years of being subjected to the elements (extreme elements in certain parts of the country), normal wear, etc. constantly cause failures in older vehicles.
First, of course without data it's anecdotal at best, and feelings at worst! I certainly feel like Toyotas last forever. That is, of course, variable on a lot of factors. I've seen average miles per year range from 10,000 to 15,000. Assuming the high end, 10 years would take us to 150,000 miles. Well-maintained models would likely still be running, but maintenance would have increased beyond brakes, spark plugs, etc. to alternators, timing belts/chains, water pumps, exhaust, radiators... they add up.
But more to my point, second - I'm talking about Big Failures like a very expensive CPU system or an engine or transmission. Those aren't likely to die before 150,000 in a reliable vehicle, and the Camry is one of the best.
It's just beyond me why people would buy a brand new car on loan. Only if you're poor/living from paycheck to paycheck and absolutely rely on a car to get to your job I understand why it would make sense on some level to get a car loan.
Taking a loan out for the car means I'm buying a 20k car for 18k, being able to return 10% a year on the money I borrowed, with the ability to pay off the car anytime I want.
Buying a car in cash is for those who can't get a low APR loan and/or are too risk averse to use debt properly.
That's why I like certified pre-owned. It's the sweet spot between new and used IMO. Get a car that is just a couple years old (often from a trade or a lease), an extended manufacturer's warrenty, and let the original owner take the major hit on depreciation.
I got the impression they list everything as pre-owned certified on the website and then try to up-charge people for it in person, without actually doing any of the supposed checks. On the other hand, if you can get it the warranty should help with any gremlins in the first few years.
Certified used vehicles are also significantly more expensive than a used vehicle and a warranty, and Consumer Reports recommends the latter.
I bought the cheapest house within commuting distance of where I work (in London) and am still trying to figure out how the hell to get out of that mortgage sooner than the final term. My car was bought outright as was my campervan.
I don't know how the people who drop half a million on a house and 50k on a Chelsea tractor, earning the same wage as me, sleep at night.
At least with T-mobile. Even if you have horrible credit as long as you pay your bill on time with them for 12 months, you are eligible for a no interest phone loan.
This doesn't mean they are rock-headed. Like all of us, they could have a blind-spot where a decisions made may not be in our long term economic interests.
It’s much easier to get a car with a $350/month car note where you won’t have unexpected repair expenses than getting a $200/month car note on a car without a warranty and then have an unexpected expense.
Now we have a credit card with the car shop we used that has a six months/no interest program. I use that even if I do have the money. But if we had bad credit, we could get a car loan much easier than an unsecured credit card.
I am at a point in life now where I can afford an expensive car repair bill and it just stings a little bit. When I was first starting out decades ago working at night as a computer operator while I was in graduate school during the day, any unexpected expense meant a call to my parents. Many people don’t have that luxury.
It can be rationalized with emotions, but not financial sense.
As far as four vs seven years. You’re hoping that you can figure something out in four years.
Whether this is good or not is completely dependent on the loan interest rate, a person's cash flow situation, and what they will do with the free cash flow otherwise..
$50-100/mo saved due to lower 7y payments reinvested elsewhere could quite feasibly offset the higher cost associated with the (assumed) higher interest rate of the 7y loan.
And, according to the assumptions in financial/economic theory anyway, if you can get a loan at or below inflation rates, you're getting a 'discount' on the total price w/r/t paying 100% cash now
But yes, this should be made as a 'financing' decision, not an 'affordability' decision - if you can only afford the vehicle with 7y loan at all, and aren't taking the longer loan as an savings/investment decision among weighing the TCO you probably should be buying a cheaper one.
You are still losing maybe 50% in the first year in depreciation. If you are paying it over 7 years then you are under water on the car from the minute you pick it up until it's paid off in full.
If you can finance at an interest rate below what you are earning in the market then you are better off financing. People who pay in cash are leaving money on the table for non-financial reasons.
I'm saying that financing can easily make sense with low interest rates. Nothing in my comment nor criklis has anything to do with buying a used vs new car as the same logic applies to both.
Mathematically, it makes a lot more sense for us to refinance to another 30 year loan (to get rid of PMI) and invest the difference but I am planning on refinancing to a 15 year.
Consider a $30,000 vehicle. I can finance it at 1.9% for 48 months or 84 months. The payment on the 48 month loan is $650/month (scenario 1) and the payment on the 84 month loan is $380/month (scenario 2).
In scenario 1 I invest $0/month for 48 months and then $650/month for 36 months. After 7 years I paid $31,178 for the car and earned ~$26,000 from investing (at 8%).
In scenario 2 I invest $270/month for 84 months. After 7 years I paid $32,062 for the car and earned ~$30,000 from investing (at 8%).
In scenario 2 I paid $884 more in interest but earned an extra $4,000 from investing.
There is a lot more that goes into this type of calculation but it is not nearly as cut and dry as "you're an idiot if you financed a car for 84 months."
But financing doesn’t make you an idiot.
Besides, as I've mentioned elsewhere, anyone offering a loan at 1.9% is aware that they are subsidising your purchase. You should be able to negotiate most of the difference into a decent cash deal.
Not to mention the non-trivial risk of being involved in an accident in a car which is worth less than is outstanding on it (which for a 7 year loan is probably 6+ years).
Your financing argument is actually flipped. You will get a better cash price if you finance because that is where dealers make money. Your best strategy if you want to pay cash is to finance the car and then pay off the loan immediately.
As far as being underwater is concerned... most dealers throw in GAP insurance these days. Removing GAP to lower the cost is counterproductive because the banks buying your loan want you to have GAP.
There really are just very few scenarios where paying cash at the dealer makes the most financial sense.
But yes most people don’t treat money this way.
Denying this reality will lower your risk profile but also lower your potential rewards. If you can’t control your spending and investing then don’t finance a car for 7 years.
But don’t pretend that economics and math are wrong.
The recognition that something -- like your case -- is an extreme exception proves the general validity of the rule. (Yes, I know there's a frequently misused version of the quote, but I use this modified, correct version.)
>That’s only true if you are already bad at personal finance.
That's kind of the point: you can't just assume away the case of "people making bad financial decisions", and that might be -- and probably is here -- the reason for the trend.
Nitpicking, but you didn't earn $30k from investing. You contributed $22,680, and ended up with $28,910, assuming dollar-cost averaging contributions monthly (bulk contributions at the beginning of the year would get you $31,223). So your total return, assuming 8% annual growth, is $6,230.
I didn’t even get into down payment or cash opportunity cost because just generally don’t even believe the basic examples.
They're under no legal obligation to cancel the transaction if your post-purchase inspection turns up something. In almost every state, used cars are sold AS-IS. It's entirely a 'good will' policy and from this video it sounds like they won't give you money back, but instead allow you to swap with another vehicle in their inventory.