Let’s face it:
We can’t go through life without making a single mistake, but truth be told, us humans tend to make a lot more financial mistakes than we really need to. So, what is the biggest financial mistake that nearly every American makes?
Buying a new car!
Eventually, we all need to buy a car. We move away from mom and dad’s house, we go off to college, we graduate college and get a fancy new job.
There’s no argument that we need cars. It’d be pretty hard for me to commute to school every day for two hours on my bike (especially during these outrageous Illinois winters).
However, this just begs the question:
Do we need a NEW car?
In short, no. This is one of the biggest mistakes that just about all of us make, and it can have a very detrimental effect on our finances.
As most everyone knows, the second you drive that car off of the lot, you lose an absurd amount of the cars’ value.
It just gets up and walks away, apparently.
What’s more, is the average car buyer can’t even afford to buy their car outright, so they have to take out a loan with some ridiculous interest rate.
“But Dylan, you filthy hypocrite, your Debt-Demolition series mentions that you have a 19,000 car loan”.
Okay, you got me.
My first car buying experience was a nightmare, and I doubled-down on my stupidity and somehow made it worse. You can read more about it here.
Yes, I took out a loan for a car. Before you click off, I think the purchase was justified, and financially, it made sense in my situation (there are exceptions to every rule, right?). I’m sure you’re skeptical, so let me briefly explain why I did what I did, in bullet-point form.
- My 2006 Audi A4 (paid off) was a few months off of needing a new engine. $6,000 dollars plus labor.
- I didn’t have enough money saved up to buy a reasonably reliable car for 3,000 (I spent almost all of my money repairing my Audi).
- I had no credit history, and thought of this as a great credit-building opportunity.
However, my stupidity got the best of me, and I traded in my new car for an older one with more features and a manual transmission. Because I was still underwater on my old loan, my old car ended up costing more than my new one.
Like I said, we all make mistakes.
Trust me, I’m never going to do this again.
However, it wasn’t all that bad. In my new transaction, I did have a few things going for me:
- I bought a certified pre-owned vehicle that was low mileage and had a lifetime warranty on the engine and transmission, plus a good chunk of its 5 year, 60,000 mile bumper-to-bumper warranty intact.
- I got a ridiculous 2.99% interest rate on my loan.
- I learned a valuable new skill that a vast majority of Americans cannot do (drive a manual transmission).
Whether or not you agree with what I did or not, (sometimes I wish I would have bought some $200 piece of junk like Marc Cuban did), what’s done is done. I do, if you’re wondering, plan to drive my car until it is a $200 piece of junk. Then I’ll at least know I got my money’s worth.
However, this is still a very serious issue for a lot of consumers. When you walk into a car dealership, the sales reps eyes will light up.
They don’t see you as a person, they just see a dollar sign with legs.
They will do whatever it takes to get you to walk out of that showroom with the keys to a shiny new car. They will try to convince you that you can really afford the car when in reality you are far from it. Unless you can write a check for the car on the spot (the check has to clear, mind you), then you can’t afford it.
So how does just about anyone end up with a brand-new car? Like I said, car salesmen will go to great lengths to make the sale.
They may offer you a reasonable $300.00 monthly payment, but if you look closer at the terms of the loan, you’ll likely be paying off the car way longer than a usual term. I’m talking like six to seven years in the future.
You’ll probably also have a mile-high interest payment. I recently heard of a friend who just bought a (used) car with something along the lines of a 15% interest rate. The math worked out so that he’ll be paying almost half of the value of his car in just interest.
Obviously, this isn’t a wise investment. New cars are a depreciating investment, so you’re basically borrowing money to pay for a car that will never again be worth what you originally paid.
Don’t believe that they depreciate as dramatically as I’m making it sound? When I bought my new car, it stickered for 23,000 dollars. Combining my trade-in and down-payment, my loan ended up being just above $17,000.
When I made my fateful (fatefully stupid) trade in just 8 months later, my 23,000 car was worth just 12,500.
Half of it’s value was gone in eight months.
That hurt more than anything else, and the same thing will happen if you buy a new car too.
So, how can you avoid this? Spend 2-3,000 bucks, buy an older Toyota, Honda, or Hyundai (Asian cars tend to be more reliable than other brands), and then save up your money.
My girlfriend drove a ’97 LeSabre, and then a 05′ Mercury Mountaineer (Prius drivers probably cringed at the name, that thing drank gas like it had a hole in its gas tank). However, they were, for the most part, very reliable vehicles. She had no car payments, and all she had to spend her money on was gasoline and routine maintenance.
This allowed her to save a ton of money throughout highschool and early into college.
After commuting for a year, she decided enough was enough, and she wanted something more fuel-efficient and practical for her daily commute. So, she pooled up her money (she had tons saved up because she drove old used cars) and bought a really nice 15′ certified pre-owned Hyundai Elantra, and she got a pretty great deal on it too.
The best part?
She has no car payments. She bought it in full, and now she has a reliable car to get her to and from school without having the burden of a car payment. The car is under warranty if something were to go wrong, and she doesn’t have the stress of a car payment weighing down on her shoulders.
However, in order to get there, she had to drive something she absolutely hated for a few years.
So, what can we learn from this? Save up your money to buy used/CPO car in full. I will never buy new again, and my plan is to buy a certified pre-owned car in cash when my current car bites the dust.
Yeah, it’ll suck to drive and old beater for a few years. You might get some flak from your friends at school or work, but who cares?
A few years from now, they’ll still be paying 10% interest on their 2012 base Camaro, and you’ll be driving a car to which you owe no debt.
Pretty sweet deal if you ask me.
Did you enjoy what you read? Have you made this same mistake before? If so, how did you deal with it? Comment down below! Also, be sure to share with your friends and family, and subscribe to email updates to stay up-to-date with my latest posts!