Avoid leasing and long loans
Orman says:
“Leasing might sound attractive with low monthly payments, but you’re essentially throwing money into a temporary solution without building any equity. Likewise, Orman advises keeping car loans short (no more than 36 months) since longer terms mean more interest paid over time, draining your wallet.”
Generally speaking, it’s better to buy a car and hold onto it for a while than it is to lease, because you never retain ownership of that vehicle. However, there are times when the lease is the smarter move. In the case of many electric vehicles, the rebates and discounts are far greater on the lease, making payments far cheaper than even less expensive gas-powered cars. Leases also hedge against depreciation losses, which are accelerated in the electric market.
Get a car that meets you where you are
Also, sometimes a “temporary solution” is what someone needs to get into a reliable vehicle at a more manageable payment. I call this the “hold me over car,” where you can lease a brand new car with a full warranty for a lower payment compared to a used car that may be riskier.
Speaking of loans, shorter terms mean a lower chance of being underwater and owning the car outright faster. But short loan terms often don’t align with the budget reality of the average consumer. Let’s say someone can afford $500 per month for a car payment. On a 36-month term assuming an interest rate of six percent, that results in an all-in budget of about $16,400. While it’s certainly possible to get a decent car for sixteen grand, a buyer would be looking at something typically seven or eight years old with well over 50,000 miles and therefore no warranty balance. Whereas if that person were to take a 60-month loan with a six percent interest rate, that allows them to buy a car with an all-in price of closer to $26,000. This puts the consumer in new, or almost new, car territory, dramatically reducing their risk of out of pocket repairs.
Go used not new
Orman Says
“New cars lose value right after you leave the dealership. Orman recommends opting for a nearly new car, around three years old, for substantial savings without compromising reliability. This lets you skip the sharpest depreciation while still getting a solid vehicle.”
Here we go again, the same folks who want consumers to focus on basic, high-quality, reliable vehicles also believe that the used versions of these cars offer substantial savings compared to buying them brand new. I think it’s safe to say that the Toyota Corolla would be the quintessential recommendation from these finance experts as a car that is practical, safe, and reliable. A market scan of the mid-Atlantic region for 2022 Corollas with under 45,000 reveals cars upwards of $24,000. That same scan of brand new Corollas currently has cars with advertised prices under $23,000
Even if someone could find a used car for $5,000 cheaper than a new one, the differential in interest rates between used and new models often will negate that depreciation savings. Let’s look at a Hyundai Elantra, which would be another practical purchase but often will find better deals in the pre-owned market due Hyundai’s steeper depreciation. A three-year-old Elantra with around 36,000 miles would retail for about $18,500, that’s a bit cheaper than the new MSRP of $23,320.
Vehicles are not investments
Hyundai is currently offering 2.99 APR for up to 72 months on new Elantras. That’s a monthly payment of $354 per month. On the other hand, if this same buyer held to Orman’s advice of buying a used car for $18,500 with a 36-month loan at 7 percent interest, they would pay $571 per month. I understand that is a bit of an unfair comparison due to the length of the loan term, but supposing they bought that used car and did the same 72-month term, their payments would be $315 per month. That’s only a $39 savings per month between a brand new car, and a used one.
Vehicles are not an “investment”; they are an expense, and while consumers should absolutely run the math to understand what they can really afford and not overspend, relying on outdated guidelines can end up costing more in the long run.
Tom McParland is a contributing writer for Jalopnik and runs AutomatchConsulting.com. He takes the hassle out of buying or leasing a car. Got a car buying question? Send it to [email protected]
