How to Pay for it

You have decided to buy a car. Now you must pay for it. If you have read my other web pages, you have gotten the impression that I want you to save all the money, then buy it. Although this sounds austere, let us explore it for a moment.

Buying the Car with Cash

If you pay cash, you need not worry about making monthly payments. Also, you will not get disgusted when you notice that car loan interest is not tax deductible. The monthly payment money you save can go toward the next car you buy for cash.

How much money can you save by avoiding a loan? Let's do an example. Suppose you borrow $10,000 at 8% interest for a 3 year loan. Your monthly payments are $313. You pay $11,268 all together. If only you had the $10,000, then you could have avoided paying the $1268 in interest. Better yet, if only you did not need to buy a car requiring as much as $10,000.

I do not suggest that you drive a cheap car all of your life, but if you drive a cheap car once, while you save the cash for a great car, you can save the cash for the next car while driving the great car. You need only drive a cheap car once!

If you take my advice and tolerate a cheap car, take care to avoid a common pitfall. Some people will buy a cheap car to save money. After the loan is paid off, instead of thinking "Now I can save some money," they think "Now I can get rid of this garbage and buy a real car." The problem is that they cannot yet afford a "real car." They buy another cheap car and go through the same cycle. My advice is BUY A CHEAP CAR, HOLD YOUR NOSE, THEN BUY A GREAT CAR. The great car will save you money.

Lease versus Loan ... or ... Lease is Loan

All right. So you decided that you cannot or will not pay all cash for your car. You must borrow some money. I will forgive you, but try not to do it again.

If you pay only part of the price for your car, try not to fall into the lease option. For the seller to agree to a lease, he must take enough of an initial payment and monthly payments to do as well as he would if he lent the money. Otherwise, he would just sell the car to someone who would borrow the money. Also, he will want to set the post-lease purchase price to be as high as possible. This way, he makes big money when you buy the car, or he makes big money when your lease is over and you need another car.

If you must choose to lease a car, how do you calculate what a fair deal would be? To be honest, I don't know. It would take some assumptions and an enormous amount of calculations. In general, you want to make your car transactions as simple as possible to protect yourself. Leasing is not the way.

The advantage of leasing is that you need a very low down payment. If you have that little money, you should buy a cheaper car.

Many people will lease a new car for two years, then lease another new car for two years. They violate every rule in the Your Car page. I hope that they are rich. They will need to be.


Copyright 1996 Alacrity Research