How Much of Your Car Should You Finance? Zero percent.

[Jim Nickerson]

Re: How Much of Your Car Should You Finance? Zero percent.

From the purely for-what-it-is-worth department, I just noted that this tread has had over 22,000 views, assuming the view-counter has not been gimpy.

What does that say? A whole lot of people are buying cars?

[Stretch002]

Re: How Much of Your Car Should You Finance? Zero percent.

Looks like a popular thread! It certainly offers very good advice. Thanks to everyone for indulging me.

I have decided to pay the car off. Thinking of it as an investment that pays 6% AFTER taxes is what did it for me. A rock-solid investment yielding that figure after taxes is hard to come by. Also, after having typed everything out I do not think I need the additional liquidity at this time. Thanks everyone!

[Jim Nickerson]

Re: How Much of Your Car Should You Finance? Zero percent.

Looks like a popular thread! It certainly offers very good advice. Thanks to everyone for indulging me.

I have decided to pay the car off. Thinking of it as an investment that pays 6% AFTER taxes is what did it for me. A rock-solid investment yielding that figure after taxes is hard to come by. Also, after having typed everything out I do not think I need the additional liquidity at this time. Thanks everyone!

By the way, Stretch, what kind of car is it?

[Stretch002]

Re: How Much of Your Car Should You Finance? Zero percent.

It is a Lotus Elise! Being a huge F1 racing fan growing up I have always LOVED racing inspired cars. This car is a ton of fun and everything I hoped it would be. Incredibly good performance, low running costs, exotic looks and handling. And most importantly, lots of FUN!

[jk]

Re: How Much of Your Car Should You Finance? Zero percent.

it's fun just to look at. must be a hoot to drive.

[Jim Nickerson]

Re: How Much of Your Car Should You Finance? Zero percent.

Stretch you are truly a great American in that you seem to fully grasp what America is all about--having FUN, you can't beat it!

[Stretch002]

Re: How Much of Your Car Should You Finance? Zero percent.

Thanks for the positive feedback. I was waiting for a tongue lashing once the "evil sports car" was shown! Did I mention it gets about 30mpg?

The car really is amazingly fun. Obviously I'd never want to wreck my finances for one but as they say "Ya gotta live!". I think it is healthy to balance long term monetary goals with short term happiness. After all, we are all dead in the long run! :p

Now to discuss where we think interest rates are headed...

[Jim Nickerson]

Re: How Much of Your Car Should You Finance? Zero percent.

Thanks for the positive feedback. I was waiting for a tongue lashing once the "evil sports car" was shown! Did I mention it gets about 30mpg?

The car really is amazingly fun. Obviously I'd never want to wreck my finances for one but as they say "Ya gotta live!". I think it is healthy to balance long term monetary goals with short term happiness. After all, we are all dead in the long run! :p

Now to discuss where we think interest rates are headed...

Thanks for your equanimity, Stretch.

Interesting is that your last comment is something that has been on my mind, and I am sure many others' too.

Last night I ran across an article by Paul Kasriel who is someone who strikes me as generally rational in his interpretation of data. He wrote an article: The Fed Probably Thinks It Is On Hold for All of 2007, February 7, 2007 http://www.financialsense.com/editorials/kasriel/2007/0207.html in which he posits that the next move by the Fed will be later this year "perhaps on August 7" and will be a rate cut.

His article is devoted to contradicting the title of it. To me his arguments seem solid. He thinks the bottom in the housing market decline of real residential investment expenditures could go a bit further from about the -13% so far from their Q3:2005 peak, and notes that the average peak to trough since WWII is about 25% unless this time it is milder.

For those who pay attention to EJ's Ka-Poom theory, he proposes there will be a period of disinflation. Kariel notes that core consumer inflation was decelerating in past two quarters of 2006. So my little mind's impression from this is that a period of disinflation is perhaps upon us or is still to be more manifested in the next 6-7 months.

From MoneyNews
Wednesday, Feb. 7, 2007

NEW YORK –- Merrill Lynch is sounding the alarm on a global liquidity crunch as central banks in Europe and Asia tighten monetary policy and advise clients to avoid risk and switch to safer assets over the coming months.

The bank said 2007 would be the "year of the dividend", with concern returning as the VIX and VDAX volatility indexes that are widely used in option trading rise from record lows.

Merrill Lynch's chief European strategist Khuram Chaudhry said the bank thinks "global interest rates are going to rise a lot more than investors are discounting, and this is a worrisome outlook for profits.

"We've seen liquidity everywhere, in equities, property, bonds. It's been a one-way bet for investors, and they've taken on a lot of risk. But they're not looking beyond the news to the slow drip-drip effect of interest rates. It matters when central banks tighten monetary policy," he continued.

Although the Federal Reserve left interest rates unchanged at 5.25 percent at its last meeting for the fifth consecutive time, it's raised rates 17 times already since June 2004. But the bank pointed out that Europe has been slower and the Bank of Japan is still holding rates steady.

Russell Comment -- Interesting and certainly not in tune with the PIMCO crowd. Bill Gross continues to think that rates in the US will be coming down during the second half of this year.

So on one hand a bigwig at Merrill Lynch is suggesting international rates are going to tighten, which I presume will result in some cooling off of equity markets around the world. If Kasriel and Gross think rates will be coming down later this year, then it suggests to me that there is going to be something happening that will stop the runups that have occurred rather much worldwide in the equity markets.

So back to you, Stretch (and I thought you would tell us your car was a long limo), rates may go down, and equities may go down, so ridding yourself of $50K now might turn out to be brilliant, unless I am missing something--which odds are, I am.

[FRED]

Re: How Much of Your Car Should You Finance? Zero percent.

This just in:

5 Reasons You Should Buy A New Car

1. You don’t think car dealerships make enough money and you want to help them out

2. You enjoy throwing money out out the window as you drive down the road in your new car

3. That great new car smell really is worth 5-10k

4. You enjoy parking in the back of the lot sideways with orange cones surrounding your new vehicle

5. You work hard and deserve a new car

[Spartacus]

Re: How Much of Your Car Should You Finance? Zero percent.

6. You want to be safer than the pedestrians and cyclists

7. you want to be more vulnerable than the SUV/truck drivers and train/bus passengers

8. he who dies with the most toys, WINS !!!![*]

This just in:

5 Reasons You Should Buy A New Car

1. You don’t think car dealerships make enough money and you want to help them out

2. You enjoy throwing money out out the window as you drive down the road in your new car

3. That great new car smell really is worth 5-10k

4. You enjoy parking in the back of the lot sideways with orange cones surrounding your new vehicle

5. You work hard and deserve a new car

[*] exactly WHAT he wins is left as an exercise for the reader

[Guest]

Re: How Much of Your Car Should You Finance? Zero percent.

It's certainly sound advice to not go into debt buying a car if you can avoid it. I own 3 vehicles and not a penny is borrowed on any of them. But like everything, a little moderation may be useful.

Yes, strictly FINANCIALLY there is a great argument to be made for buying the cheap rustbucket and saving up for your next new car. However, there are a couple of other things in life besides money, and sometimes you have to spend a little to make more.

1. Your Life: Your extra $300/mo in the bank earning you 6% isn't worth a whole lot if you are dead or maimed. Newer cars are much safer than anything you're likely to find for super cheap. In the last couple of years, stability control has been proven to make a significant dent in death rates, for example.

Also, the cheapest car may not crash test well, may be lacking sufficient mass (which matters a lot in car/car crashes), etc. Also, performance is a factor in "active safety". The ability to handle and brake well, as well as accelerate adequately to avoid trouble, helps you stay safer and usually isn't found on $600 beaters.

Google Volvo, BMW, etc and you can find websites dedicated to harrowing tales of how drivers walked away from terrible accidents. Thankfully cheaper cars are now catching up in safety, but you are going to have to spend a significant amount to maximize safety. I want my wife to have the best chance possible out there, so safety matters more than saving a little on the car expenses.

2. Sanity and Peace of Mind: Newer is usually more reliable. And reliable brands often cost more than comparable cars of less reliable brands. If you live 6 blocks from work, drive 4,000 miles a year, and have ways to get to work via friends or family members if your clunker won't start or is in the shop for a week, fine. But some of us have 80 mile round trip commutes and jobs where being late regularly isn't a good idea. Some may also be commuting along deserted roads after dark and don't want our wives at the mercy of whomever stops to help. Losing a $120,000/year job to save $3,000/year in auto costs probably isn't a good trade-off. Anyone who has broken down in the middle of I-285 in Atlanta where the "slow lane" is going 65mph and you have to cross 7 lanes to get to the roadside will testify that the $250/mo car payment to help avoid that situation would be worth it.

Others of us rely on vehicles in our businesses to earn a living. A breakdown might cost me $400/day till it's back in service and I'm back servicing customers. But worse than that, my reputation for reliability suffers, which is hard to even calculate in dollars. And the hassle factor of a breakdown for me alone outweighs anything else. It doesn't just ruin my day, it ruins my week.

Finally, if you DO make that hour plus commute, it sure goes by better in a BMW than in a '83 Chevy Citation. It just may make it tolerable and saves you from having to move to a more expensive home closer in or find a new job that may pay less. It's a cost of doing business. Just like buying suits and drycleaning bills.

3. Image: I personally don't care what I drive, but my customers do. So an '07 pickup may pay for itself in new business and customer confidence vs the '82 rustbucket my competition shows up with. My brother saw his income rise dramatically as an electrician when he moved from buying old utility company used vans dirt cheap to new pickup trucks. People just perceived he was better due to the smart looking vehicles. He worked for great remodlers who showed up in old vans and though they were cheap and did good work, they often didn't get the job. I'm not saying it's right, it's just the way the world is.

4. Hobbies. For some their car is also a source of recreation and so instead of being seen solely as a capital investment part of the cost can be written off as a regular monthly expenditure on entertainment. If you drive a beater but drink $3 coffees and eat out 5 times a week, you're still spending the same amount of money. It's all about choices.

Cars are definitely silly sometimes, and no doubt Americans spend way too much on them, but in some cases I think it makes sense to borrow a reasonable amount. I haven't had a car payment in years, but did in the past. never large, always a big down payment, and always on a modest vehicle, but I wouldn't say "NEVER" is always the right answer to this question.

I would say there is a happy medium between the $40,000 SUV bought with nothing down and the $600 beater.

[jk]

Re: How Much of Your Car Should You Finance? Zero percent.

i bought my first car, new, in 1970. it was a bmw 1600 and cost $3000, equal to the cost of 2 vw bugs at the time. i drove it for 13 years, and finally decided to sell when it broke down going to work one morning, and i realized that the car was worth less than what i'd earn in a day at work.

[DemonD]

Re: How Much of Your Car Should You Finance? Zero percent.

1. Your Life: Your extra $300/mo in the bank earning you 6% isn't worth a whole lot if you are dead or maimed. Newer cars are much safer than anything you're likely to find for super cheap. In the last couple of years, stability control has been proven to make a significant dent in death rates, for example.

EJ never said to buy a car for "super cheap." He said to buy the best car for you without resorting to financing. If you can't save 3-5k for a decent used car, it's likely you aren't going to be able to be responsible for a car anyway. Stability control is great, but if you are driving a smaller more economic car you have a lot more control than any boat anyway.

Also, the cheapest car may not crash test well, may be lacking sufficient mass (which matters a lot in car/car crashes), etc. Also, performance is a factor in "active safety". The ability to handle and brake well, as well as accelerate adequately to avoid trouble, helps you stay safer and usually isn't found on $600 beaters.

Dude, they invented this thing like in the 70's, where the car crumbles around you and spares the cabin. For example, a 1991 Honda Accord received 4 and 5 stars for driver and passenger frontal crash tests. Smaller cars in general handle better, and smaller cars are generally cheaper than larger cars. When was the last time you heard of a honda civic rolling over? Probably never, which is about 5 times less than I have seen SUVs on their roofs. Bigger mass also means less fuel economy, and also likely more moving parts and more expensive repair bills.

Google Volvo, BMW, etc and you can find websites dedicated to harrowing tales of how drivers walked away from terrible accidents. Thankfully cheaper cars are now catching up in safety, but you are going to have to spend a significant amount to maximize safety. I want my wife to have the best chance possible out there, so safety matters more than saving a little on the car expenses.

I'm going to relate a story here:

A patient of mine had a bad accident on Mulholland drive. She was driving a 1980s Mercedes sedan, and it flipped off the road. The fact that it was a Mercedes saved her life v. other cars. She had some neck problems but other than that was fine, just some bumps and bruises. I asked her, if she had been driving a lighter, smaller car, might she not have lost control of the car? Yes, BMW's and Volvos have great safety records. But many people buy SUV's because it's "safe" - you feel like you are in a tank. But when you can't corner as well, or you think you can corner better than your vehicle can, you psychologically are in more danger of actually having an accident. Further, smaller (cheaper) sedans from Japan have excellent safety records going back many years.

I can't argue with the safety of German cars, as you are right - you can't go wrong if you are buying for safety in buying a Volvo. But do you need to pay 30k for a car when you can get the same amount of safety for less than 10k? This is all about LBYM (live below your means). Just because you can afford something more expensive doesn't mean it's best for you to get it, and the majority of people buying these vehicles can't afford them anyway.

2. Sanity and Peace of Mind: Newer is usually more reliable. And reliable brands often cost more than comparable cars of less reliable brands.

My 2001 Corolla has 120k miles and hasn't had any major problems at all. I expect to get at least another 130k out of it, and I know plenty of people who have Corollas from the early 1990s that are well into the 200-300k range in terms of mileage. Compare that to BMW and Mercedes where your maintenence bills after 5 years start going through the roof. So I call BS on the "newer is more reliable" (how about all those mercedes a few years ago that had all those electrical problems) and cost - Toyotas and Hondas historically have been way more reliable than more expensive luxury vehicles from the US and Germany.

If you live 6 blocks from work, drive 4,000 miles a year, and have ways to get to work via friends or family members if your clunker won't start or is in the shop for a week, fine. But some of us have 80 mile round trip commutes and jobs where being late regularly isn't a good idea. Some may also be commuting along deserted roads after dark and don't want our wives at the mercy of whomever stops to help. Losing a $120,000/year job to save $3,000/year in auto costs probably isn't a good trade-off. Anyone who has broken down in the middle of I-285 in Atlanta where the "slow lane" is going 65mph and you have to cross 7 lanes to get to the roadside will testify that the $250/mo car payment to help avoid that situation would be worth it.

As I stated above, a good economic Japanese car from the late (or even early) 1990s will get the job done, without a 250/month car payment. And maybe without that 250/month car payment you could put that towards a house a little closer to your work maybe?

Finally, if you DO make that hour plus commute, it sure goes by better in a BMW than in a '83 Chevy Citation.

But the difference between a BMW and Honda/Mazda/Toyota is minimal, definitely not 5 digits worth more.

3. Image: I personally don't care what I drive, but my customers do. So an '07 pickup may pay for itself in new business and customer confidence vs the '82 rustbucket my competition shows up with. My brother saw his income rise dramatically as an electrician when he moved from buying old utility company used vans dirt cheap to new pickup trucks. People just perceived he was better due to the smart looking vehicles. He worked for great remodlers who showed up in old vans and though they were cheap and did good work, they often didn't get the job. I'm not saying it's right, it's just the way the world is.

A vehicle for a business can be written off as part of a business expense. I do not believe that a fleet vehicle needs to be brand spanking new to have a good image. Your vehicle should be relatively clean, organized, not TOO old, but also not beat up; if you have a logo on your van or truck your vehicle should be seen as a moving advertisement and as such it is not good business to have a trashy looking vehicle. But think of it this way, do trucks from 1997 look that much different from trucks in 2007? Doubtful. Now if your 97 truck is rusted, trashed, spews exhaust, yeah, that's not good, but if it runs perfect, has a good paint job, is well maintained, I don't see where an older model like that would be seen as "dumb" or "not smart."

4. Hobbies. For some their car is also a source of recreation and so instead of being seen solely as a capital investment part of the cost can be written off as a regular monthly expenditure on entertainment. If you drive a beater but drink $3 coffees and eat out 5 times a week, you're still spending the same amount of money. It's all about choices.

True, but the issue is that most people who are driving are not car afficionados. After you drive a car a few times, a car becomes a car - a means of transportation. Whether you are in a 2 ton SUV or a 1000 pound hatchback, when you are sitting on a highway stuck in traffic it's all the same. Most people are buying cars, and buying more car than they can afford, simply to keep up with the joneses, and for status symbols. The original article likely is targeted more to the semi-moronic typical US joe or jane who sees all their friends driving dope cars and they just HAVE to have that new BMW 3 series, and it's "affordable" because it starts at "only" 25k!

Cars are definitely silly sometimes, and no doubt Americans spend way too much on them, but in some cases I think it makes sense to borrow a reasonable amount. I haven't had a car payment in years, but did in the past. never large, always a big down payment, and always on a modest vehicle, but I wouldn't say "NEVER" is always the right answer to this question.

EJ also didn't say never, he stated that if you needed to borrow, you borrow as little as possible and pay it off. A car is a depreciating asset, unless you are putting a lot of labor capital into an old restoration.

I would say there is a happy medium between the $40,000 SUV bought with nothing down and the $600 beater.

I don't think EJ was advocating a $600 beater. Spending a saved amount of 2-7k you should be able to get a safe, reliable, fuel efficient used car like a honda civic or toyota corolla

[Andreuccio]

Re: How Much of Your Car Should You Finance? Zero percent.

Good post. A few random thoughts:

I'm going to relate a story here:

A patient of mine had a bad accident on Mulholland drive.

I love that drive, especially at night. There are spots where you can see the lights of both the city on one side and the valley on the other. Definitely a better view right-side-up from the road, though, than upside-down from the hillside.

I can't argue with the safety of German cars, as you are right - you can't go wrong if you are buying for safety in buying a Volvo.

Not to pick nits, but Volvos are Swedish.

My 2001 Corolla has 120k miles and hasn't had any major problems at all. I expect to get at least another 130k out of it, and I know plenty of people who have Corollas from the early 1990s that are well into the 200-300k range in terms of mileage. Compare that to BMW and Mercedes where your maintenence bills after 5 years start going through the roof. So I call BS on the "newer is more reliable" (how about all those mercedes a few years ago that had all those electrical problems) and cost - Toyotas and Hondas historically have been way more reliable than more expensive luxury vehicles from the US and Germany.

I used to have a Corolla. Outstanding car. As you say, I got close to 250,000 miles before I started to have any major problems. And I think those were due in part to some maintanance I deferred when I hit a rough spot personally.

As I stated above, a good economic Japanese car from the late (or even early) 1990s will get the job done, without a 250/month car payment. And maybe without that 250/month car payment you could put that towards a house a little closer to your work maybe?


But the difference between a BMW and Honda/Mazda/Toyota is minimal, definitely not 5 digits worth more.

To me, the difference isn't so much between German and Japanese cars as between luxury and practical cars. I haven't checked pricing, but I imagine prices are comparable for German and Japanese luxury cars. I'm all about buying practical cars for myself, but I think the difference in quality of ride between the two is substantial, and if I had the cash and drove a lot I would definitely opt for luxury.

[DemonD]

Re: How Much of Your Car Should You Finance? Zero percent.

To me, the difference isn't so much between German and Japanese cars as between luxury and practical cars. I haven't checked pricing, but I imagine prices are comparable for German and Japanese luxury cars. I'm all about buying practical cars for myself, but I think the difference in quality of ride between the two is substantial, and if I had the cash and drove a lot I would definitely opt for luxury.

What I'm saying is that the difference is minimal, and not worth the price difference unless that difference makes no difference to you.

For example, I've driven my corolla about 3 times to vegas and back. One time I drove a Porsche there (friend's Porsche). Same model year of car - 2001.

When you have your cruise control on at 80 mph on the I-15, there is virtually no difference. When you are stuck in traffic on the Strip - virtually no difference. Yes for the 1 or 2 stops you make you can accelerate onto the freeway a little better. But my corolla handles that just fine thanks, so like I said, in terms of safety and performance and reliability, the cost is not worth it.

What does a Porsche buy you then? Let's call it social capital - my buddy with the Porsche got a lot more attention socially (both boys and girls) compared to before he got his Porsche. This says nothing about his level of success. Warren Buffett famously drives a Lincoln Towncar. I'm also told that Kirk kerkorian drives an older model Jeep Cherokee - an 80+ year old multibillionaire driving a true beater! Just goes to show you you can be a successful businessman and not have an ostentatious vehicle.