The following is a guest post from Michael Taylor at Household BudgetCoach.com
In the market to buy a car? Thinking about financing a used car? I’ll show you the cost of owning a car and why you should be paying cash for a car. Read on!
My First Car- Paid For With Cash
Ah… the joy of owning your first car. I remember my first car. It was the summer after my sophomore year in college. It was 1992. I had the bug pretty bad. I had $1500 saved up and I was dreaming big! Long story short, I bought a car and cracked the cylinder head on it two weeks later. Sad day…. For those of you that don’t know much about cars, that’s really bad! I pretty much flushed all of my money down the drain for two weeks of driving. No car for college. :o(
Pay Cash or Finance?
Enough reminiscing about the past. Are you getting ready to buy your first car? Or maybe this one will be your fourth or fifth car. Whatever the case there’s the classic question, is paying cash for a car worth it or should I finance a car? I’d recommend paying for a car with cash rather than getting a used car loan due to my desire to not accumulate any debt. Accumulating debt means you are paying interest on a loan.
Maybe in your mind it’s not that cut and dried. For me, I don’t want to bust my budget making payments on a car loan. Hopefully, by the time you’re done reading this post you’ll talk yourself out of debt.
The Cost of Owning a Car
What is the cost of owning a car? Today, I’ll show you how much it’s cost me since 2009 to own two cars without any car payments. I’m talking about maintenance, insurance, license plates, personal property taxes and fuel. My wife (Amy) and I have two cars. We always have. I’ve tracked our spending pretty extensively since about 2007. Early on I was using primarily spreadsheets. Since
June 2009 I’ve used an iPhone App called HomeBudget.
Since I can easily run a report on expenses using this app I’ll include all auto expenses incurred since June 1, 2009. I didn't add up these numbers before I sat down to write this, so it’ll be interesting to see how this turns out. Do you think I’ll find paying cash for a car is worth it? We’ll see….
Let’s see what the numbers look like.
Total expenses incurred in the Transportation budget category: $59,454.82.
$12,000 of this is for my current 2003 Ford F-150 truck that I paid cash for in July 2010.
So I’ll subtract out the purchase cost because I only want to include what I call Cost of Ownership expenses beyond the purchase price.
Total Transportation Expenses Minus Truck Purchase: $59,454.82 – $12,000 = $47,454.82 !!!! OUCH!
More Details
It’s good to track your spending, but it’s painful sometimes to see how much you really spend on things that just depreciate with time. These are expense over a period of 56 months. Honestly, I’m surprised at how big this number is. Let’s break it down into a little more detail.
Maintenance: $12,500.99
Gasoline: $28,122.61
Auto Insurance: $4,659.04
License Plates and Taxes: $2,061.72
Other: $110.46
All of these expenses are for two vehicles. Now if I average these expenses for two vehicles and the cost per month this is what it looks like:
Maintenance: $111.62
Gasoline: $251.10
Auto Insurance: $41.60
License Plates and Taxes: $18.41
Other: $0.99
Total Monthly Expenses Per Vehicle: $423.71
Do these monthly expenses seem high to you? All I’ve got to say is, Ouch! Gas is by far our biggest expense. This is the average fuel cost over the past 56 months. If I re-ran the numbers just using the fuel cost over the past 24 months it would be higher due to the high cost of gasoline now. We typically drive a lot due to having four kids to run around, commuting to work and traveling throughout the year to visit family.
Is Paying Cash For a Car Worth It?
Now, let’s assume I chose to finance the truck instead of paying cash for it. When financing a used car the interest rates can vary based on metropolitan area, auto age, credit score and other factors. For the purposes of this exercise I’m just going to use the average used car interest rate quoted by bankrate.com as of Jan. 2, 2014. The average used car loan interest rate is 4.72% for a 36 month loan.
Using a simple used car payment calculator:
Purchase price = $12,000
20% down payment = $2,400
Amount financed = $9,600
Monthly Payment = $286.52
Full Loan Payment Amount = $286.52 x 36 = $10,314.72
Principal = $9,600
Interest = $714.72
I’ve over simplified this because I haven’t included the sales tax you have to pay when you buy a car. That would also add to the amount financed in the loan.
Hidden Expenses
There are also hidden expenses I haven’t accounted for: depreciation! This is an example of buying a used car. It’s a fact that automobiles depreciate. According to Edmunds.com, on average a new car depreciates 15-25% each year for the first 5 years. That is a big loss! This is the main reason I buy used cars.
By financing the truck I would have added an additional $286.52 to my monthly expenses. Also, over the life of the loan I am paying $714.72 in interest just for the privilege of financing! I could use that money somewhere else. As my fellow blogger, Steve Stewart, at MoneyPlanSOS.com says, “Pay attention, not interest!”
Personally, I’d rather pay cash and put the payment amount in my bank account each month for the next car purchase.
What about you? Do you think paying cash for a car is worth it or do you finance them? Leave me a comment below and let me know.
Michael Taylor is the founder of the Household Budget Coach blog. To receive good advice on getting out of debt sign up for his free blog updates. He is married to his wife of 18 years, Amy. He is the father of 3 boys and 1 daughter. Michael enjoys hiking and camping with his family and the occasional amusement park. He and Amy have been living debt free since September 2009. Find out more about Michael on Google+. You can also connect with him on Facebook, Twitter and by email.
photo credit: John Lloyd
Why does car depreciation matter if you have no plans to sell it in the next 7 years to ever
Good point! I usually don’t worry about depreciation myself because I keep my cars until they die. But using depreciation is certainly a good way to argue the point that paying cash is best in the long run.
I don’t disagree that paying cash is better, interest is really a convenience fee for not needing to buy something before you have the cash. The problem for most people is that it’s hard to break out of the cycle of needing to finance. In order to do so a person would have to do one of two things (in an everyday, real life sort of scenario): 1.) finance a vehicle, then essentially make double payments – one to the creditor, and one to a savings account so that when a new car was purchased (assuming AFTER the loan was paid in full) the person had money in the bank to pay cash. 2.) finance a vehicle, and then have it last double the term of a normal auto loan, but then on the second half save the money instead of giving it to a creditor. Both of these scenarios require a lot of financial discipline, and most people just find it very difficult to set aside this much cash and just let it sit there without touching it.
Another alternative is to do what I did. Angie and I made a commitment to drive our cars for at least 250,000 miles. That allowed us to drive them until they were paid off. Once each car was paid off, we started putting the car payment in the bank until we had a large chunk of money to pay for the next car. That’s how we made our turnaround. We have paid for a Lexus and an Infiniti with cash (Used, of course!). The other cool thing is that when Angie’s car hit 250,000 miles and we decided to get a new one, we were able to give her old car to someone who needed it. That was 6 years ago and that car is still on the road today.
Wait. This assumes two things: (1) That the buyer has the cash (2) That the buyer who has the cash and instead chooses to finance lets that cash sit around collecting dust. Presumably, the buyer would want to invest it inside of a retirement account or pay down other, higher interest debt… either of which could potentially net more than the 4.72% of the loan. To me, the biggest benefit to paying cash is that it forces you to look at less expensive vehicles.