A car is a significant investment and finding the right buying method is essential if you want to make the wisest financial decision. The four most common routes open to you are:
Let’s take a closer look at every option so that you understand what exactly each plan entails for you financially. I’ve chosen the Honda Civic Sedan SE 2015 as a model for my example in this article. I’ll list all the important formulas so you’ll be able to do the calculations for the car of your choice.
Paying cash for a new car is relatively simple. You only need to find a dealership that offers the model you want for a reasonable price and then pay for it. The biggest advantage of paying cash over any financing is the lack of interest. Interest makes you pay more for the same car.
Every day you drive your car, it becomes worth less, so paying more in interest makes no sense. Paying in cash also means you only buy what you can afford. If you can afford a new car in cash, and that is what you want, go ahead and do it.
The average cost of a brand new Honda Civic SE starts at around $20,000. The actual price will depend on quite a few factors, including dealership fees, configuration, etc. By the time all these extra fees are included, you’ll pay around $22,000.
Paying such a large amount of money may not seem appealing; however, its benefits cannot be overlooked. I’ll sum up the pros and cons of this car buying method.
I must say that personally I prefer paying cash to spending more than you can afford. Financing, even with attractively low rates, is always a trap that puts you into debt to others.
The next part of the question is if you should be buying new, but we’ll get to that in the last example.
Car dealers make financing seem easy, and it allows you to buy what you can’t afford to buy right now in cash. Like any other option, financing has its advantages and disadvantages. I’ll list the most essential ones so that you’ll understand exactly what you’ll be getting into:
Returning to our example, there are plenty of financing options for the Honda Civic SE, which really isn’t surprising seeing how it’s one of the best-selling cars in the US in 2015.
According to Bankrate.com the average interest on a new car loan was 4.35% in 2015.
This is what the dealers say, but what does it mean exactly when you do the calculations? The market of auto financing is such a mess that sometimes it’s difficult to make any sense out of all the fancy terms and endless calculations.
What I offer here is a simple breakdown of the essential formulas you’ll need to use to understand how much money you will overpay for a Honda Civic Sedan SE.
To make the calculations easier, we’ll assume that the car costs exactly $20,000.
Therefore, if financed at 4.35% APR for 60 months, you’ll get:
This formula is complicated, so simply use one of many auto loan calculators – I recommend this one at Bankrate.com
A 60-month loan of $22,000 with an interest rate of 4.35% would have a monthly payment of $408.65 and the TOTAL interest paid would be $2,518.85
So by financing, you have paid $2,500 more for the same car vs. the cash buyer.
There is also a matter of down payment to be considered. On average, various Honda dealers require $2,500-$4,000 down payment. Therefore, there will be no avoiding an initial investment if you choose to finance.
Looking back on this example, consider why you feel you need to buy a car you cannot currently afford?
Do you need a new car to fit your sense of pride?
Do you want to buy more car than you need for those few trips a year?
Do you think a new car is the only way to get a reliable car?
It is always good to analyze the “why” when going into a purchase scenario whether it is buying new shoes to buying a new car.
Leasing is the rage these days. It seems like such a good option that you get to drive a cool new car for a relatively low monthly payment. Honda offers two leasing options on the Civic SE:
I know that when you look at it this way, leasing seems like a very attractive option, but… There is definitely a huge “BUT” at the end of any leasing deal, these “buts” are just well-hidden under the pretty wrapper of small monthly payments.
The biggest issue you’ll get with leased vehicles is a mileage restriction. This may not seem like a big problem at first, but that’s only until the point when you notice how much freedom you lose because of it.
There will be no using your car to visit your family two states over on an emergency because breaking the terms of your lease will result in a financial disaster. There is also the unpleasant feeling that will always gnaw at the back of your mind that keeps reminding you that your car isn’t really yours.
If you choose option one, you’ve paid $7,363 for the course of the lease and you have no car and no equity at the end.
This excludes charges for wear and tear, which are almost impossible to avoid, and you would have had to stay within the mileage limits.
If you chose option 2, you would have paid $7,920 over the course of the lease, and you have no car and no equity at the end as well as the charges mentioned above.
All in all, I’d sum up leasing like this:
I’d say that in this case, the cons outweigh the pros.
This option has all the pros of the first one, which means that you get to pay and OWN the car right away. It’s yours to do with as you please, and this is liberating.
It also won’t drop you further into debt. This, in particular, is the actual point of buying anything with cash. Being debt free is the ideal that so many people strive for, this option is more preferable to leasing and financing.
The question, therefore, is whether you should buy a new or a pre-owned car. As we are talking finances here, let’s focus on the costs first. As I’ve said before, a new Honda Civic SE 2015 costs about $20,000-$24,000 with all the taxes and fees included.
The pre-owned market varies greatly in terms of price. The quality of the vehicle is the deciding factor. If we focus on cars about two years old and in good condition, you can get a Honda Civic SE 2013 for around $16,000-$17,000.
The important thing here is to take the time and search the market for the best offer. I’ll admit that this will take a lot of time, but the effort will definitely be worth it in the end.
Now that the cost issue is settled let’s look at the old vs. new dilemma. The advantage of buying a brand new car is that you are sure that it’s as good as it will ever get, and it comes with a warranty attached. However, its value will only go down from the moment you drive it for the first time.
A good pre-owned vehicle that was cared for properly is usually as good as new performance-wise. When you buy this kind of car, you skip out on wasting the money that you’ll lose on depreciation. Sometimes you even get to benefit from the warranty as some used cars still have it attached.
As far as I see it, the definite best option way to buy a car is to buy a slightly used vehicle with cash. If you can’t afford a slightly used vehicle, you might have to go with an older used model.
Simply put more time into researching the longest-lasting brands and models and try to buy certified or from an owner you trust to have taken care of the car.[clickToTweet tweet=”Buying used, with cash, is the best way to get the best deal.” quote=”Buying used, with cash, is the best way to get the best deal.”]
Buying a new car for cash isn’t my first choice because depreciating happens quickly, and if your budget is limited, the extra expense is just not worth it.
Financing and leasing are last options for those who are not interested in building wealth. If you have to choose, choose anything but the lease, which only takes your money and gives you nothing in the end.
What are your experiences with car buying? If you have any questions or would like to share your own stories, please leave a comment below.