Monday, January 18, 2010

Financing the New Car

OK, Thursday I talked about buying a new car. Today let's discuss the financing options.

Option 1, is to lease the vehicle again. I'm sure there are valid reasons to do this and if you think you have one talk to an accountant. I think for the most part these benefits only apply to businesses and only certain ones at that. Even if you want a new vehicle every 2 years it's cheaper to buy the car and then resell it than it is to continue to pay the lease amount. It's certainly not worth it to me when I want to buy a used vehicle and drive it until the wheels fall off. A lot of companies are starting to drop this option as well anyhow.

The only reason I leased the first time was because I bought a car I couldn't afford. Mind you I think they were pushing the lease and compared a 2 year finance to a 4 year lease, but that's beside the point. I don't think it's smart to buy a car you can't afford any more than it is to buy a home you can't afford. So, for me this option is out.

Option 2, is to finance the vehicle. You could finance it through the bank or through the car financing company. One thing to take into consideration which I didn't the first time around, was any financing fees. The car dealers financing options are almost always going to look better than the banks. However, when we financed the dealer charged us a $500 fee. They wanted to charge us $1000 but I told them there was no way that was going to happen. Even with the higher interest at the bank it would have been cheaper to go with them it turns out.

An attractive offer from the dealerships is 0% financing. Again though, this might not mean what it sounds like. Read the fine print. 0% might exclude any offers you would have gotten if you paid cash. It also might have extra fees to finance, etc. Borrowing the money from the bank might allow more bargaining with the company for those cash incentives.

If you have enough room on a line of credit, you don't even need to go to the bank and ask for the loan. If I buy directly from a personal seller and not through a dealership, dealership financing won't be an option anyhow.

So, I'm going to be looking at some form of Option 2 because I don't have any other funds set aside. I'll use the line of credit if I can free up enough room, but otherwise it will be some sort of financing. However, there is a 3rd option that I plan to use on every vehicle from now on.

Option 3, is to pay cash from a good old fashion bank account. Sounds crazy I know, but let me explain before you give up.

Let's say I borrow the $12,600 from the bank to buy a 2yr old Ford Focus. Ignoring the $1000 push, pull or drag event. Assuming I finance that over 4 years at say 5%, the monthly payments are approximately $275/month. Here's the trick, once I'm done paying off the car, I continue to make the payments. Only this time to myself. Assuming the car lasts my projected 10 years, I then have $13,200 sitting in the bank for the new car.

The next car becomes even cheaper because I have longer to save for it. I could put $130/month aside and be able to pay cash for the next vehicle. You get a much better feeling of satisfaction when you pay for something with your own money. Not only that but earn interest on your money instead of paying interest on the money borrowed.

Now, if you're thinking you can't afford to put the money aside monthly, then how are you going to afford to make the higher monthly payments to finance it yourself? Somehow we always find a way. That's the same sort of mentality you have to bring to this to make it succeed.

Now that you're talking about a significant amount of savings, let's look at a way to make the money grow even faster. This results in lowering our monthly car payment even further.

For example, if you put $125/month aside into a saving account and want a new vehicle every 8 years. After 1 years of savings, you can buy a 7 year GIC. Then the following year you buy a 6 year GIC, etc. Earning much more interest than in a simple savings account. This technique is called laddering. I think the 5 year GIC might be a max, so you might need to buy a 5 year then a 2, but you get the idea.

Using INGs current GIC numbers, you end up with $12,846.59. More than you need with $5 less a month. Money you earned rather than gave to the finance company. If you compared 4 years on your own to 4 years with the finance company you save at least $25 a month. Not to mention the benefits that paying cash gives you.

The best part of all of this is that this technique applies to every big purchase, not just cars. Reversing the cycle of borrow, buy, repay can save you a lot of money in the long run! Not to mention the great feeling of not being indebted to anyone.

I'm going to use this technique on my vacations, flooring, and new electronics as well.

As always I'd love to hear your thoughts.

1 comment: