Personal Finance Resources

Whether you want to face it or not, when you buy a car, count on car depreciation, or a continual loss in value over the life of the car. With older used cars, the rate of depreciation is a lot less to you, because they have already lost most of their value. But with new cars, the sting is extremely heavy, in fact, when you first purchase a new car, you could stand to lose upwards of 20-25% just driving it off the lot. Why? Marketability.

Consider this - if you decided to sell the car immediately after you bought it, what kind of a price do you think you will get? Probably much lower than the dealer sold it to you. Ask yourself if you would pay retail for a car that was just recently bought by someone else, instead of going to the dealer directly. And if you wanted to sell it back to the dealer, well…they aren’t going to give you a price anywhere near what you paid for it. They want to make sure they make their money.

A good rule of thumb on car depreciation is to figure anywhere from 10-20% loss each year on the vehicle. Now, if you buy a car that is ten years old, most of the value has already depreciated, and it is nothing to worry about. If you spend $2,500 for a car, who cares if it is only worth $1,500 in the next 2-3 years. When I write posts like Should I Buy a New Car or a Used Car?, and the Ramifications of Making Payments on a Car, this is what I am referring to.

So here is the bottom line from my opinion. If you are considering buying a new car (many people do to get something that will have low maintenance costs for the first few years and be very reliable), plan on driving it for years. I’m talking 10 years or longer. The absolute worst thing you can do is to buy a new car, and sell it or trade it in during the first 2-3 years. You will almost definitely find yourself “upside down”, or in financial terms, with negative equity in the vehicle. My suggestion is to buy a used car that is 5-10 years old, and driving it into the ground. My last vehicle I purchased was a 1993 Acura Integra; it currently has around 160,000 miles and it still drives good. I plan to have it for another 5 years or more, hopefully. When buying an old car, just make sure you have your mechanic look it over thoroughly, because chances are high that it will need significant repairs when you buy it, and as long as you are prepared for the repairs, you can use the information to negotiate down the price of the vehicle. Two quick pieces of advice, don’t be afraid of repairs and make sure to buy foreign cars like Hondas and Toyotas. They just last a lot longer and have fewer maintenance problems.

One last thing, I found a car depreciation calculator if you are interested in seeing an estimation of what your car might be worth in the future. It isn’t as good as waiting until the time you are ready to sell and checking the blue book value, but it might be useful when you are considering purchasing that next car. Here’s the link:

http://www.money-zine.com/Calculators/Auto-Loan-Calculators/Car-Depreciation-Calculator/

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Want to get taken to cleaners? Then consider buying a used car from a dealer. Even certified dealers will swipe the last dime from your pocket book. I am not trying to be hateful here, but I have a friend that was a car salesman for a year or two, and he told that they go for every last dime they can. They try to sell you on “Intergalactic Personal Car Protection” and a whole mess of other baloney add-ons that just boost their profits, not adding any real value. They will also go for the highest interest rate possible when providing financing for you. I am going to give you a few tips when looking to buy a used car:

1. If at all possible, use cash.
   This is the most beneficial tip I can provide. If you use cash, you will be able to get the best bottom line price, and can more easily turn down all the baloney add-ons. Be sure to get the title in hand when paying cash.
2. If you are going to finance a car, don’t use the dealer’s financing options.
   Again, the dealer is not your friend, they are trying to milk you for the most money possible. Look at the rate and terms they provide, and compare them to quotations you have already obtained from your bank or other lender. Use the power of “NO” when dealing with a salesman. If they tell you they can’t give you the price you want on the car unless you finance with them, just say no. You will almost always be able to work a better financing deal if you go through your own channels outside of the dealer.
3. Get some kind of guarantee or warranty.
   Get the longest, highest grade warranty possible. Cars break down, especially used cars, and even more so used cars that are sold from a dealer or third party. Getting the longest warranty possible will guard you against major repairs that will eat your budget’s lunch.
4. Have a mechanic friend checkout the vehicle before purchase.
   This is immensely important when buying from an individual seller. This kind of person usually has a reason for selling the car, and that reason is almost always because it breaks down a lot, and they want to dump it, and get a better car that won’t have so many problems. This means many times you will be getting a lemon. Almost every time that I have bought a used car from an individual seller, I have been forced to make substantial repairs, almost immediately after buying. Get the advice from someone who knows about cars, I can’t stress that enough.

Bottom line, use common sense. Get estimates on interest rates, maturities and other terms from several different lenders before making your choice. Avoid dealer financing if possible. If it were me and I had to finance a car, I would not finance it for more than 5 years (60 months). The depreciation on the vehicle will outdo the loan before you are finished paying on maturities that are longer than 5 years. And if you ever needed to sell the car, you definitely don’t want to be in a negative equity position.

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If you want to estimate car payments before you buy a new or used car, you’ve found the right page. I have compiled a spreadsheet that you can download and put in the specifics of your situation and calculate a payment that will be very close to what your actual payment might look like. This is a simple spreadsheet that will calculate your payment only. After your payment is calculated, you will then have to add any additional monthly payments for insurance or other protection you may need.

Using the Estimate Car Payments Spreadsheet

This xls file is pretty easy to use. Here are the quick instructions:

• Input the loan amount that you will be taking out for the car in the Principle Loan Amount cell.
• Put in your interest rate.
• Last, input your number of years to repay the loan in the Loan Term in Years cell.

After you have inputted the information, the Monthly Payment will be calculated automatically for you. In the example, there is a $19,000 loan taken out over a 5 year period with 12% of interest. The monthly payment comes out to $422.64. Sounds pretty high, doesn’t it? Well what the advertisements on TV don’t tell you about the $99 down, $99 per month is that they are probably doing a 7 year note or even longer. So it makes sense to do your own estimation; chances are it will work out a lot closer to the actual number you will be paying than what the commercials will lead you to believe.

Here’s the xls spreadsheet for download: Estimate Car Payments .xls

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I have a friend, who recently traded in a used car that he owed less than $2,000 on for a newer used car that he is now making payments of $400 per month. The reason behind the decision, as he told me, was that he was in financial trouble, and the car he had needed new tires. Anything sound wrong with this picture?

Working through the numbers, he was going to end up paying the financing company a grand total of around $24,000 at the end of the 5 (yes I said five) year note he took out. This is a mistake, a big mistake. He was looking at about $400 for some nice tires for his other car, and instead of paying for the new tires, he buys another car. Now he is stuck trying to find an extra $400 per month to pay for this new car when he didn’t have the $400 before to pay for the new tires.

Bottom line is, don’t get caught turning a bad situation into a disaster. Stick with low, low cost vehicles that are foreign (I personally like Honda’s the best, but Toyota’s are good too) and that are mechanically sound. You will probably have to buy models that around 10 years old to get a low price, but I promise you, they are worth it. Right now I am driving a 1993 Acura Integra, it gets about 26-30 mpg, I paid $2,500 cash for it, no car payment, low insurance cost (liability only), and the car runs great. Are you going to have more maintenance problems with an older car? Most likely yes, but the maintenance costs, especially on these foreign cars, should be far less than payments would be on a new car.

So don’t act on emotion, take time to think it through. Ask yourself questions like, how much would it take to repair my car, and how much is my car worth? Can I sell the car I have and have enough money to buy another one for cash? And the most important question, Do I really need another vehicle? I mean think hard about it, do you really, really need that new car? Most likely you don’t, so look at it logically, not for the shiny pizzazz of a new car.

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Teenagers are great, all they think about (especially if they are boys) is 4 spinning wheels. They all have high aspirations for the expensive car, with the souped up engine, NOS (nitrous oxide) booster, and titanium alloy rims. They want it to go 100+ mph and have a hot, shiny finish. But they are ignorant, and do not count the cost of a vehicle. Many teens today have parents that will buy them most any car they want, along with keeping the gas tank full and paying for insurance. This is one of the worst things you can do to your child. They need to learn responsibility, and respect for the things that they own.

I am reminded of one of the teens that is a member of our Church. He was looking at an F-150 full size truck. The price wasn’t too bad, about $2,000, but it was full size truck, eg a gas guzzler. He decided to put a couple hundred bucks down on it and to finance the rest with the bank. Not a bad idea for one his age, use the loan on the vehicle to build a little credit before going on to college.

The Good

As eluded to previously, the positives related to this purchase are as follows:

1. Low price. It was a used vehicle, and long term, the better way to go. See Should I Buy a New Car or a Used Car? for more details.
2. Credit Building. Taking out a short term loan (1-3 years) on a used car at this price is an excellent way for first time borrowers to build credit without getting in too deep. Credit will be invaluable to him later.
3. Utility. As we all know, having a truck will allow you to do all kinds of work and moving, that a car will not allow. This will come in handy as he moves out of state to go to college.

The Bad

Now let’s look at some reasons why this is not a good purchase:

1. Gas Mileage. After the issue of price has been settled, gas mileage is the most important factor for teen. They have no money and therefore have to take steps to keeping the gas budget down, especially with the price of gasoline here in Texas approaching $3/gallon. With the F150 getting less than 20 mpg even on the highway, this teenager is facing an enormous cost of gas per month.
2. Standard Maintenance. Oil changes and air filters won’t be much different for this teen, but when he needs to replace the tires, he is in for a rude awakening. 13 inch radial tires for a small car may cost as little as $30-40 a piece, but he will be lucky to get decent tires for his truck for less than $100 a piece.
3. Insurance. This is the real downside to financing a car for college, or for any other reason. Banks will not lend money on a vehicle without full coverage, and the cost of full coverage vs liability only coverage is staggering.

The Ugly

F-O-R-D (Found On Road Dead). Ford’s are terrible vehicles, especially the F150, their most notorious flop. Do not, I repeat, do not buy a Ford F-150. They are among the worst vehicles on the road. If you do, expect high, high maintenance costs, as they love to break down. Also, and I’ll throw this in for free, Ford is one of the largest financial supporters of the homosexual cause. The company is tearing at the heart of Christianity, and I have added my name to AFA’s boycotter list.

To close, I recommended to the youngster that he not buy the truck. However, against my counsel, he bought the truck anyway. I have talked to these teen boys for a long time about buying a small car that is cheap and gets excellent gas mileage, but they just will not listen. I guess they want to make their own mistakes. Only time will tell…

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A home based business is often not enough to get a car auto insurance. Ideally, one should get free insurance quotes prior to committing to anyone. With luck, one can get instant loans as well. People having health insurance jobs usually of sort such deals instead.

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Guaranteed car finance companies have helped thousands of customers who have different past credit problems to finance the purchase of a new or used car. Some people need guaranteed car finance simply because they have no credit history. So, thank goodness for guaranteed car finance arrangements whereby you can find a car you like and drive it out of the showroom within minutes, right? Maybe not. You might want to look a little closer before signing those papers…

Rates

As usual, the rate you are offered will depend upon your credit history. If your credit history is bleak at best, then you can bet your quote will include an interest rate that is sky high upon “approval”, and be careful with that as well, because the rate advertised is not always the rate you will get. I’ve heard of some guaranteed car finance companies coming back with an interest rate as high as 15% and higher! That’s like credit card interest on a larger principal amount. Car finance rates are determined by the percentage or cost added onto the loan by the lender and the dealers get paid a commission on higher purchase deals and will try to charge a rate that is more beneficial to them, and not you.

Payments

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