I can’t explain why, but we’ve had a flurry of calls from clients recently about buying a new vehicle, so I thought I would take this opportunity to throw my “two-cents” in on things you ought to consider when going through this exercise.
Other than your home, the most expensive purchase you are likely to make is a car or a truck. According the Bureau of Labor Statistics, we spend, on average, about $500/month to purchase, maintain and insure our vehicles. Over a typical 60-year adulthood, that equates to a whopping $360,000!
So, what kinds of decisions should we be thinking about?
First, with interest rates so low today and generous and easy loan approvals, it really doesn’t make a ton of sense to pay cash for a vehicle. Loan rates today are typically so low that you could invest that money, even in a very conservative portfolio, and you stand a very high likelihood that you will outperform the cost of that loan.
Next, even though used vehicles are generally less expensive, you really need to understand the advantages of purchasing a new car. They are less likely to need costly repairs and most of those should be covered by the manufacturer’s warranty. Also, you should be able to get much more favorable loan terms, which translates into lower interest costs and, probably, smaller monthly payments.
What about leasing? This is an interesting alternative because you would really only be financing the amount of money that the vehicle is expected to depreciate over the life of the lease. This strategy typically provides a lower monthly payment and puts you in a new car with the accompanying warranty.
At the end of the lease you will either return the car to the dealer or you could purchase it for its “residual value,” which was actually calculated when the lease was established. If that residual value is too high, give the keys to the dealer! If it is lower than market price, keeping the vehicle, or, even, selling it, might make more sense. Just make sure to negotiate the purchase price first . . . and don’t exceed the mileage restriction!
A strategy that used to have some appeal in paying for a car was to use a Home Equity Line-of-Credit, but, unfortunately, the new tax code makes that less appealing because the interest is no longer tax-deductible.
And, finally, be careful not to pay too much for “fuel efficiency.” Suppose you are choosing between two cars – one that costs $30,000 and gets 25 miles per gallon, and another that costs $25,000 but only gets 20 miles per gallon. If you drive about 15,000 miles per year for five years and gas costs, on average, $3.00/gallon, you will absolutely spend more money on gas with the car that only gets 20 mpg – about $2,250. But, and here’s the part most of us miss, you will still end up $2,750 ahead by purchasing the second car because of the lower initial purchase price!
Now, I don’t know ANYONE who really likes to go to a car dealer and negotiate an auto purchase. Still, as you meander into the world of purchasing a vehicle, just keep in mind some of these ideas and your experience could be a little less painful!