With the exception of hearth and home, the motor vehicle constitutes the average American's single most important fixation. Far more than transportation, it’s for many the embodiment of beauty, pride, status, and individuality.
There’s no single product more forcefully promoted or representing such a substantial portion of disposable income than one's vehicle, and the potential for financial dilemma is all too real. Still vivid is my recollection of a friend with a wife and two children who drove an older vintage Chevrolet. One day while at his apartment he showed me his new possession: a somewhat used Volvo. In those days any foreign car other than a Volkswagen Beetle seemed a novelty. The surprise came two weeks later when he proudly displayed his subsequent acquisition by trade-in of the Volvo: a used Mercedes Benz. But the real eye-opener was his justification – that he expected to be in debt for a car forever, so it might as well be a nice one. Perhaps you know persons with similarly misguided values.
From a logical viewpoint, it’s easy to dispense the following advice on the purchase of a motor vehicle.
- Don’t buy anything you can’t pay for in hard cash without borrowings of any sort.
- If a new car isn’t within your budget, search for a serviceable used one.
- If continuing to use your present vehicle costs less than buying a replacement, don’t make the change.
Unfortunately such advice is just that¾easily dispensable. Social and psychological considerations make pressing demands. The need to sport a fashionable vehicle can be an obsession for many young – and not so young – men and women. I recall my shiny new financed convertible with pride; by the time I made my last payment, it needed a replacement transmission and the top leaked.
And these pressures are not restricted to the lower and middle economic rungs. A close friend, a man whose family wealth dated to the early part of the past century, related a revealing story. As a private investor in Southern California during World War II, he organized and financed new public companies. Auto production had ceased during the war years – 1942 through 1945 – and by 1946 his rusty 1940 Oldsmobile showed visibly that it too survived the war. However, with wartime price controls still in effect and the trickle of new cars requiring under-the-table fees that my friend refused to pay, he continued to drive his relic. One day after completing business at his Wilshire Boulevard office in Beverly Hills with the CEO of a newly formed firm, the executive commented on his recently purchased 1946 car being serviced a few blocks away. My friend offered to drive him over. When they got to the Olds, the executive took one look at it, said he preferred to walk, and blurted out, "Maybe you're rich enough to drive that thing, but if any of my stockholders saw me in there, I’d be ruined."
At this point you are entitled to a dispensation. Although my three rules of car buying may be logical and defensible, many of you simply will not conduct your lives in this Spartan fashion. You’re entitled then to a next-best alternative. If you badly want a new car you can’t afford, consider a late model used car. These past several years they all look alike anyway and in general a 3-year-old vehicle sells for about half of what it did new.
Whatever you select, minimize your financing, and shop for the lowest interest rate. Except in the case of a new car subsidized by the manufacturer, it generally won’t be the loan arranged by the auto dealer nor an unsecured bank loan. Borrowings secured by assets such as securities or an insurance policy are often available at lower rates. You may do even better from a credit union. Best yet, get a loan from a family member at little or no interest. And whatever the loan, make certain the monthly interest charged is one-twelfth the per annum rate on each month's balance owed, with no prepayment penalty. Do not consent to a "term" loan in which interest for the full term is calculated at the beginning and included in the face amount of the borrowing.
Finally, remember that the more rapidly the loan is paid off, the better. An elderly mortgage lender once put it most succinctly: "Interest is not something you pay; it’s something you receive."
A professional investor for nearly five decades, Al Jacobs holds a degree in civil engineering from Rensselaer Polytechnic Institute, a Real Estate Certificate from the University of California and a Certified Property Manager designation (CPM) from the Institute of Real Estate Management. His written works can be found in the book "Roadway to Prosperity: A Practical Guide to Wealth Accumulation" and also in several newspapers near his hometown of Monarch Beach in Orange County, Calif. Jacobs writes a weekly column for his website.
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