Thursday, June 14, 2007

Should I buy or finance a car?

I am already biased; I do not believe in financing vehicles. I decided to sit down and do some math, because while my personal opinion may be enough for me, I need some hard numbers to convince someone else - like my wife - to get on board. Since I do just about all of the maintenance on our vehicles, we can keep them running for relatively little money over their lifetime. Yes, big repair costs do come up, but with a little planning and setting aside savings just for that purpose those big repairs don't seem so disastrous anymore. Plus, until I do need that repair money, I'm earning interest on the balance. Much better than scrambling to find cash to pay it or putting it on a dreaded credit card and carry over the balance.

Here is my 10 year plan for purchasing automobiles. In this example I leave out potential repairs and maintenance, which you would need whether you finance it or not.

Option 1: Financing a car. I want to buy 2 cars over the next 10 years. Not a bad deal. Based on my income, I decide that I only want to spend $15,000 on each car (including tax, license, etc). I finance it and get a great rate, 3% and payments of $269 a month. Over the 5 years I end up paying $1,171.82 and $16,171.82 total. We will ignore the value of the trade, since whether or not I finance the trade in value would be the same. Let's just say I finance another $15,000. I pay another $16,171.82 total. It is now 10 years and I have financed and paid off 2 vehicles.

Option 2: Buying a car. I want to buy 2 cars over the next 10 years. Instead of financing it, I keep what I have (or carpool, ride public, etc) and pay myself $269 for 5 years in an online savings account with 5.5% interest. I now have $18,613.87, and I buy a new car for $15,000. That leaves $3,613.87 and I continue paying myself $269. It is now 10 years so I buy another car with the $23,368.65 in the bank and have $8386.65 left over.

With either option I end up purchasing 2 new cars over a 10 year period. In both cases I am putting in around $32,000 of my earned cash. The difference is that at the end of the 10 years and car purchases, by financing I will have paid more for each car and have nothing left over. If I save up the money myself, I end up paying only the sale price for each car and I have $8,368 in the bank!

What is the kink in this plan? Well, the major one is that in order for option 2 to work, I need to be able to hold on to my existing car for another 5 years, or save up for a year and purchase a small older vehicle. On top of that, I will have higher repair costs due to the age of the existing vehicle.

Okay, but this problem is because I've stuck myself in a financial hole with the car loans. It will be a struggle to get out of the hole, but the rewards for doing so are pretty clear. Even if during the first 5 years I spend more in repairs than I would on a new car, I am still setting myself up for a 10 year plan later on. I plan to be driving at least until I am 70-80 (lets hope), so we are looking at a good 40-50 years of car buying ahead of me. I'd rather struggle a little to get myself out of the rut than be perpetually stuck in it.

Financing cars is a hole. Saving for a car is freedom.

No comments: