Comments: Thoughts on Cars: How to Buy One and What They Cost

Several good comments on my post titled Thoughts on Cars: How to Buy One and What They Cost starting with this one:

I think also, a person can get a cheaper car (maybe doesn't look as sporty) but is more economical. Some of the entry level cars are about 12-14k. And of course, if a car payment was put in savings each month after paying the car of (and keeping the car for a few more years) the cash would be there. I wish I would have thought of it before I bought my car!

This is what we do. We save for our cars in advance by making "payments" to our savings accounts, then pay cash for them years down the road. Not only does this keep us out of debt, but it also helps in negotiations. Dealerships start to salivate when you say you'll pay them NOW in CASH. ;-)

Here's the next comment:

This brings up two thoughts in my mind:

1) When people spend 1 dollar out of 5 on private transportation, it makes me wonder why initiatives to fund public transportation are so controversial. When it is done right, as in Europe, it is a big cost saver for the public at-large.

2) I believe the trick to paying cash for a car is to get on the right treadmill. Most people are on the debt-payment pattern, but people who pay cash in effect make virtual car payments into an investment account. While the first plan involves paying a little over 100% for a car, due to interest payments to the bank, the second plan is like paying less than 100% because you collected interest. It requires discipline and buying some modest cars at first, but given the choice I would much rather collect interest than pay it.

I think the key to the public transportation issue is in the phrase "when it is done right." I'm not sure there is a "right" way for Americans and public transportation. We all seem to want our freedom to drive anywhere we want whenever we want. And I've taken public transportation when it's been done the wrong way -- not a pretty site.

As for part 2 of the above, I'm with you 100%!!!

Here's the last thought:

When I was very young, about 18 or so this elderly man told me exactly how to purchase a car. He told me to use my "savings" but not buy the car out-right. Huh? I said.

He explained . . .

One should always "save money." As much money as one can possibly save while you are young. Then NEVER touch the principal, but USE the principal to create "income" to purchase what you need.

For instance, a young person works hard over 5 years to save $32,000 (that's $500 a month @ 4.0% annually, compounded monthly). They want to purchase a car that if financed over 4 years would cost them $250 a month.

Take the principal ($32,000) put it in an investment that earns 10% annually (or more) and you have $266 in interest.

The INTEREST on your principal (your savings) pays for your car. At the end of 4 years, you have a fully paid for car + your principal + any additional savings (since you are now in the habit of saving) you've accumulated.

He called it "letting your money work FOR you, instead of working for the money."

It's funny how we're so quick to think in terms of debt (paying out) to get what we want, instead of working our resources to make payment come "in" to get what we want.

Another way of paying for your car that's really a version of the "paying cash all upfront" method. I'd rather just pay the cash and get it over with -- not have to hassle with the monthly payments.

Comments

[abileneblues]

When I paid cash for a car a couple of months ago, the sales guy started complaining about what a pain it would be to have two different people count the cash, etc.

I asked him if they did, indeed, take cash.

What an interesting world we live in.

[Duane Gran]

Is there an auto industry insider in the house? From what I can tell, many auto dealerships are supplementing lower margins on the sale with emphasis on service & repair and financing. The latter involves incentives and kick backs (in the fair and legal sense) for financing a customer's vehicle. In this way, I wonder if paying cash is a useful lever for negotiating the purchase price.

Maybe a better way is to utilize financing, but to make sure there isn't a pre-payment penalty. In this way, you finance and the dealer gets their bonus and the next month you pay it off in cash. Any thoughts on this strategy?

[GHoosdum]

As far as I know, Duane, you're correct in that the dealer actually makes more money when you finance the car through them. We strongly negotiated down the price of my wife's car two years ago when we bought it, then when we later told them we had financing through our credit union, suddenly they weren't so keen on selling us the car, and they tried to renegotiate the price higher. In our case, threatening to walk out that late in the game secured the price they'd previously committed to, but made us question the new car sales manager's integrity.

Additionally, many dealerships and manufacturers only offer certain rebates/incentives if you finance through them, and they won't give those incentives to people who pay cash or finance with someone else. For my next car, I'm going to do what you suggest and look at the loan without prepayment penalty option.

FMF, I think they were salivating when you ponied up the cash more over their lost profits than over the cash. ;)