A vehicle is a significant contributor to our overall quality of life. It provides a means to get us to the places we need to go quickly and efficiently. It provides a means of getting to and from our occupations. It provides a means to go where we want to go when we choose to go.
Although cars don’t increase in value or even hold their value for that matter, they’re still an investment when you consider the role they play in helping us generate income. Whether your vehicle is a good investment or not depends heavily on how much you pay for it. For example, let’s say two people work for the same company, both earning $80,000. One person drives a brand-new BMW with a $700 payment. The other drives a seven-year-old Toyota that’s paid for. From a financial perspective, the person driving the vehicle with no payment is getting the most return on investment because they spend less of their salary on transportation.
Reasons you should pay cash for cars
While it’s hard to argue with that math in the above scenario, most people don’t make vehicle purchase decisions from this perspective. For some, a vehicle is a status symbol, they feel a need to drive something that’s a reflection of them. For others it’s an emotional decision, they fall in love with a specific model and just have to have it. I’m not suggesting there is anything wrong with this, but it is important to point out that vehicles are depreciating assets, meaning they decrease in value over time. The only time a vehicle might be worth what we pay for it is before we take it home. After that, the value steadily declines while we continue to make payments based on what it was worth at the time of purchase. Which brings me to my point, you should pay cash for cars.
Here are four reasons why:
Not wasting money on interest. Financing a vehicle means paying a significant amount of interest on the money you borrow. Interest is one of the things I classify as a money evaporator; things we pay for without getting anything in return. For example, if someone financed a $25,000 vehicle at 5% interest for 48 months, that vehicle will actually cost them $27,635.22. They don’t get anything in return for that extra $2,635.22, it’s simply the cost of borrowing money.
To retain your ability to negotiate the price. People who sell vehicles don’t want those vehicles. They want the money they’ll get from selling the vehicles. They also understand that the person with cash has the option to buy anywhere. Therefore, they will do what they can to get the person to spend that cash with them. With cash they don’t have to worry whether their credit is good enough to get approved for financing. They don’t have to worry about receiving the money over the life of the loan, they will get the full amount right now. Therefore, if you have cash, you’re in position to negotiate price.
To avoid buying too much car. I hear it all the time, “if you’re buying something, you might as well get what you want.” That thought process causes a lot people to overextend themselves. When you pay cash for a vehicle you limit yourself to only vehicles that fall within your budget. As opposed to what the bank will approve you for. It’s not necessary to go big all the time. It’s OK to do the best you can right now and graduate to something better later.
To keep your income freed up for other important financial priorities. The more income someone has obligated toward regular bills, the less money they have for things like investing, building retirement funds or saving up to buy a home. These are the types of things that can actually improve your overall financial situation. A car note is simply an obligation that pushes those other financial obligations further out into the future.
Tips for how you can pay cash for cars
I’m not naive, I realize that everyone isn’t in a position to pay cash for a vehicle. If you’re in need of a vehicle right away, do what need to do. I just encourage you to make business decision by finding something affordable that gets the job done. For those of you who have some time before your next purchase I want to offer four tips for paying cash for your next vehicle.
Use your bonus to buy a car. I hear stories about people getting bonuses all the time. If you’re one of those who are fortunate enough to receive a bonus, it’s a great opportunity to drop a lump sum on a vehicle.
Use your tax refund to buy a car. Many people receive a large tax refund. A tax refund is also a perfect opportunity to drop a lump sum on a vehicle.
Start saving before you need a new vehicle. If you’re currently driving a vehicle that’s paid for, that’s great. Please don’t wait until you need a new car to start savings. Start saving for your next vehicle right now. By the time you’re back in the market for a vehicle, you’ll have some cash to work with.
Don’t be afraid to purchase a vehicle via a nontraditional route. They are means of buying a vehicle beside going to a dealership. Several years ago, I lived near an excellent mechanic who also did body work. He always had nice looking, good running car parked at the edge of his property for sale. I never saw a vehicle being sold for more than $10,000. You might not live near anyone who sell cars but you have access to the internet and you can almost certainly find a decent, affordable, vehicle from an independent seller if you’re willing to do the leg work.
Happy New Year….toast to paying cash for your next vehicle!!