A few years ago I paid some stupid tax.  Suffering from an incurable form of car fever, I went out and financed a late model, used Chevy Silverado pickup truck. It ranks right up there with the dumbest financial moves I’ve ever made.  I fell victim to the “I work hard, so I deserve it” line of thinking.  I do work hard, but I didn’t deserve it.  After eventually wising up I sold the truck, took a $1,000 hit between what I paid for it and what it sold for, and moved on.  Since then, I’ve received several letter from the dealership offering to “buy back” my truck.

The Vehicle Buyback Pitch

The letters all have the same tone–because of my superior finance history, and the wise choice I made when selecting a vehicle that has held its value over time, I can bring it back to the dealer where I purchased the vehicle and drive off the lot with a new truck, no down payment required.  Sounds like a pretty sweet deal, doesn’t it?

What they don’t tell you in the body of the letter, but reserve for the tiny print in the footer of the letter, is that you also drive away with a brand new, 60-month loan.  How nice.  Assuming I had kept that truck, I would nearly have it paid off by now, so why would I want to obligate myself to another five years of car payments?

What’s In It for the Dealer?

Dealers are trying all they can to move new car inventory.  With the economic downturn, few people can afford the exorbitant costs of a new car, and more and more consumers are looking for used models.  The vehicle buyback program is the auto industry’s attempt to replace their new car inventory with more popular used models.  But there is a catch.  The offer sounds sweet because no down payment is required.  You simply hand over the keys, they pay off any remaining balance on your old car, and you drive off in a new car with the same monthly payment thanks to a longer financing term.

The problem is that your current car is probably worth significantly more than the value they quote for offsetting your down payment for the new model.  In other words, if you owe $3000 on your current car, but it is worth $12,000 in a private sale, you have $9,000 worth of “equity” in your vehicle.  The dealer might require a $2,000 down payment for new cars, but offer to waive that for you in lieu of your trade-in, and pay off your remaining $3,000 loan.  To the naked eye it sounds like a great deal, but if you simply sold your existing car for $12,000, paid off the loan yourself with the proceeds, you’d have $9,000 to play with, not the $5,000 (loan payoff plus down payment waiver) they are offering.

Of course, the dealer’s hope is that you take them up on the offer because they can turn around and sell your used car for $12,000 (or more) and pocket the profit themselves.  Bottom line?  If you like your car, and it is a reliable form of transportation, don’t let some gimmicky sales letter talk you into “trading up.” That is just dealer-speak for going deeper into debt for a longer period of time.

Nothing says freedom to the American teenager like getting a car of their own. Most parents would love to give their kids a new car when they turn sixteen, or when the graduate high school, but few can afford it. Still, some out there hock their own financial futures to put their prince or princess in a brand new car, and pay for it long into their college years. Not only is this harmful to the parents’ financial plan, it sends a bad message to teenagers. They have nothing invested in the car, and are more likely to drive recklessly or be irresponsible with the maintenance, cleaning, etc.

Create a matching savings plan. To help Jr. raise money for a new car set up a plan to match any savings amount they contribute, dollar for dollar. If your kids are as enterprising as mine you may want to put a limit on this, else they could save $20,000 of their own money and expect a new Hummer when they turn 16! Agree to match the first $5,000 they earn and contribute to a dedicated “car fund” subaccount at ING Direct. Since they are not old enough to legally work until they reach 16, this will encourage them to get creative and find unique ways to earn money. Foster that entrepreneurial spirit by pointing out yards that need to be mowed, babies in need of sitting, and when Mom’s car needs a good washing.

Pretty soon your fifteen year-old could have one or two thousand dollars saved up towards a used car purchase.

Set spending limits. Fortunately, I’ve got a few years to plan for car purchases for teenagers. However, if I was in the market today I would probably use Edmunds.com to find a $5,000-$7,000 used Honda with a good maintenance record. I would not be overly concerned with how the exterior looked, unless there was significant body damage. I personally believe small dings and scratches give a car (and their driver) character.

Drive safely. Check Consumer Reports for safety ratings on used cars, and be sure to run a CarFax vehicle report to rule out any past accidents or significant claims related to body damage. It is also a good idea to have a mechanic look over a potential buy to advise if any repairs are needed and provide a rough estimate of the cost. This will give you some leverage in the price negotiation with the seller. Avoid small SUVs because of their propensity to rollover. Inexperienced drivers are more likely to over-correct steering and cause small, top-heavy SUVs to flip. Used, mid-size cars such as the Honda Civic and many older Saturn models make great buys for teenagers. They are generally safer, and more reliable than their sporty equivalents.

Sharing the operating expenses. Cars come with a lot of expenses. Gas, car insurance, maintenance, repairs, new tires, etc. can really add up. Come up with a realistic way for your kids to share in the expenses and encourage them to drive frugally. If parents agree to help with insurance costs, and any repairs, kids should pay for gasoline and oil changes. If your teenager doesn’t work, you will wind up paying for these anyway, but do so in a way that sets a budgeted amount for each category. If you give a teenager $50 a month for gas they better not “cruise” around after school burning up fuel or they will be catching the bus the last week of the month. This will subtly begin to instill in them the value of budgeting.

If you want to buy a used car for your kids then a no obligation car loan quote from one38.org could be the answer.

Photo by tomsaint11

The other day I was working up an article at a local cafe when I overheard a couple discussing whether or not they should buy a new car to “save on gas.” The wife made the comment, “I know we spend a lot on gas, but we don’t have a car payment.” I theorized from their conversation that they currently have a paid-for car, but are considering financing a newer car to save on gas expenses. Initially, the idea of spending money to save money sounds ridiculous, but after giving it some thought I wondered where the breaking point is, financially, to make this a wise decision.

The Real Costs of Car Ownership

With gas prices climbing we are consumed by how much it costs to fill the tank, but owning a car includes additional expenses often not considered when accounting for the “auto” budget category:

• Car Insurance
• Depreciation
• Maintenance
• Repairs
• Loan Interest (if financed)

Excluding depreciation (since it doesn’t directly affect cash flow), let’s compare the costs of continuing to operate our current gas guzzler with the expense of financing a new car. Now, I realize that gas prices fluctuate, MPG ratings change for highway driving vs. city driving, etc, but for this example we will assume everything remains the same – gas prices, costs to operate, etc. for at least one year. Both calculations assume $150 in monthly maintenance/insurance costs, and the new car includes a $300 car loan payment.

As you can see, from a purely economic standpoint it does not make sense to finance a newer, more efficient car in the short term. Over time, as the cost of gas continues to increase, and the costs of ownership of the newer car come down (and the loan is paid off), the savings realized could be significant. However, it would take a lot of fill-ups at the pump to justify adding a car payment to your monthly budget.

The Costs of Being Green

One aspect I have failed to mention in my analysis is the environmental costs of continuing to operate a car with a lower MPG rating. As you can see from the example above, the “current car” requires about 320 gallons more fuel over the course of a year than the newer, more efficient model. Multiply that amount by several million drivers and you can easily see why demand for gas is so high, and why supply is spread so thin. For purposes of this example I have only used “real” numbers, but environmental costs are certainly something you should consider when making your own car-buying decision. It may cost you more in the short term, but in the long term you are saving money and helping the environment. As Kermit said, “It’s not easy being green,” or was that Al Gore?

Earlier this week an article appeared on Yahoo featuring a man and his million mile pickup truck. You read that right; the truck actually rolled over one million miles in its seventeen year life. It struck me for a couple reasons. First, I drive a seventeen year old truck myself, but it has barely a tenth of “the old girl’s” mileage. Second, in this day of 36-month leases very few people buy and hold their cars long enough to drive them into the ground. This is good news for used car dealers, but bad news for consumers. So, if Mr. Oresnik has proven that it’s possible to drive your vehicle a million miles, why does everyone rush out and finance a new car every three or four years?

To impress people at a stop light. Seriously, think about the motivation for your last car purchase. Was safety your top priority? If you have kids it might have been. Chances are you were more impressed with the options package than the safety ratings. Were you concerned with the interest rate on the loan, or the early prepayment penalties? Probably not. Americans have had a love affair with their cars for many years. It is a concept that is perpetuated by auto manufacturers and dealers alike. Our vehicles have become an extension of ourselves, a reflection of our self-worth and an indication of our success. Some of us actually believe our cars make us better looking. I personally gave up on that idea a long time ago – I look just as ugly in a beautiful car as I do a beater!

I need a nice car for my job. Oh really? Says who? Real estate agents, contractors and other service professionals have fallen for this one. Let’s pretend I call two plumbers to come out to my home for a repair. One drives up in a brand new Hummer, the other a used pickup truck. Guess who is getting my business? You got it – give me the old pickup truck any day. Driving around in a flashy car might give your customers the idea you are successful, but it probably leaves them feeling like they are the ones paying for that ride by overpaying for your service.

I need a new car to save on gasoline. This is one of my personal favorites. I hear people all the time say, “I bought a new car because it had better gas mileage than my old gas guzzler.” Now, I can appreciate their concern for the environment. However, “green” concerns aside, there is no way you can justify financing a new automobile because of higher gas prices. How many thousands of miles a month would you have to drive to make up a $400 car payment in gasoline savings?

Bottom line, cars are simply a method of basic transportation…that’s all they are. They are assembled hunks of metal sitting on four tires designed for the purpose of transporting us safely from point A to point B. I doubt Henry Ford ever envisioned the kind of luxuries we see in today’s automobile – voice activated radio controls, heated leather seats, heads up displays, and backup cameras installed in bumpers. If families invested the $400 a month wasted on new cars into a good, growth stock mutual fund for 30 years they could easily retire millionaires. Hope you like the car!

Automobiles represent one of the largest expenditures in our household budgets, second only to housing. The costs of driving a car don’t stop with the monthly payments, but include insurance premiums, gasoline, tires, general maintenance and costly repairs. One of the most significant, forgotten costs of buying a new car is the depreciation expense.

Cars go down in value like a rock (where do you think Chevy got the tagline?). New cars can lose as much as 30-40% of their original value in the first two years, leaving many people owing more than their car is worth (a position often referred to as being in an upside down car loan). If you find yourself in this upside down status chances are your situation could be greatly improved if you sell that “new” car and buy a $2,000-$3,000 used car to get back and forth to work.

The first step in selling an upside down car is to get a good valuation figure to work with. Kelley Blue Book (kbb.com) offers a great online service for looking up your used car’s value, taking into account mileage, options specific to your model, and the overall condition of your vehicle. Be honest with yourself when assessing the condition of your car. If your kid spilled grape juice all over the backseat upholstery don’t list the condition as excellent. You get the idea.

Always look for the “private sale” estimate. You can almost always get more out of your used car selling it to an individual than trading it in at a dealership, or selling it to an auto wholesaler/reseller such as CarMax. Advertise in your local credit union bulletin or newspaper, and stick a For Sale sign in your window when the vehicle is parked.

If you find yourself in the unfortunate position of being in an upside down car loan, consider financing the difference. This is one of the only times you will here me advocate taking on new debt when trying to become debt free. If your car is worth $15,000 and you owe $18,000, it’s much better to sell it and owe $3,000.

Yes, you still have a debt associated with a car without having the car, but better to owe $3,000 than $18,000. With decent credit you should be able to finance this difference at places like Lending Club, and if you don’t have any cash sitting around for another car, you may want to add $1,500-$2,000 to this figure to include your new (used) car.

Bottom line, quit sacrificing your financial future for the opportunity to impress people at a stop light. Seriously folks, a car is four tires and a hunk of metal. They were designed to transport us from one location to another. Despite popular opinion, they don’t make us look any better or make our lives any richer. Remember, Sam Walton, one of the richest men in America at the time of his death, still drove his 1979 pickup truck.