The 10th Man

Cars

January 3, 2019

Buying a car is a pretty terrible experience. The last car I bought was in August of 2017—it took about six hours, the salesman was a bit like the pool boy in Extract, and I had to sit through the extended warranty rigamarole.

You can order pretty much anything else off the internet and it will show up at your doorstep. Not cars. Tesla is trying to do this, but Tesla has its own issues.

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Anyway, I had done plenty of research on what my trade-in and the new car were worth. My pool boy car salesman put together what I thought was a pretty good offer, so I took it. In spite of being Master-of-the-Universe-trader-guy, I am not much for haggling over car prices. I will haggle for stuff if it’s on a computer screen, but not face-to-face. A cultural thing, I suspect.

The car I bought before this one, I got on cars.com, which eliminated all the haggling and got me a good price. That actually was a good experience.

Not including the car I inherited from my grandmother when I was 16 (which was a POS), I have driven four cars in my lifetime. All Toyotas. A Toyota Tercel, a Toyota Camry, and two Toyota Highlanders. I am brand-loyal to Toyotas.

In 23 years of owning Toyotas, I have never had mechanical issues. I have never had (aside from me leaving the lights on and running down the battery) an instance where I walk out to the car and it won’t start. That is pretty much what I want in a car—I want it to start when I turn on the ignition. The only other thing I care about is the sound system. I pay extra to upgrade the sound. In my last Toyota Highlander, I blew out the speakers twice.

There is a school of thought that you should buy gently used cars, since you drop a few thousand bucks in value once you drive a new car off the lot. Maybe. I have my system and it works for me—I buy new Toyotas (which are not terribly expensive) and put hundreds of thousands of miles on them, then trade them in for new Toyotas.

Because they are new, I know they don’t have any mechanical issues. Because they are Toyotas, I know they won’t have any mechanical issues. Buying a used car is a false economy if 6 months later it craps out on you, and you have to take it in for $3,000 in repairs.

I don’t think this works for other kinds of cars. BMWs have a reputation for having maintenance problems. They are cool cars, but… I’ll be a dork and drive my Toyota because I know it will start when I turn on the ignition. I suspect I will continue to drive Toyotas even if I become the richest person in town. I am just not much of a car guy.

Being a “car guy” is an expensive hobby to have. I like to think about car expenses in terms of how much you pay per year for the privilege of driving your car. I paid $40,000 for my current car, with a $9,000 trade-in, so an all-in cost of $31,000. If I own the car for 8 years, it costs me $3,875/year, not including gas, insurance, or maintenance, which is basically zero outside of replacing tires and brakes.

$4,000 a year to own a car is not bad. Unless you buy some beater car, $2,000 a year is probably the minimum it will cost you. If you make $80,000 to $100,000 a year, you can afford $4,000 a year to own a car (even after including gas and insurance).

If you make $40,000 a year, you will probably want to get a cheaper, used car. This is one of the ways that life is unfair to people without money, because in order to save money, you necessarily have to run the risk of dealing with mechanical problems. And the worst part of that is not the money, but the time. Everyone knows the lamest excuse for missing work is “car trouble.”

What’s missing here is a discussion on financing.

     
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Car Loans

Don’t get one. Pay cash.

I have had two car loans in my life. They worked out fine, but I paid a lot of interest.

Paying interest is bad, as we have said many times here in The 10th Man. It is unproductive.

The last car loan I got was for the Highlander I bought in 2010. It was a 5-year loan at 4%. The car cost $32,000 and I paid $8,000 in interest over the life of the loan. Useless.

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This especially applies if you are a subprime borrower, in which case you will be getting a car loan of 6 or 7 years at a much higher interest rate. You will buy two cars with all the interest you are paying.

I know some of these car salesmen. They are very creative with financing. They say, “I can get you in that car.” One way or another, they will structure the deal so that you can buy the car. And that is not going to be a very good deal for you. Which is the understatement of the century.

The cars guys are not acting in your best interest. They can put you in the car. It will just not be a car that you can afford.

I am a big fan of paying cash for stuff. Technically, I put $5,000 of my last car on my credit card to get points (more on this at a later date). Then I paid it off the following month. I wrote a check for the rest. From here on out, I will always pay cash for cars.

People get screwed when they buy cars because they are not financially sophisticated. They also do not have a healthy respect for debt. A lot of misery is spread this way.

One final jab about cars and self-image. People who end up in debt often do so because they care too much about what people think about them. I drive a Toyota. It might as well be a moped.

2019

I sent you an email on this yesterday, but it’s important enough that I’m going to briefly mention it again here—please check out your invitation to join the Alpha Society!

It’s a pretty great time to join. For one, you get access to every service published by Mauldin Economics, for as long as it’s published. And you pay a one-off membership fee (plus a small yearly maintenance fee).

It’s a brilliant deal. The alternative is either to go it alone, which is not very wise in the current environment, or to pay yearly subscriptions to a hodge-podge of newsletters, which is not very streamlined. Plus, it’s not unlike the issue I have with car loans—it won’t be long before what you’ve paid in yearly subscriptions will be more than the one-off Alpha Society membership fee.

And that’s not even getting into the membership perks that aren’t available to non-Alpha Society members, at any price: our members-only Quarterly Conference Calls… our online community (the Alpha Society Council)… Alpha Society-only discounts for one-time events including online conferences, emergency summits, and more…

As I said in my email, what’s happening in the markets requires real discussion and debate. We want interesting thinkers and doers in the Society (not just financial professionals) so we can figure this out together.

But there's only a couple of days left before the doors close before another year. So I encourage you to come and join us (and get 2019 off to a great start).

Jared Dillian
Jared Dillian

 

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Comments

John Porter

Jan. 3, 3:54 p.m.

I have a rule that works especially well for cars. Never borrow money for a lifestyle decision. It also works for private clubs. If you make a bunch of money and you are a car guy, enjoy!

John Dziminski

Jan. 3, 3:40 p.m.

I’m not sure how the interest on your car loan was calculated, but if you financed the entire $32,000 purchase price at 4% for 5 years then, you should have only paid $3,360 of interest. Not sure how you could get close to $8,000

eecinvest@yahoo.ca

Jan. 3, 2:42 p.m.

This is not consistent with what is taught in corporate finance.

In corporate finance, placement of money is all about the best alternative use. So if a car loan has an interest rate of 4% per annum (after tax) and the prospective buyer has an investment opportunity that would yield 5% per annum (after tax), it makes more sense for the buyer to take the car loan when buying the car and use the money he would have paid for the car and invest in the investment opportunity. The individual would have an interest income of 5% and an interest expense of 4% resulting in a positive interest spread of 1%.

The scenario is so much better when car companies offer interest-free loans (provided one ensures that the loan is indeed an interest-free loan and not subsidized by raising the car price).

hoynielsens@hotmail.com

Jan. 3, 11:41 a.m.

I coach in financial matters and totally agree with Jareds perspective on car buying at large. Financing however might work in your favor. I bought a 19k brand new Honda Fit last year and got 0.9% financing - this was a special offer from Honda Finance and required good credit - however the dealers are desperate to sell. I still put down 1/2 for good measure, but the cash saved by financing are now in Mysavingsdirect earning 2.4% (at the time it was 1.50-1.75%) 

I do it all over the internet, where the negotiation takes place - often referring to competing offers from other dealers) When the price is settled I make them know that I will pick it up, bring the check, and sign the loan documents, and that if there are changes or up sell I’ll walk away. Aside from the finance guy gentle prying, it worked well. I was out within 45 minutes.

thom.wright@gmail.com

Jan. 3, 9:59 a.m.

Why bash fun cars?  I don’t live in a tent or even a small apartment though I would fit in it, I don’t eat ramen noodles though they would sustain me, I take vacations, I go out to dinner and lunch a lot, I live in a large nice house, and I drive a nice car, actually two, and two nice trucks and fly 3 hot-air balloons and……

When earning money is about having money, not the things that money can provide, something might be amiss in your perspective on life. Those numbers that show up on the screen when I look at my bank balance aren’t nearly as much fun as driving my Challenger Hellcat (707 HP) or flying in my hot-air balloon.  You should try it sometime.

dting@mugar.com

Jan. 3, 9:58 a.m.

This column appears to be a little contradictory to your column ‘Cash Flowers and High Rollers”.
Driving a “nicer” car than a Toyota, however subjectively that is defined, is like wearing a pricier shirt that fits better and other notice.
I have nothing against a good value and dependable car, but a Toyota is not a BMW.  Why not live and enjoy your money a little?

john miller 80095551

Jan. 3, 9:50 a.m.

Its better for a car person to discuss cars.


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