As a depreciating asset, a car is an investment that is guaranteed to decline in value. How you buy and finance a car can make a huge difference in your financial health.
After our homes, cars are the costliest items that most people buy. In the course of our lives, we will buy as many as 10 to 15 cars. So how we buy and finance our cars can make a huge difference in our financial health.
Years ago, most families had one car, which they kept until it died of old age. Today, families tend to have more than one and will buy a new one every 4 or 5 years.
Cars are de-investments, which is my term for assets that are guaranteed to decline in value. When you invest, you hope that the value of your investment will increase, but when you buy a car, you know that its value will steadily drop. Since the main purpose of a car is to provide transportation, to get you from point A to point B, it may be time to rethink how you purchase one.
Cars are depreciating assets. Let's say that you just bought a car for $22,000. The salesman congratulated you for making such a great deal and as you drive home, you feel like a million bucks. Actually you should be crying because you lost $4,400 the moment you left the lot.
New cars lose about 20% of their value as soon as you take ownership. Then, they depreciate anywhere from 6% to 13%, annually. So in the first year you could lose $5,720 to $7,260. Ouch! The money you lost could have been saved or invested in assets that usually appreciate over time.
If you buy 10 cars during your life at an average cost of $25,000 each, you will lose $65,000 to $82,000 in first year depreciation alone. Although the car manufacturers won’t like me, I’m going to make a bold, but true, statement: Unless you’re wealthy, never buy a new car. It will damage your financial health.
A new auto is more expensive than a used car as are the monthly payments, costs of insurance and registration. New cars immediately depreciate at an accelerated rate so if you have to sell soon after you bought it, then you’re going to take a bath.
Buying a used vehicle costs far less and makes much more financial sense.
Being financially healthy means accumulating wealth, and we accumulate wealth by saving and investing. So let’s take a look at how much we really lose over a lifetime of buying new cars.
Let's assume that we buy 10 new cars during our lifetime — one every 5 years between ages 20 and 70. Let’s also say that the first-year depreciation is $6,500 on each car. Had we invested that $6,500 and received an annual 5% return, at age 75 we would have accumulated $437,535, which isn’t chump change — if fact, it could be a nice retirement fund.
Instead of purchasing a new car, buy a 2- or 3-year-old vehicle that has just come off a lease. Over the years, the quality and reliability of cars have improved dramatically. Today’s cars are built well and can be expected to run for at least 150,000 to 200,000 miles when they’re properly maintained.
Many used cars, especially those less than 4 years old, have low mileage and look new. If you have them checked out mechanically, then you won’t have to worry about buying someone else’s problem and you can expect years of safe, dependable service.
When you buy a used car, the original owner has absorbed the early depreciation. Instead of paying $25,000, you may pay $17,000, which is 32% less than the original owner paid. You also have to finance much less so your monthly payments, insurance, and fees will be lower. If you decide to sell the car, you’ll get more of your money back because your car will have held more of its value.
Over the course of your car-buying life, buying late-model used cars can save you lots of money.
The right way to buy a car
When cars are returned to banks or finance companies at the end of leases, the lenders don't want the cars. They want to sell them as quickly as possible to get their money back. So they work with dealers that specialize in selling off-lease vehicles for lenders.
These dealers are called liquidation dealers or liquidators. Every month, liquidators receive a large number of recently returned cars. The liquidator that I buy cars from gets 1,500 cars a month. It takes the best 250, puts them in their showrooms and sells them to walk-ins. They wholesale the rest at auto auctions. Since lenders are eager to sell, their liquidators frequently sell returned cars below book value. Since the price is already so low, there is no haggling!
My liquidator dealer's showroom is filled with cars of all makes and models so you always have a good selection from which to choose. They look new, have low mileage (most between 10,000 and 30,000 miles), have been cleaned up and are certified as mechanically sound by the liquidator.
I've purchased 7 new-looking, dependable cars from my local liquidator dealer. I bought each below book value and have always been pleased. Check the internet or local phone book to find a liquidator near you.
However, before you buy a car from a liquidator, get the Vehicle Identification Number, or the VIN, and check its history. A number of online services provide reports on cars’ histories, but the most popular is CarFax.
When you buy from a liquidator, the portion remaining on the vehicle’s new car warranty comes with your purchase. For example, if you buy a car that has a 50,000 mile or 5-year warranty that has been driven only 29,500 miles in 2 years, the new-car warranty will protect you for 20,500 miles or 3 years, whichever comes first. And if you wish, you can purchase an extended warranty from the liquidator.
Traditional used car dealers may be the worst places to buy late-model used cars. Used car dealers derive all their income from selling used cars, they charge the highest prices and the condition of their cars may not be reliable. Many used car dealers run small operations and are legendary for their questionable sales practices. At any time, they could close shop and leave you with little recourse if the car turns out to be a lemon.
So make your next car a leased liquidation and let someone else pay all that depreciation.