May I Please Finance My Car? – Friday Q&A

[Editor's Note: Our question/guest post this week comes from Jonathan Clarke, MD, an emergency physician practicing in Texas.  Jonathan is one of my former residents, who is not only nearly as cheap as me, but twice as good at practicing emergency medicine.  We have no financial relationship. ]

Q.

I currently have a financial dilemma that I’d like to share with you and perhaps your readers.  The topic has been covered before, but my ultimate decision may fly in the face of conservative financial wisdom and advice.  The decision is whether to buy a new or used car and whether to pay cash or finance.  I know what you think (used, cash) and I would typically agree, but some other factors may skew my decision.

Background

 

2013 Subaru Outback

2013 Subaru Outback

1. I’m 37 years old and I’ve never bought a car.  My current daily driver is a 1998 Jeep Cherokee Sport (not the Grand Cherokee) that my parents bought for me in college.  It’s been my daily driver now for 15 years and has racked up over 206,000 miles.  It’s mean and green and it just keeps running.  The only reason I would even consider getting a newer car is that the Jeep has become rather unsafe/unreliable as my primary commuter, where I’m currently driving 40-80 miles per workday in Dallas, Texas.  If you’ve never driven in Dallas, it’s NUTS!  So, I’m in the market for a newer car which is very safe, reliable for years to come, relatively inexpensive and also fits my off-duty lifestyle, which includes cycling, camping, sailing, kayaking, etc.  In other words, a Subaru Outback.

 

2. Our family lives well below our means.  We give 10%, save almost 25%, have a very low housing to income ratio and live quite comfortably on the remainder with plenty to spare.  Oh, and I just made partner a year early.  Our other car (which my wife brought to our marriage) is a 2006 Subaru Outback which she bought used in 2009, and now has 100,000 miles on it.  In a city full of ridiculous bling, some would say we border on being hippies.  Don’t even ask about the chickens, bees and organic garden!

 

Dilemma

 

The quandary is really whether to pay cash for a 2-3 year old Outback (conventional financial wisdom) or finance a new one (I know, I can hear the shrieks of dismay!).   I completely understand and whole-heartedly subscribe to to the conservative wisdom that one should pay cash for a good used car.  “Financing a new car is the worst investment one can make.”  Yes, but is it always?  With the background I’ve laid out above, here are a few of my arguments (rationalizations?) in favor of financing a new car.

 

Justifications

 

The Old Car

The Old Car

First of all, the car in question is NOT a luxury vehicle or a status symbol.  It’s an average-for-our-day-priced (about $30k) wagon and the difference between new and 3 years old is about $5k (Subarus hold value well).  First I’ll tackle the finances… DEPRECIATION.  Yes, I understand that the new car will statistically lose 15-20% of it’s value in the first year.  But, I statistically drive my cars for a decade into the flat part of the depreciation curve!  And I’m not planning to sell the car – I’m planning to drive it into the dirt. So depreciation isn’t really a factor that’s relevant to me and I’m willing to pay an extra $5k to get the car I really want.

 


Secondly, does anyone (besides a car dealer) REALLY believe that a car is an investment?  Of course it’s not.  It’s a consumable item, part necessity and part luxury.  If we can agree that it’s not an investment, then why should we compare it to our investments?  I expect my investments to serve me by growing in value to support my future.  I expect my car to serve me in my transportation and recreational pursuits and provide a high degree of safety so that I can enjoy that future.  I have no notion that a car is intended to serve my financial interests.  Now I understand that less financially fortunate souls often reach too high to finance a status-symbol car and so strain their finances, but this purchase would have (almost) no impact on our monthly budget.  What WOULD impact our budget is if I were to nearly wipe out our emergency savings by plopping down $20-25k for a used model.  We’ve just bought a home, so extra cash is a bit tight for now.

 

Additionally, my savings account at Ally is earning 0.95% interest and I can get 0.89% for 3 yrs financing a new car from USAA.  If I pay the car off in 1-2 years, I lose just a couple hundred bucks in interest charges, while the interest I’m earning on my emergency savings account out-paces what I’ve lost on the car finance.  So I’d actually come out slightly ahead by financing and keeping my cash in savings… before taxes on either, of course

 

As an option (and you’ve suggested this), I could save for a year to pay cash for a slightly used car without breaking the bank now (I just used a big chunk to buy the house).  Yes, but then I have to drive my unsafe beater for another year and hopefully avoid a serious wreck in the meantime.  Hopefully.  Well, living on disability or cashing in my life insurance policy are both unpalatable, so I’d rather have something safer now.  I will certainly begin saving to replace my wife’s car now, but I’ve hopefully got another 150k miles before that eventuality.

 

What about financing a used car (keep my emergency savings), save $5k and avoid depreciation?  Could do.  But, several safety updates have been made since 2012.  Most significantly, I’d like to get the Eyesight collision-avoidance package (no used cars out there with them yet), since I’m frequently driving 40 miles in traffic after being up all night.  So I’m willing to pay a premium to get that feature.  And this car will likely go with my daughter to college in 6 years, so I want to get the safest car I can now.

 

Getting a job closer to home or vice versa is another reasonable option and would allow me to keep driving the Jeep, but the current arrangement is too lucrative to make a switch at this point.

 

So, within the current decision-matrix of long/dangerous commutes with an old Jeep, new car safety features, minimal difference in new vs used prices, good disposable income, and great interest rates… I’m leaning towards financing a new car.  I really hate to hear myself say that and it totally goes against the grain of who I am and what I believe, but there you have it.

 

What do you and/or your readers think?

A.

First of all, I’d like to correct a few of your misstatements.  I have no problem whatsoever with someone buying a new car.  You can’t take your money with you when you go.  So long as you’re putting enough away for retirement (and you are), you get to spend (or give away) the rest however you like.  I don’t care if you use it as firewood to impress your friends.

Second, it appears you’re not looking for just basic “Subaru Outback” transportation.  You’re looking at a top of the line tricked out Outback.  The basic one goes for $22,600 new and about $16,000 when 3 years old.  The top of the line version goes for $30,300 new and $25,200 when 3 years old according to Kelley Blue Book.  An outback might not be a luxury item, but those seat warmers and the sun roof probably qualify.

Third, Ally’s savings account is only paying 0.84%.  That’s less than the price of your financing, and after taxes, quite a bit less.  Now while it’s probably true that if you invest the money in riskier assets you’re likely to come out ahead, you won’t do so using that fully-taxable Ally savings account.

Living Beyond Your Means

The problem I have with people financing depreciating assets like cars isn’t so much a math issue as a behavior issue.  As you mention, financing $10K at 1% for a year is only going to cost you $100 in interest plus a few hundred dollars in fees (and perhaps a few hundred dollars that you could have knocked off the price by paying cash.)  Given your salary, it’s peanuts.  Even Suze Orman would agree you can afford to finance this.

The issue I have with it is the habit.  First it’s the car, then the house, then some nice vacations, then private college for the kids and before you know it you’re that 65 year old doc still working 15 shifts a month because he has to who seems to detest his patients, has no tolerance for new nurses and overall seems to hate his life.  Financing a depreciating asset is by definition living beyond your means.  It’s a slippery slope.  Knowing you, I doubt you’ll go far enough down that slope to matter, but it’s worth at least recognizing what you’re doing.

Justifications Are Just That

Now, just for fun, a few words about your justifications.  You say you “drive your cars into the ground.”  No you don’t.  You sell them in order to get a safer car when you hit 206K miles.  For most modern cars, 206K miles is a long way from the ground.  As a general rule, the longer you drive a car, the better deal it is financially.  It’s okay not to get a good deal on a car, as long as you can afford it.  But driving it for 10 years or for 200K miles isn’t the same as driving it into the ground.  Driving it into the ground is driving it until it doesn’t run and the repair to make it run costs more than the car is worth, and sometimes even further if it’s close.

A common justification for upgrading is to get a safer car.  The likelihood of you being in a crash or near-crash where a new safety features actually makes a difference in your health is statistically very low.  If you were really concerned about your safety you’d hire a driver, sleep over at the hospital after a night shift, or move closer to the hospital, not just upgrade your car so you get an extra airbag or better anti-lock brakes.

My favorite of your justifications is “I’m 37 and have never bought a car” because that type of thinking is so common among doctors. “I’ve been in school and training for 15 years and all my college roommates have great houses, drive fancy cars, are about ready to retire, and go to Fiji every year and I deserve to have the same things even if I have a negative net worth!”  All I have to say is “patience, young Paduan.”  I was commenting to my wife last night about what an awesome life we have.  We’ve got a three car garage with two SUVs and a boat in it attached to a huge house with a 100 mile view in an outdoor recreational paradise, our kids go to one of the best public schools in town, we have a rapidly growing nest egg, and there is pretty much no single consumer purchase my wife could bring home that I couldn’t pay for with cash by the time the credit card bill comes due.  How long did it take to get into this enviable position?  7 years out of residency.  Given your habits, you’re not far away.  But the world doesn’t owe you the good life just because you went to med school.  You still have to earn it with hard work, good financial decision-making, and just a little more delayed gratification.

A Couple Of Other Options


You presumably make something in the neighborhood of $30K a month.  You save 25%+ of your income.  That’s $7500 a month.  Even if you don’t want to touch your emergency savings at all for this, you’re only looking at saving for four months in order to get your desired vehicle.  Less if you can get a few thousand for your beater.  You can probably still get your 401K maxed by the end of the year so there’s no opportunity cost.  If you were really antsy to get a new car, you could sign up for a few extra shifts in the next 2 months.  If your group is like mine, as soon as the kids get out of school for the summer there are plenty of docs willing to give away a few shifts.

You could also use the emergency fund, and replenish it over the next 4 months in the same manner.  It isn’t like it’s paying you anything anyway.  Yes, I suppose you could get burned if you needed it in the next 4 months, but I suppose you could always sell the car in that situation and get most of its value back if it were that dire, or even raid retirement investments if needed.

At the end of the day, there are a lot stupider things to do than to finance a car at less than the rate of inflation, so if you can’t help yourself, go get your Outback and quit feeling so guilty about it.  But don’t make a habit of it.

[Update prior to publication:  In his next email Jonathan said his wife was mad at him for not getting the car yet.  At which point I told him happy spouse = happy house and happy wife = happy life and told him to go buy it.  He did and managed to get a very good price ($27K.)  I hope both kayaks fit on top of it.]

What say you readers?  Is it okay to buy cars on credit?  Do you pay cash or finance at a cheap rate?  Comment below!

 

 

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Comments

May I Please Finance My Car? – Friday Q&A — 42 Comments

  1. It’s tough for me to understand how someone who owns a boat can lecture on how many options you should add to a modest new car. Talk about superfluous. Unless you use it for your commute, the boat is quite simply a luxury item.

    I say buy the Outback. Dallas driving is rough.

    • My thoughts exactly. This post sounds like two competitive friends over-debating a topic. Jonathan, enjoy your new financed Subaru. Sounds like you’re grounded enough not to let this new purchase lead you astray from your financial goals.

  2. Being frugal doesn’t mean you can’t enjoy the perks of life. Maybe it’s a smalll row boat that he likes to take out on a local lake to take a a break from his busy life.

    As for Jonathan, I was in a similar boat. I had a 1998 Honda CRV with 210k miles and loved it. However, in the last 2 years, it was becoming less reliable with engine issues. With a new baby on the way, my wife finally wanted me to get a new, safer SUV. I really wanted to get a new CRV but my wife insisted on getting a bigger SUV since she didn’t think the CRV was big enough. I knew better than to argue with her. This was our first luxury purchase and we, like Jonathan, usually drive our cars into “ground = 200k miles”.

    With the interest rate at below 1%, we decided to finance the car with 33% down. I know it was a big purchase but we justified it by thinking it’s a long term purchase and for our baby. We are happy with our car and don’t feel guilty about it. At the end of the day, I believe you have to have a balance between being a penny pincher and enjoying the fruits of your labor

    • I apologize for being so frank but buying a larger SUV because an already enormous Honda CRV is not big enough for a baby is just stupid. I will never understand why everyone thinks they need a 9 passenger bus for a no greater than 10 pound child. Enormous vehicle, while I’m sure you can afford it, are the most inefficient thing ever invented. They are NOT safer than smaller cars, in fact, they are less maneuverable and thus more likely to be involved in collisions. Whenever I see backed up traffic and police lights (indicating a traffic accident) I tell my wife, I bet it is a big stupid SUV/truck and IT ALWAYS IS!!

      The other correlate to this is that it snows maybe 15 days a year in my city. I ride my bike every day I work and I mean every day: rain, shine, show, ice, whatever. I always chuckle to myself when I see large SUVs sliding around on the ice with their 4-wheel-drive, while I have no problem getting to work (28 miles round trip) with almost no difficulty on my one-wheel-drive bicycle.

      If the original poster moved closer to work (80 miles per day! Why?) and bicycles most days when practical. Keep your old Jeep for your very occasional out of town trips or for hauling large appliances.

        • Ha! I actually am an avid reader of Mr. Money Mustache but my bicycle commuting precedes MMM. His idea of a little shopping trip in the snow (that he considered pretty difficult and was bragging about in a post – that I can’t find right now – maybe he was embarrassed and took it down) can be a typical January Monday for me.

          I think that there are a few articles on the MMM that are pure gold that “rich” doctors may think don’t apply to them but really do. Fore example The True Cost of Cummuting – http://www.mrmoneymustache.com/2011/10/06/the-true-cost-of-commuting/ – really does point out how costly driving all over the place is and why it is so, so, so stupid to car/truck/SUV commute long distances from a financial perspective. The calculation that he makes about how much more a reasonable person would pay to live 1 mile close to work is actually significantly higher for us docs because we should value our time at at least $100 per hour and in some specialties significantly more.

          Also, some people may be turned off by this post, but I find it motivating for my every day bike ride – http://www.mrmoneymustache.com/2013/04/22/curing-your-clown-like-car-habit/

          I happen to be a reasonably frugal guy and I am actually working on starting my own blog about bicycle commuting. Perhaps I can write a guest post about frugality – your live like a mantra played out in real life by a real doctor. Of course my wife is not particularly frugal so I have to make some exceptions to what I would prefer but I have somewhat successfully implemented MMM’s Selling the Dream advice – http://www.mrmoneymustache.com/2012/03/22/selling-the-dream-how-to-make-your-spouse-love-frugality/ – which I think is great advice for doctors who have married spendy partners (or in my case I was also spendy) so convincing my wife to turn things around was a little more difficult! T

          • While I agree that reducing waste in life is a wonderful thing, and hate any commute, the frugality I preach is for the most part a “relative frugality.” Doctors don’t have to live on $25K a year to be financially successful. They can blow 6 figures a year for the rest of their life without any financial concerns if they just make sure they squirrel away 15-25% of their income and invest it in some reasonable way.

            I like riding my bike, but I don’t enjoy it as much at 5:30 am, 3 am, 10 pm and the other times my shifts begin and end. In fact, of all the “high-risk” activities I do, I’m convinced that cycling on the road is the most dangerous. It seems like every week or two around here some 35 year old father of two young children is getting run over, and that doesn’t even count my own wipe-outs! I figured if I’m going to take that much risk, I might as well do it while taking a ride I’m enjoying, rather than just trekking back and forth to work in the middle of the night.

            • I definitely appreciate the danger of bicycle commuting but I also know that are many things that one can do to minimize/eliminate the risk of fatality or at least get it far below the significant risk that others encounter while driving. This can mostly be done by using mostly or exclusively low traffic streets or bicycle trails.

              At >30,000 motor vehicle related fatalities every year since 1930, driving is not exactly the lowest risk activity either.

              I have many times done the 3am ride and aside from being the coldest part of the night during the coldest parts of the year it is a very peaceful time to be outside and you basically have the road to yourself.

              I also agree with the concept of “relative frugality” but instead of putting a sum such as $100k, I think it is more important to look at your spending and say am I buying the things/services that maximize happiness or am I being dumb and wasteful which prompted my comment on the CRV not being big enough for an infant: Dumb, Dumb, Dumb! If I can not buy a big stupid SUV which has no added value in my life and then take a trip to Tahiti with that money saved, I’ve increased my happiness A LOT!

              I think the blog could use some of that side of Mustachianism which I suspect from multiple things that you have said on this blog that you are well aware of these concepts.

              • Bicycle commuting is a decision that is made when you buy the house and choose the job. I did it as a resident and in the military. But now the most direct route to work (8 miles) is a 6 lane road. There is no time of day when it is peaceful!

                I agree that spending your money on what you value most is important. For me, not having to bicycle for a half hour at 3 am is well worth the money I spent on my $4000 commuter! :)

                • For me now, I would probably ride to work even if it were more expensive than driving. There is something about being outside in the elements, smelling the fresh cut grass that just generally make you a better feeling person. Also, once bicycle commuting has become your habit you basically have obligatory exercise. For me, I never have a week when I get less than 10 hours of high-quality aerobic exercise and when I recreationally ride or go to the gym I am just building on top of that.

                  Your 8 mile each way commute by freeway could probably be converted to a 10 mile by trail/low traffic streets. I actually preferentially go the 14 mile route over the most direct 12 mile route because it makes the ride about 40-50% trail. Every morning I see wildlife – deer, bunnies, occasional coyote – on the trail, and I live in a major metro area.

                  Bicycle commuting is not something to dismiss just because you perceive it would not work for you. I know you are in the majority opinion on this. However, I think most people think that bicycle commuting is much harder than it really is.

                  That will be the purpose of my blog: to attempt to make bicycle commuting mainstream. I plan to get my blog online in the next 5-6 months. I will send you a link once it is up and running.

                  • I’ve commuted on a bike before for 7 years of my life, not counting 3 years of college and 4 of med school. It’s not new to me. I suppose if I was willing to add mileage and time I could do a 14 mile route where 3 miles is off road, but at a certain point, I’ve got to get on a busy road without a shoulder and go under a freeway. Only so many places you can do that. I do not work any shift where I would not commute one way or the other in the dark. In the winter, I often leave for work in the sun and return in a blizzard. Now, maybe I’m just a wuss, but I’m not really into bicycling in a blizzard.

                    If I want to seriously bicycle commute again, I need a new house or a new job. :) I suspect that is the case for many. It would certainly help the air around here if it weren’t though.

  3. I bought a new truck last fall. I wanted a V8 SUV or pickup to meet the “needs” of my two big dogs, recreational activities, and towing my motorcycle and most of my life around every time the military moves me. Initially I was looking at used 4Runners, but ended up with a new Nissan Titan. Long story short the used V8 4Runners were half the cost of the Titan, but also had 80,000-100,000 miles. So for twice the price and almost twice the life I financed the Titan. At just over 1% interest I figured I wasn’t losing much to inflation. The price I paid for the truck was also below KBB trade in value. Best financial decision? Maybe not, but I still save over 30% of my income, didn’t wipe out my emergency fund, and really like the truck I bought.

  4. People like to say they purchase for safety but that’s an exaggeration.

    Still any of the type of cars mentioned so far aren’t a problem from a money wasting scenario (new or used)

  5. I’m the son of parents who are in their 70s and have never bought a new car. This mentality was preached to me growing up. After experiencing the headaches of aging used car repairs, I decided the dollar expense of buying a new car outweighed the time expense of repairs (even if only once or twice per year). Cost should not only be viewed in dollars and cents.
    I don’t need the “bling” of a new car, but my wife does like it. We typically buy a new car every 5-6 years. I take her used car for my use and she gets a new car. That allows us to keep each car for 10-12 years and then dump it (while it has some resale value) for another new car that has a full warranty.

    I would never use our emergency fund to buy anything that wasn’t an emergency. Financing at 1-2% and earning 4-5% on a conservative, hedged investment is easy math. That said, we paid off our last car in under a year since we hate debt of any kind. Our next car might be financed longer, but only if I think the market will earn relatively safe gains that outpace the car’s interest expenses.
    Heated seats are worth the extra cash every time you sit on them. Then again, I say that because we live beneath our means. If you aren’t saving, you deserve a cold bum.

  6. Financing always adds risk that you are not considering in your arithmetic. Be patient. Save up and pay cash for a new car. You will not regret staying off the slippery slope of rationalizing debt. By December this year’s model will likely be cheaper and if any are left over into 2014 even more so. You know the right decision for you, so why are you trying so hard to justify going against it?

  7. Enjoy your new car. I was in the same position 4 years out of residency. I financed at a low rate and paid off in a year. Aside from my dog, it was the best purchase I ever made.

  8. No problem getting a car that you both want and will serve a good purpose (maybe several)borrowing to get it now is OK as long as you don’t go overboard which seems unlikely.

  9. Just a couple points to add:

    – A new care comes with a warranty (peace of mind) albeit a short one usually. Most repairs aren’t expensive but some can be very expensive. Personally I like knowing the car wasn’t “ridden hard and put away wet”

    – Financing at low rates isn’t always a bad thing either. Studies show that people that pay off their vehicles quicker or early are more likely to purchase another vehicle sooner. The idea of having a vehicle paid off makes one more likely to shop for another apparently.

    – Finally, the regret factor. One thing I have learned with friends and myself is that when you purchase a vehicle that doesn’t have the features you really want you tend to regret it constantly. Your always left wanting. Its like not asking out that really cute brunette in high school because you though she was out of your league…

  10. I’m wondering if you are better off buying new rather than buying cheaper but used. Repair bills can add up quickly. I just traded in my older truck where I spent over $1,000 in 3 months for repairs for a gas efficient small brand new car at 0% financing. One thing is clear, neither new or used is an investment. You’re losing money on both. Has anyone done the math to see which one costs less in the long run, new or used?

    • I think the math would largely depend on the initial cost savings.

      I own a BMW. I have always wanted one. Being in the military afforded me the opportunity to purchase it for 7K below sticker. Otherwise, as a family doc I wouldn’t have been able to afford it.

      However I likely could have afforded a certified pre-owned BMW which often sell for $15-20,000 less and actually have a better warranty than the new ones. I have a feeling that the CPO BMW’s come out significantly ahead of new purchases ones based on lower price and longer warranty.

      I plan to own my car for 10-12 years. Personally I don’t think luxury cars are normally a good purchase, but if you really want it, then it may be worth it.

  11. Cars are emotional. This is not a financed Porsche at 5%. Buy it. My only concern is that you are buying the newer version of what your wife currently drives. If she is anything like mine, the only time you will drive this car is home from the lot and then you will be in the 2006 model.

  12. I think that WCI’s point about not making this sort of thing a habit is the most important thing. There is nothing terrible about financing for a luxury now and then if you do it intelligently and have a definite plan.

    Here’s a related story of mine.

    I’m a pretty frugal guy by nature (maybe not WCI level but close). Once I finished my training, I had a significant amount of educational debt, but was otherwise debt-free (didn’t own a house, cars were beaters and paid for). Wife an I decided that we wanted to travel, so I took out a massive cash advance on a credit card (50K) and spent almost a year traveling around the world. I did this because I knew that if I started working (and/or had a kid, which we were planning on doing soon) I would never get such a long break for many years. If I waited until I saved the money, then I just wouldn’t be able to disrupt my practice and life for that long. I also knew that I was entering a very high paying specialty and that I would be able to pay off the debt quickly.

    So to make a long story short, I took the loan, had a great time, started working, and paid off the debt in a year (while allocating money to savings as well).

    In general, I find the thought of borrowing for a vacation silly, but I think what I did was one of the best financial decisions I made. I had a window of time, I knew I would shortly have the money (excepting the possibility of disability or some other catastrophe), and this is not a habit for me. I have never taken another loan since (except mortgage) and live well within my means.

    Taking that loan was the only way that I could enjoy a luxury that I could afford but for the timing.

    That’s exactly what this guy is doing. Buying the new car is a luxury that he can afford, but the timing is just a little off (since he just bought a house). If he does it responsibly it will have very little impact on his financial future and it doesn’t sound like it will trigger future irresponsible borrowing. I say do it.

  13. Jackson, ms had a hail storm weeks ago, saw lots of Subaru Outbacks 6+ thousand off new on lot due to hail damage when getting some service done on my car… Just a thought…

  14. When you say you save 25% of your income, is this BEFORE or AFTER taxes? When you are on a W2 in a high tax state (like me), it makes a world of difference.

  15. In the Big Scheme of Things, it really doesn’t matter. What matters is where you put the money you don’t spend on the car. Fail to fully fund your tax deferred retirement every year and the opportunity is lost forever.
    Having said that, new cars have higher insurance costs, but maybe they get better mileage. Financed vehicles have built in asset protection. If used for business, the cost can be depreciated.

  16. I am always in favor of buying a new car instead of buying a used car from an unknown third party. Ask any person in used car sales and the profit margins in selling used cars are much higher than the profits in selling new cars.

    You must account for the risk factor of surprises in purchasing a used vehicle. You can have a mechanic audit the vehicle, but there are some bad apples trying to make a profit off bypassing those audits. It’s a cat and mouse game you don’t want to get into to save a few dollars to risk a large repair bill.

    I am glad you can wrap your head around the idea of having the ability to pay cash but choosing to finance. That’s a big difference in comparison to not having the ability to pay cash and financing. Plus the interest rate on a car compounds annually, not daily, like a home mortgage. So interest will be very immaterial.

    That’s just my opinion. Have a great day!

    • I agree you have to add in the risk factor of surprises. Although you can be surprised by a repair in a new car, it’s usually covered by warranty. Most used cars bought from a private party will need something repaired in that first year or so in my experience.

  17. I purchased a new car in December 2012 and decided not to pay cash but finance it with PenFed over 4 years at 0.49%. Total cost of the financing is going to be about $300. I invested my saved cash and never looked back.

    Currently PenFed offers 0.79% through their car buying service. I always double check my target price for a new car by checking edmunds.com forum Prices Paid and Buying Experience.

    I plan to drive it 12-15 years and get a new car again. I have never had a good experience with used cars I purchased (3 different countries).

  18. As a relatively new reader to this blog, I’m really enjoying the wealth (pardon the pun) of information on tax shelters, P2PL, etc. I have to take issue with this concept though, that repair bills on a used car are trivialities, and that driving any modern car to 206,000mi isn’t “into the ground”. I enjoy working on my vehicles, and have come to understand a fair amount about cars in general. Whether you buy a ‘new used car’ or a true beater, you are in for repair bills in the cost of ownership that will absolutely demolish the WCI estimates for expense of the consumable over time.

    Lets take my situation. My beloved old truck finally crapped out and I didn’t have the time or access to facilities to fix it myself. The truck was $2000 (basically a gift from family, KBB $10k at the time) about 7 years ago. I don’t even want to know what I spent on repairs in that 7 years (much of which I did myself), but in the year preceding its demise, I spent well over $3000 on maintenance (brakes, b/l cv shafts, gas tank, sending unit, fuel lines, brake lines, etc etc). The final nail in the coffin that year was failure of the intake manifold gasket. That was going to cost $1200 to tear apart the top half of the engine, though I was quoted another $4000 for myriad other repairs on failing systems, including: new oil pan d/t old one rusted out and leaking; another brake job; rear U-joints; another round of half shafts; ECM which had been shorting out the throttle body sensor; etc etc etc. Additionally, it got 9mpg city and 15mpg highway. I got $500 as a trade in (was towed to the dealership). It had 110k miles on it.

    In addition to the ridiculousness of plowing all that money into a used car, I bought myself $300/mo gas bills, several episodes of missing clinic b/c the truck was undrivable (like the time the gas tank rusted out and dropped 30gal of 87 octane everywhere, or the starter failed, or, or, or), situations of danger (like having your fuel line spraying gas with the engine running, or catastrophic loss of brake pressure from a line blow out), and the pleasure of driving around a rusted out truck with no A/C (compressor failed so I replaced it with a cheap idler pulley).

    When the truck went, I financed a used car, which was the best I could do as a student. Even if I paid cash though, I think the situation holds. Due to some financial aid quirks at my school, I was able to get $8k to put down in cash, and financed $5k. This was a 2006 sedan with 16k mi on it. That also bought a bumper to bumper warranty to 52k miles. This seemed like a good deal at the time- the car was much cheaper than anything new, but also had very low miles. In the two years I’ve owned it, I’ve had to spend nearly $2000 JUST ON BRAKE WORK! It turns out brakes on this model were under engineered, and this was corrected in the redo of the model line two years later. The rotors warp constantly, destroying the pads as well and requiring all around jobs q6-8mo. While the warranty (that cost $1800) has picked up most of the other stuff, totals include: electronic steering rack, $600; broken mcpherson strut, $500; replacement of transmission lines d/t leaks, $300. The list goes on. It currently has 43k mi on it.

    Finance the new Subaru…

    This is only my experience with two vehicles, but I’ve certainly seen similar patterns with my friends and colleagues.

    • First of all, you definitely get credit for driving that first one into the ground, multiple times. I would have said you “drove it into the ground” the first time you had a repair that cost more than $200. Doing repairs that cost more than a car is worth probably isn’t the smartest financial move (and sounds like you did it a lot.)

      Second, even if you count up those $3000 you put into it in 7 years, that’s basically the equivalent of $429 a year, or $36 a month. That’s a very cheap car payment. Yes, you had bad mileage, but that was more a function of the car than its age. Repairs are also usually cheaper on economy cars. You complain about reliability but you also drove a car not only into the ground but through 100 yards of dirt, so you have to expect some of that.

      Third, your second car was basically brand new. You still had to spend a ton to keep it running. That pretty much proves my point. Honestly though, I think you had some bad luck there. Perhaps you could have saved some of it by researching the model a bit more before buying it.

  19. “I would have said you “drove it into the ground” the first time you had a repair that cost more than $200.”

    WCI, really?! Have you ever actually owned a car? This is ridiculous. $200 is about half of the cost of the 36,000mi required service for a new car.

    Part of keeping the truck was attachment; I loved my old truck. Was it a poor financial decision to keep plowing money into it? Absolutely. Never-the-less, those costs would have been required to keep the used car running, lest I would have had to get something else. Further, as a student, financial aid will not extend loans for a car payment, but they will extend indefinitely for repairs. While this is ridiculous, it was my only option.

    As I also stated, $3000 was just the last year. The total for 7 years was MUCH more, and easily approaches a lease payment. Not to mention the frustration of breakdowns (it was a love hate relationship) and potential catastrophes (which I luckily avoided).

    As for my current car, there was no way to know about the brakes, until they started failing and my shop informed me that this is a trend he’s seen. It’s not something that shows up in a search on the internet. Further, “its basically new and that proves my point” doesn’t work here. New cars almost universally come with bumper to bumper warranties that cover things out to 100k miles (Nissan, for example).

    While I agree there was some bad luck here, it is undeniable that adding up big repair bills over time is going to rival if not surpass the costs of financing a new car. It’s not some negligible fudge factor you can forget about with some hand waving. If you buy a beater, its not as if the 1996 beretta is going to just last indefinitely until you decide you can afford something better. The transition from 100k miles to 200k miles is going to be expensive. Transmission $1500-2k, catalytic converter $600-1000 (lots of platinum), shocks/struts ($400 if you do it yourself), power steering rack ($600), etc.

    • Oops. Where you wrote $2000 I read $200 and completely skipped the $10K value. Hope that explains my comments that obviously don’t fit very well now.

      After thinking about this some more, I think you probably had bad luck with both cars. Obviously it can’t be financially better on average to lease a car than to buy one, or else leasing companies would all go out of business. So your expenses had to be more than average.

  20. Admittedly, I do think your commentary on behavior is right on the money, and perhaps the greatest strength of sticking to your cash purchase rule.

  21. When is a car driven into the ground? I ask because I just graduated med school and am starting residency this month, and we are being hit with some unexpected moving expenses, all while my wife’s 2004 Honda CRV comes up with a 2K repair bill for a new catalytic converter, which as of now, we have decided not to do. The blue book value of the car is maybe a little over 4K and we probably wouldn’t get much more than 3K for a trade in, but we can’t afford a car right now. We decided that the car is not worth repairing and since a catalytic converter doesn’t really impact drivability, we’re just biding time and trying to save enough for at least a down payment on a used car, but we don’t think we can drive it long enough to save enough cash for the whole purchase. Is this a situation where we’re basically forced to finance? It sure seems like there’s no way out of it.

    • Unfortunately, I’ve had quite a bit of experience with this question. A car is driven into the ground when the repair costs more than the car is worth. $4K car – $2K Repair = not driven into the ground. That’s okay, you don’t HAVE to drive a car into the ground. But I would before I financed a car, especially a new car.

      At times like these, I ask, “What happens if you don’t do the repair?” It may still run fine, so why not run it? It may not pass emissions, however, but at least you could defer the repair until emissions is due. You can also sell it for whatever it is worth. It’s tough to sell a car needing an expensive repair, however. If you really want to sell it you’re probably better off getting the repair for $2K, selling it for $4K and putting the $2K toward your new car. Selling a car that needs an immediate repair without disclosing that probably isn’t very ethical. A dealer may not care, of course, but dealership trade-ins usually aren’t a very good idea.

      There certainly is a way out of it. You have a new income starting next month. If you can put off your purchase for a few more months you may be able to save up $5-10K and buy a decent little used car. It sounds like you may have another car as well. We were a one car family in residency. It’s not that hard at all if you live close to the hospital. We had many days where we both biked to work and the car stayed in the driveway.

      • Now I’m researching doing the repair myself for possibly $500 – $800 for parts and tools. I figure we not only save a lot of money on the repair bill, but we save any interest on another car and get more time to save up for a replacement. The labor doesn’t sound that involved. Hopefully, if successful, we can avoid any more major repairs until we save the cash. I really don’t like the idea of dropping $2K on that car, especially now that we are so cash strapped.

        • Can’t say I’ve done a catalytic converter before, but in recent years I’ve discovered that there is a youtube video for almost any repair. You can watch it, and if it looks too hard, hire it out. If it looks really easy, do it yourself.

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