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Car Buying Advice I. Objective evalutation of car deals

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  • Car Buying Advice I. Objective evalutation of car deals

    Ok, we all have our pet theories and justifications for how we buy cars, but what I think gets a lot of people in trouble is the lack of an objective set of criteria and rules for really evaluating car purchases.

    The other issue is mind-set. What I mean here is the thought "I just like a new cars", or whatever excuse you tell yourself to buy more car than you can afford.

    The following guide is for those that have little or no cash net worth and make less than $150,000 per year (which, unfortunately, is most people). The funny thing, most people you see driving around in nice cars, can't truly afford them. I think you can take some wisdom from this observation, I see a 2 year associate (attorney) driving a brand new Mercedes, yet Warren Buffet drives an 8 year old Lincoln Town Car.

    1. Fact: Cars are depreciating assets, you will NEVER make money on owning a car.

    2. Fact: There are two basic costs to owning a car. Acquisition cost and ownership cost.

    3. Fact: Most cars made since 2002 will easily last 10 years or more with only basic maintenance and a few major purchases for tires and brakes.

    4. Fact: Most cars depreciate in value on average of 40%+ during their first 3 years. (and many depreciate as much as 50%)

    Acquisition Cost: This is the cost to actually acquire the car, price, taxes, initial registration. etc.
    Ownership cost: This is the cost to maintain, drive, register, and insure a car.

    Ownership cost is largely out of our control. Certainly, your choice of car model can determine if you pay more or less in ownership cost, but by-and-large, for any given car, ownership cost is a fixed amount.

    Thus, what you have the most control over is Acquisition Cost. Acquisition Cost is not simply the price, what we have to consider is a way to put the price in context to provide some objective basis for selecting and buying a car.

    My mindset for cars: (1) I need a car for transportation, a car is a tool (2) since I can never MAKE money with the car, my goal is to spend as little as is reasonable for owning a car, i.e. keep my cost low for the purpose for which I own a car...transportation. That is just good financial planning.

    The method

    In a nut shell, the "basic" formula I use for acquisition cost is this...

    (Net Purchase Price - Estimated Future Resale Value) / estimated months of ownership.

    The formula gets a little more complicated if you finance the car, but we will address that later. The formula is a way to amortize the acquisition cost for the amount of time you actually use/own the car.

    Lets look at an example:
    New car purchase: 2008 Mazda 3 Wagon. Gross Price (i.e. with tax, title etc), $22,000. (net price $19,500) Let's assume our buyer is like most Americans and only keeps the car for 36 months and lets assume the standard 40% depreciation. In 3 years, that car will probably sell for between $11,000 and $12,000 (I should point out, I am talking private party sale, trade-in would be significantly less). Thus, the Acquisition Cost (assuming this person paid cash) is $277.77 per month. (22,000 - 12,000) / 36

    Used: 2004 Mazda 3 Wagon. Gross price $12,500 (net price $11,000). Average deprecation varies at this point, but it is about 5%-10%. Lets assume an average of 10% per year, estimated future resale value after 3 years is $8,000. Thus, the acquisition cost is $125 per month.

    The net acquisition cost difference between the used deal and the new car deal is $5,500. That $5,500 is the amount you keep in your pocket by minimizing your acquisition cost of a car.

    Obviously, the longer you keep the car, the lower the amortized acquisition cost will be. But even if you kept the NEW car for SIX years, your amortized acquisition cost is still $194.44 per month. Thus, in many buying scenarioes, you still come out ahead buying a used car and owning it for 3-4 years than buying a new car and owning it for even six years.

    Other considerations:

    1. To make this formula truly work in your favor, you have to find the right car AND the right deal. You generally need to find a lower mileage car that is in good to excellent condition.

    2. Many buyers tell themselves that used cars cost more to upkeep. Not "necessarily" true. First, you have to realize, you don't use this method for any old clunker, this method forces you to find the "right car, the right deal". It takes some leg work. When I shop for a car, I will generally spend about a month until I land on the right car. The ownership costs between new and used wash themselves out in this way. It is true, you are likely to have a couple of "bigger ticket" upkeep costs with a used car (probably tires and brakes), but those costs are offset in that new cars are more expensive to insure, register, and if applicable, taxes or more. Thus, even if you have some major repairs, odds are, you will still not eat into the savings from the Net Acquisition Difference.

    3. If you must finance, the only change in the formula is you have to add-in interest to the Gross Price.

    4. Never ever finance a car (new or used) with zero down. At a "minimum", you must put at least enough down to cover tax, title and other finance related charges.

    5. The endgame with this formula is to allow you to have some cash on the back-end to buy another car.

    6. By using this formula, and finding the right car and the right deal, is about the closest you can come to coming out ahead on car ownership.

    7. Under this method, leasing never makes sense (basically, you are paying for the most expensive years of the car's life).

    8. If you buy from a dealership, don't be afraid to get up and walk away. You will be surprised how fast the numbers come down as you start walking out.

    9. If at all possible, try to pay cash for a car. I realize that paying cash is tall order these days, but if you can save up, try to do so. If you do this right, you will get some of that cash back on the back end. If you do this plan correctly, along with other frugral financial management techniques, you can perpetually buy a car every 3 to 4 years.

    10. The process assumes that when you re-sell the car, you do so as a private party sale and not a trade-in. (but you can still run the numbers on trade in value, but you minimize your acquisition cost by selling private party).


    How much car can you really afford. To figure this out, you need to budget budget budget, and research research research.

    Rule of thumb...if you finance a car (or if you look at the monthly Acquisition cost), your payment should not exceed 5% of your gross monthly income. Why so low, because ownership cost will easily eat up another 5-10% of your gross monthly income (i.e. gas, insurance, registration, taxes, upkeep). Thus, in keeping to my example. The person who bought the "new car" would need to make $5,555 per month. The used car buyer need only make $2,500 per month.

    The truly wealthy people I know also make similar considerations, but do so a little differently. The truly frugal wealthy people I know (they are wealthy because they are frugal), will use a percentage of net cash worth in deciding how much to spend on a car. They generally will pay no more for a car than 0.5%- 1.0% of their "cash" (or liquid) net worth. To put that in perspective, a person with $10MM in liquid assets will not spend more than $50,000-$100,000 on a car. But most wealthy individuals I know tend to draw the line at about $60,000. In addition, they tend to keep their cars longer, usually about 5 years. In any event, they all have objective criteria for minimizing the cost of acquisition and have rules about how much they are willing to spend on a car.

    In any event, that is my advice for how to go about and at least analyze how to buy a car. The overall point is, do not take car buying lightly. I use this method because it is objective, it meets my needs, and gives a true picture of what I am paying for a car.

    Any similarity to any other persons car buying advice is incidental, this method I came up with on my own and I have not researched other published articles on car buying methods

    Feel free to reply or add your insight.
    Last edited by HHM; 03-20-2008, 11:27 AM.

  • #2
    Excellent points HHM. I've run the gamut, had brand-new cars, had used cars, had cars that had no business being on the road , and while having a car that is under a good warranty is a nice piece of mind, nothing beats not having a car payment. At the end of the day, as long as a vehicle can get someone from point A-B and back safely, that is all that matters. I'm done trying to impress people. I do appreciate the attention my car garners, but at the end of the day, it doesn't make me a better person, and lightens my wallet more than I'd like it to. My current vehicle gets in excess of 33+MPG (it's only saving grace), but I bought it new, so that payment combined with the cost of gas is really painful.

    I may have a buyer for my car, and if I do, I will sell it, pay the bank off, take some of my cash reserves and buy a vehicle that I can just run into the ground and fix up if/when needed. Sure, my fuel mileage might not be as good, but it sure beats a payment.
    Filed Ch 7: 12/27/07
    341: 2/6/08
    Discharged: 4/11/08
    Finally closing: ???


    • #3
      We own 3 late model cars, all over 100000 miles on them. We owe no one anything on them. We have slightly over $8000k in equity in all 3. I love no car payment. The insurance is cheaper. $168 every 3 months, basic coverage, no collision, but with the miles on them, why pay that extra cost? We have always drove late model cars and so far so good. We may or we may not finance a car down the road, but if we do, it will be on another later model car. No new cars for us. Our biggest concern will be gas mileage on our next car. If we could ever afford it, we go hybrid.

      Enjoyed the article. Very interesting!
      Filed Chapter 7 June 4 ~ 341 July 20 ~Last day of objections Sept 18~Discharged/Closed Sept 21


      • #4
        Car Buying Advice I. Objective evalutation of car deals

        No car buy is any good if you can't afford it
        And this thread has helpful analysis and comment re perspective on new and used car buying. Getting educated on MSRP/Invoice/Market Value, Operating Cost, etc. can be done a multiple websites. I used these and my friend showed me some new car buying videos on and I was really prepared for the battle and feel I got the best-ever deal from the eventual new car dealer


        • #5
          Backwards Rationalization

          I like all of the analysis and suggestions, but they'll mostly fail unless you understand Backwards Rationalization.

          Backwards Rationalization is not your friend. Learn how to recongize the symptoms and avoid it and you'll be much better off when you buy a car. (...and many other things too.)
          Discharged November 2008 100 days after filing no-asset Chapter 7. We intended to let a two-year-old vehicle go back to the bank and reaffirm an inexpensive ten-year-old SUV and our home mortgage. In the end we surrendered ALL of our vehicles and reaffirmed NOTHING. We'll "ride through" our mortgage after the court ruled it an undue hardship.


          • #6
            Are there any tips on Buying a Used Car?

            What are some recommendations of things that I should look out for when buying a used car? I plan on buying a 2000 or less car hoping for a BMW or Toyota. Is Ebay a good place to buy cars from?


            • #7
              This is just my advice, and I do not work in the auto industry. I am a car nut. My financial issues had nothing to do with car loans. It was all about the crappy real estate market. Not an investor, but when the crap hit the fan in 2007, I ended up stuck with 2 residences because the buyer of my previous home didn't show up for the closing.
              Anyway, tearfully, I had to let my new mini ute (2005 RAV4) go. I sold it in mid 2007, and because I had put 20% down on it and it was desireable, I got enough money to pay off the loan and pay my BK attorney.
              I also had 2 other cars. Which had been my pampered toys. The more practical of the 2, I had to start driving all the time. How did I keep them through BK, book value on old cars (KBB and NADA) said they weren't worth much. Both Toyotas.
              1st time in over 20 years I didn't have a car payment. I am very picky about how my cars look and run, and my service has been at dealership rates. In the end worth it. I have spent thousands in maintenance over the last 2 years, but it was worth it.
              My advice, stick with Toyota, Honda, or a Buick. Most reliable engines and transmissions that are made. Ford has always been forgiving on loans for a new car, and the Focus, if the size fits you and your family might be a good choice.
              I think buying a used car is problematic because in the lower price ranges, for a modern car which is not home mechanic friendly, can have issues that won't show up in a test drive.
              Last year Consumer Reports had an issue about people who had 200000 on their cars. Everything from a basic Ford pickup to a Lexus. A used car loan, even for someone with medium range credit, will be 3-4 interest points higher than a new car loan.
              BMW, Mercedes, Audi, while excellent cars, have extremely high maintenance costs.
              What someone else wrote before, that Toyota won't consider you if you have a BK is true in a way. Honda is worse. They won't be the 1st to loan you money for a car after a BK no matter how much you put down.
              So if you want new, shop Ford. GMAC used to be BK friendly, but after dabbling in the now trashed mortgage market, they are more scared than Honda and Toyota.
              My advice, if you have a useable car, find a decent mechanic, independent or factory, and have it fixed. With the way this economy is going, if you (or me) make no major mistakes financially in the next year or 2, within reason, you can probably get a loan for a new or almost new car at one of the remaining dealers, which will probably be one of the Asian or European makes, or what is left of GM or Ford.


              • #8
                I'm lucky, I guess, that I've never viewed a car as an extension of my identity or persona -- in other words, not a status symbol. To me, my car just has to get me from here to there.
                I never purchased a new car until I was nearly 50 years old -- when I found what I needed at a good price -- and it was a fortuitous buy, as it became part of my Chapter 13 case (in which it was fully paid off) barely a year later. I only traded it six weeks ago, seven months post-discharge, when its anticipated costs for maintenance and repair -- because of higher mileage -- began to equal several car payments a year anyway. Plus, I got a below-value deal on the car I purchased, which was the same (but 4 years newer) model I traded.
                I usually end up with a year or so between the end of payments on my current vehicle and my purchase of another. I don't even look to buy until reliability of my current vehicle becomes a potential issue. I don't expect a vehicle to last forever but, with proper maintenance, I DO expect one to outlast its payments.
                Frankly, what prompted my recent trade was the availability of a low-mileage car at a good price when I expect the new, federal CAFE standards to drive up the price of new vehicles $1,500 and more within two model years. I had an older car which wasn't going to last many more years. Better to trade for a good deal now than not be able to find a good deal (by today's standards) in a couple of years.
                So, were I to condense all this into some sort of rules, they'd be:
                • Don't buy until your current vehicle is costing you significant money for repair and/or maintenance;
                • Buy late-model used cars whenever possible, because the decrease in value for new cars as soon as they're put into service is precipitous, making positive equity difficult;
                • Break the habit of 'always' having a car payment. Cars generally outlast their payments, but owners don't;
                • Don't pay retail! As with anything else, there ARE good deals out there, if you don't set your heart on a particular model before you shop.


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