Six Signs that Your Car Might be Too Expensive

I really liked Living Rich by Spending Smart: How to Get More of What You Really Want. Why? Because it's full of great money saving tips. Here are some thoughts from the book -- a list of six signs that your automobile might be too expensive:

• You bought a new car -- depreciation is a killer.
• You financed the car -- if you can't pay cash, you can't afford the car.
• Your car payment is too high -- the book suggests that car payments shouldn't exceed 7% of gross income
• You financed for more than three years -- if you finance for more than three years, it's likely that the car is too expensive for you
• You leased the car to get a lower payment -- this is a tell-tale sign that you bought too much car
• Your vehicles total half your income -- the total current value of all your cars (plus boats, motorcycles, and similar vehicles) should be less than half your gross annual income

Here's how I stand on these:

1. We buy new cars and drive them for years (it takes me seven years to get to 100k miles -- the point where I start looking for a new car. It takes my wife somewhere in the 12-15 year range to hit this level.) I'm considering a used car for our next purchase, but I'm not convinced that buying new and holding forever isn't at least as good of a deal as buying used and holding the car for 2-3 years less (due to mechanical issues that used cars will have versus new simply because they have more miles/usage on them.)

2. We save up and pay cash. It helps us in negotiations as well since the dealer knows we can buy immediately.

3. We pay cash.

4. We pay cash.

5. I've never leased and don't plan to.

6. Our vehicles are a very small percentage of our income.

How do you stack up on these issues?

Comments

[Kristen]

I completely agree with your advice of paying cash for a car. This is the mentality I was raised with and I plan to continue it. Currently my husband and I have the cars our parents gave us (we are only a few years out of college). We plan to keep and maintain these cars until we can pay cash for a new one. This will also help us buy a car we can really afford not just one to be a status symbol that we can't afford.

[GBlogger]

We have tried both -- buying new and buying used. In buying used, we have tended toward a car that is around 2 years old -- trying to miss the depreciation that takes place during that time. And we have tended toward the "certified pre-owned" programs, hopefully to avoid the mechanical problems that FMF mentions as potentially coming with used cars. So far, we have not noticed unusual or greater incidence of problems with the used cars versus the new cars -- and the used cars and new cars have pretty much all had at least some minor issues within the first year or two after the purchase, despite having fairly good reliability and similar ratings. I would be curious if anyone knows any data on or has other experiences with whether these "certified pre-owned" programs are as good as the marketing would make them sound and how those cars compare to new cars as far as problems/reliability go.

[Mark B.]

This list does not consider other factors that might impact a car spending decision. For example, I have a lengthy commute of about 35 miles and I am also responsible for picking up my children from daycare on the way home from work. Therefore I HAVE to have a car with reasonable reliability because a breakdown is just not an option. When I went to buy a car I did not have a lot of cash to put down, so I had to finance a used vehicle for 4 years to afford the payment. Even though I broke some of the above rules I feel as though I made a frugal decision that was best for me.

Next time I am hoping to save enough to pay cash, but it all depends on how reliable my current vehicle stays.

[Ryan S]

I usually buy used cars and pay them off in 6 months to a year. I guess I could dip into short term savings or emergency fund to buy them outright, but I don't like to deplete them either. I'd rather have those amounts always going upwards.

[Curtis]

Great advice for those already out of debt. Not much advice for those of us who are.

We just traded in our first used car purchase for a new car. The used car was eating into our real debt repayments because of all the gas it was eating as well as the maintenance required. We drive very little, so a smaller, more fuel efficient new car isn't actually costing us more money.

Used isn't always better. I know nothing about working on cars and choose to keep it that way, so new is much easier on my budget with fixed expenses. It helps me plan to get out of debt easier so that I can finally save up to pay cash for a car... someday.

[Always Private]

Just some thoughts to consider...

You can buy a new car and drive it for years and years.. but then you end up spending half you life driving an ever more unreliable old car.. that is more and more out of line with fuel efficiency standards.. and lacks the current level of safety devices...

Paying in cash when you can negotiate 0% new car promotional rate loans is ummm stupid..
and the longer you can get that low promotional loan rate for.. the better..

Leasing lets you stay current with gas mileage and safety improvements.. and actually encourages you to save money on gas since you learn to be efficient with your mileage usage because you usually have something like a 1000 mile per month (35 miles per day ) lease mileage limit...

By not paying cash in full for a leased car.. the interest you earn on the money you left in the bank cuts the effective monthly lease payment down to a very attractive level...

[Daniel]

Those are great tips. The hardest one for me to follow is saving enough to pay in full with cash, but I'm working toward it. I have some background on certified pre-owned cars, I perform those inspections and my overall opinion is that the check list is very in depth and the standards are high. If they are not correctly inspected, the dealership is responsible. From time to time an item that is not within specifications is missed on a CPO inspection, and in that case, where I work disciplinary action is taken on the individual who performed the inspection. I also notice some people can afford the car and the payments, but can't afford the basic maintenance.

[Tom]

One thing to consider when buying used:

If you buy very low mileage used cars (below 10,000 miles), you still basically get a new car, but you avoide the "drive off the lot" depreciation hit.

I bought a 2005 F-150 extended cab, before they did the redesign, with 8,000 miles for only $16,000. Blue book value was around $20,000. With my next car, if I don't buy a GM (wife gets employee discount) I'll be looking for a very low mileage used.

[Mike]

Depends on what car you buy. We were in the market for a 2 yr old civic. The prices were so high we chose to buy new. Also, with subsidized int rates for new, we pay less than our investments make.

Although usually the used idea holds true, there are exceptions.

Also, this car was not available with heated leather in previous years. How do you place a value on that new car smell?

[Michael]

Not bad, I opted to buy a new car at during an year end sale. I got screwed on my first two that were used. I figured why throw away 5k on a car that I have NO IDEA what the condition is actually like and have it only last me 1-2 years.

It wont matter if you buy the car used or new. You will still have the same value when the care is say 10 years old. Buying a new car will give you a few extra years before that point.

[Elizabeth]

Like other commenters, I take exception with some of your points.

Since getting married, my husband and I have purchased two used and two new cars. By far, the new cars were the better, wiser purchases.

The first car, we paid cash. It was our first car purchase together. I did a lot of research on the type of car but had little experience or knowledge about how to buy a car. We probably could have gotten a better deal but still, that car lasted for 13 years and almost 250,000 miles. Not too shabby.

Not quite a year ago we purchased our second new car. This time I knew as much about buying a car as which one to buy. We paid dealer's invoice, no fees, retained the manufacturer's $1,500 rebate, and got 1.9% financing on a two-year loan. We could have paid cash but we knew we'd earn more interest over that period than what we'd pay. We fully expect this car to last as long as the first one, or longer, because in a another few years we won't be putting as many miles on as we do now.

I believe that leasing a vehicle isn't always the wrong way to go. It all depends on lifestyle and priorities. We have no need or desire to have a new car every few years but for some that's a priority. And since we're currently each putting 25,000+ miles on our cars every year, we're definitely not good leasing candidates.

[JohnZ]

This is one of my favorite topics, so sorry for the following rambling rant.

I've never bought new. Some of my past used purchases were better than others, but I was often buying when I needed a car quick (one car was totaled...another was stolen) and was in debt. More to come on my buying habits, and recent purchases, but first:

FMF - you said, "buying new and holding forever isn't at least as good of a deal as buying used and holding the car for 2-3 years less (due to mechanical issues that used cars will have versus new simply because they have more miles/usage on them.)"

How long is "forever"? Sounds like for you it's about 100,000 miles? I think many car owners share your mentality on the notion that things start to go wrong after 100k. I'm a firm believer that, today, with routine maintenance a car should make it to 200k without concern that it'll breakdown on the road. Here's an article from MSN that talks about taking your car to 250k and the savings associated with the same: http://articles.moneycentral.msn.com/SavingandDebt/SaveonaCar/MakeYourCarLast250000Miles.aspx

My most recent purchase was in 2005. I bought a 2003 VW Passat certified pre-owned (CPO) with 41k miles. I currently have 109k on the car. I financed for 3 years @ 5%, but paid off the loan after 14 months when I went from being an independent contractor to an employee. The CPO program extended the factory 3/50k warranty another 2/24k. So I had full coverage until 74k. I actually had two repairs done under warranty at no charge, with a loaner car for the day. This has, so far been a great purchase. I got a car I had been lusting after, but for about $10k less than sticker. Because I love the car so much I'm shooting for taking it to 200k miles before I unload it.

We bought my wife's 2003 Outback in 2003. Her's was an employee driven car that the dealer bought at auction. We bought it we 12k miles and got the car for about $6k less than sticker. She has 78k miles on the car and we haven't had a single problem with the vehicle.

Some thoughts on buying used:

- I like buying cars that are only 1 - 2 years old and buying from a dealer. At that age, the car is likely a returned lease vehicle which was well maintained, maybe by the dealer, or, like our Outback, driven by a dealer employee...also presumably well maintained.

- CPO's are not all the same. VW's is, IMO, excellent. Check a site like Edmunds.com or COnsumerReports to see if they have reviews of CPO programs.

- Not all used cars are the same. I'm wary of buying privately, even if the price is better than dealer cost. I had a bad experience in college with a private purchase - it's harder to go after an individual after a private sale if you find something wrong. However, regardless of the source, sometimes, new or used, you get a lemon. I think, (don't quote me on this) many states (I'm in NJ) apply lemon laws to used cars purchased from dealers.

- Get a CarFax report. Ask the dealer or seller to supply one, or, during your time shopping pay for a short subscription with unlimited searches (I think $20 or so?)

[rwh]

All the cars I bought early in life were used cars, and I always paid cash. The first two new cars we bought as a married couple, we paid about 50% down and paid them off in 3 years. The last new car we bought in 2007, we paid cash.

It's probably best to pay cash, but if you can pay it off in 3 years it's unlikely you'll be upside down on your payments, which I think is a better description of whether or not you can afford the car.

We also drive our new cars into the ground. We still have a 1992 and a 2000 we bought new. But it's true they don't have the latest safety, mileage or emission standards the new cars have.

I can state categorically that I have never bought the car I truly want, because I've never been able to afford it!

[Susan]

You do realize your thinking is revolutionary and totally contradictory to the mass marketing media machine? Thank God! I truly appreciate your insights and most helpful information. I send excerpts from your site to my daughters in their 20s (much to their chagrin) just to let them know that there are others out there who think like me. I no longer own a vehicle nor do I plan to purchase one unless I have cash in hand. Yea! for Free Money Finance, you're providing an inspiring and highly informative service.

[Kevin]

Always Private - You're actually advocating leasing a car and always having a payment (aka never owning it) to save a few dollars a month on increased fuel efficiency for newer cars?

Stay with me here - I get about 18mpg combined driving on average. With gas at about $3.25 lately, I'm spending about $0.18 a mile to drive it. Let's say I trade it in for a 2008 Liberty with est highway MPG of 22. Assuming I only drive highway that would be about $0.15 a mile to operate. So I am paying a few hundred dollars a month car payment to save 3 cents a gallon? I'd have to drive 5,000 miles a month or more for your argument to even come close to being correct. As far as the safety aspect - my old Jeep has airbags & ABS just like the brand spankin' new Liberty.

How about this - I bought my 1998 Cherokee in 2002 with about 45k miles on it. I got a 60 month loan knowing full well I would pay it off early - which I did - at about the 48 month mark. Ever since then, I've been saving the $225 payment by my calculations that is about $5,500 by now. I'm at about 135k miles now and have had no serious issues.

We bought my wife's car 2 days after she totaled her old Corolla that had been in the family for years and had over 200k miles on it. We got it on a 60 month loan at 5% in June 2005 and paid it off in January. Having no car payment is a great feeling. I would challenge any pro-lease person to try it sometime. It's amazing how much extra money you have.

[kitty]

I buy new cars, choose a reliable model that I can easily afford to pay cash for e.g. Honda Civic or Toyota Corolla with the intention to drive until at least 100K (takes me over 10 years to get there). I did change three cars in the last 10 years but this was because of circumstances: gave my 1995 Corolla to my parents in 2003 after their car broke (they still drive it); totalled the 2003 Corolla in 2006; needed to add slightly less than $5000 to what insurance paid me to buy a new 2006 Honda Civic. However I am fairly comfortable financially that paying cash for a new Civic or Corolla doesn't require me to save in advance for it (although I may need to wait for a CD to mature). I could buy a more expensive car and still pay cash for it, I just choose not to.

I'd have considered financing if the rate were so low that it would've made sense to just keep money in the bank. I would use bank interest rather than equity return for comparison since loan interest is guaranteed.

I think it's OK to finance as long as you have enough in savings that you can always pay off the loan if it starts to make sense i.e. if bank interest falls. Also, if you can afford to pay cash but choose to finance because the rate is better, it means you can afford the car. If you choose financing because you don't have cash, than maybe you cannot afford the car.

[Eric]

"We save up and pay cash. It helps us in negotiations as well since the dealer knows we can buy immediately."

Dealers hate when you pay cash because they can't make any money on the financing. Go ahead and finance your car, but make sure there's no early payment penalty. Then you can negotiate a better bottom line because the dealer thinks he'll be sticking you on the financing terms. Pay off your car on the first payment, and you're good as gold.

[FMF]

Eric --

When you walk in on April 29 and they have a monthly quota to meet, knowing that you have cash in hand gives them an extra incentive to deal quickly.

The last time I bought a car (with cash) the salesman eventually said, "Just tell me what you'd like to pay." ;-)

[sow]

Consider this, you finance everything you buy, like a car. Either you pay someone interest to borrow money to purchase the car, or you pay the opportunity cost incurred by not using that money to earn interest. If you have the cash to purchase the car outright, why not finance the car with a lender and put your cash into a safe and liquid investment vehicle that will earn interest. That way, you will save on some, or all, of the interest that you'd pay to the lender and you still have control over your money. Or, if you're savvy enough, invest in something that will make the car payments for you. Paying cash for a depreciating asset may not be the best idea. Consider putting money into an appreciating asset to help offset those payments.

[Nick D]

I want my next vehicle to come from a wholesaler. They buy the car at auction and sell it to you for a fixed price over what they paid (someone has to have the license). The one catch is vehicles don't go up to auction unless there is something wrong with them. They sell dirt cheap but you have to have a fair idea of what is wrong with them and how much it will cost you in repairs. I have seen this done twice with some success. Both vehicles with repairs cost significantly less than blue book. Its somewhat risky but if your patient with your search you can come out ahead.

[Livingalmostlarge]

I keep our cars a long time, though they still feel new. I was wondering though if it doesn't make sense to lease depending on your occupation. I know my FIL leases cars for his business to give to employees because it's deductible. So he drives a leased car as well. I could be wrong and maybe he should buy but heck he has professional advice.

[Mark]

I have only bought used, and only paid cash.

Used because: Whenever I have been tempted to buy new, I have quickly noticed that the same amount of money buys me a much better or bigger "lightly used" car - and then I've done that.

Cash because: The interest on a used car loan is too high.

Most people who resist used cars are basing their feelings on bad experiences - usually because they had to buy a "junker" at some point. They also have not realized how much longer cars last now than they used to.

I love these people!!! They fill the lots with the cars I want to buy! My sweet spot is at about 60,000 miles, although on higher-end cars I could buy at 100,000.

The key is to buy from a reliable source (e.g. Lexus or Mercedes dealer, or a colleague), get a thorough check-up, and fix EVERYTHING. Then maintain it.

P.S. By the age of 45, I had $3 mil saved - and I STILL buy used.

[Danica]

I, too, buy used and pay cash. For me the key, or the loophole or back door in car purchasing, is to get diesels. My current car is a 1982 Mercedes 300D Turbo that cost me $2000 about four years ago. It's about to hit 300,000 miles and it should run pretty much forever.

The parts might be more expensive, I don't know; it doesn't need too many repairs and I am blessed with a mechanic who always does things as cheaply (but effectively) as possible: fixing the broken dealie inside the alternator for like $75 instead of replacing the whole alternator for some $300, for example.

The best part, though, is that I've been able to run it pollution-free on biodiesel this whole time, with no alterations or anything needed, and I am currently saving up to convert it to be able to also run on waste vegetable oil. Biodiesel where I am costs about the same as diesel at the moment; waste vegetable oil from restaurants is free, and vegetable oil that someone else has collected and filtered for me is up to about $2 a gallon these days, so it'll pay for itself pretty quickly! (and, hell, after a while it'll pay for the cost of the car too, huh?)

[Always Private]

A couple more things to consider...

Carfax reports are not always accurate in that the info that if contained on them is voluntarily reported. The only close to complete car history report is the one insurance companies use.. based on policy payouts.. and unless you know a friendly insurance agent.... you won't get to see that one...

And given that hurricane katrina happened in late august 2005 and caused thousands of cars to be submerged.. I'd avoid buying any used car that was on the road at that time...

As for your comments Kevin... you may feel comfortable having your wife drive an old corolla with over 200K miles on it.. and fortunately when she totaled it, she survived... but I on the other hand feel very good knowing that my wife and kids are on the road in an up to date car with the full current spectrum of safety options.. and a near zero chance of mechanical breakdown... I guess we each have our priorities.