Thursday, April 11, 2013

Middle Class Myths (The Car Payment)

One of my personal pet peeves is the car payment. Totally intelligent, responsible, middle class Americans believe they can not live without a car payment. I tend not to go after this myth as often as cable TV and cell phones. It is much easier to make an argument against a $150 a month cable bill than going after the car payment. After all, if you live in most places in this country you need a reliable car.

I recently read an article in Zero Hedge. The automakers have introduced the 97 month car loan. No really, I am not making this up. The Wall Street Journal is reporting that while the average price of a new car is now $31,000 (up $3,000 in the past four years) the average monthly car payment has dropped from $465 to $460. Experian reports that 17% of all new car loans were for 73 to 84 months. Four years ago only 11% of car loans fell into that category.

This is insane. By the time a customer has paid off a 60 month car note, the car has lost over 40% of its value according to Edmunds (their website is a very valuable resource when buying a car). Their graph does not extend beyond five years, but my calibrated eyeball extrapolated the trend line out to 97 months. I would guess your car has lost 85% of its value. Congratulations on a 97 month car loan at 4% you have paid about 115% of full retail for an asset that is worth 15% of that retail price.

You can live in this country without a car payment. I have done this throughout my entire life. I won’t lie, back in the day I drove some pretty nasty rust buckets. However since 1988 I have been able to pay cash for new cars. My current strategy is buying new then keeping the car until repair costs over the course of a year begin to approach the cost of a few new car payments for a similar car. That seems to happen after a car passes 175,000 miles. Given the way I drive, I typically keep a car for between 12 to 14 years. Until 1988 I replaced a car when the cost of repairing a car exceeded the value of the car once repaired.

I bought my first car, a 1967 Chevy Nova, in 1973 for $600. According the Inflation Calculator, in today’s dollars that would be $3,058.31. I got about 7 years and 75,000 miles out of that car. $3,000 seems like a reasonable lower limit for a car. I wouldn’t recommend a $1,000 car unless you are a professional mechanic with some spare time on your hands. Let’s say that $3,000 car lasts you for four years. During that time pay yourself a $400 a month car payment. At the end of four years, even with no interest you will have $19,200 in hand. A quick visit to CarMax shows me a 2011 Honda Accord SE 4D Sedan with leather seats, air conditioning, and cruise control with 28,000 miles for $19,998. That is a really sweet car. It only took you four years in a beater to escape the car payment trap for the rest of your life. After you have driven that 2011 Honda for another eight years or so, you will have enough money to pay cash for a new BMW, if that is what you really want.

Please believe Bible when it says, “The rich rule over the poor, and the borrower is slave to the lender.” Think about it. If you are in debt, the lenders have a legal claim to your time. Whether you like it or not, you have to work until you have paid off that claim.

Now let’s go ahead and have a little fun. The $1,000 Car song by the Bottle Rockets.

A $1,000 Car

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