Many people dream of the day when they can own a car outright, but does it really make sense financially?
These days, it’s very easy to use a vehicle even if you don’t own it outright. So, what are our thoughts on this subject?
Using a vehicle temporarily is easy
Unless you commute to work every day, you probably don’t rely on a car. Often there are easier and healthier ways to get around. However, sometimes you need a vehicle if you want to go to a festival or borrow it to visit your friend over the weekend in another city. When this happens, having a car helps.
What’s the best way to use your money efficiently? The ultimate solution to a problem like this is to rent vehicles when you need them. You can also borrow from a friend or family member and get temporary car insurance at low cost.
With this approach, you’re not constantly paying for a vehicle that you aren’t using. You only have to pay for insurance and the driving costs when you need it.
You could get into financial difficulties
Another benefit of not owning a vehicle directly is that you avoid financial difficulties. For example, if you drop a large lump sum on a car so you own it all outright, you deplete your cash reserves. This means that when things go wrong in your life, you don’t have as many resources to use to bounce back.
For example, let’s say that you have a problem with your home. You might not have as much money for home repairs. You may also experience an issue with your health and have to pay a large medical bill. The way to get around this is to make low monthly payments if you are leasing, or to simply rent a vehicle when you need it for those rare occasions where the train and other services don’t work for you.
Weaker negotiating position
When you buy a vehicle directly from the dealer, they will often try to get as much money from you as possible. When you’re paying cash, it leaves less wiggle room on price, because they won’t get the lucrative loan on the backend. Because of this, many buyers take the opportunity to pretend to finance during negotiations to get a better discount, then they pay off the loan early according to the terms of credit to get the lowest overall price.
If you do it this way, you can often save a lot of money. You may also be able to afford a better and more reliable vehicle because you have a larger budget.
Lack of assistance from inflation
We’re often taught that inflation is a universally bad thing, but actually it can really help with financing. When inflation is moderate, you’re paying back more of the loan with cheaper future dollars.
If you pay with cash, you don’t get this benefit. In the future, the value of the loan will be worth the same, but your cash paid today prevents you from taking advantage of the depreciating loan value.
Massive opportunity costs
There are also the massive opportunity costs associated with buying a vehicle brand new. For example, most cars lose around 20% of their value in the first year. That means that if you spend $50,000 on a premium vehicle, you’re going to lose $10,000 over the first 12 months. What’s more, not only do you lose money, but you also miss out on the opportunity cost that would have not have occurred if you’d invested the money elsewhere. For example, a 10% loss on $50,000 could have turned into a 5% gain if you’d put it into money markets. Instead of being down just $10,000, the real opportunity cost of buying a vehicle outright is $15,000.
Of your car proceeds, at around 4 to 10% annually. After the first year, most vehicles lose around 40 to 50% of their value over three to five years. This massively outpaces the cost of auto loan rates, which range from 0 to 4% on promotional deals. If you can lock these in early and then pay back before fire rates kick in, you can cash in on the savings.
So there you have it, some of the reasons why you shouldn’t own a vehicle outright. We’re not saying that owning a car is a bad thing in every case, but you may be able to leverage your finances more sensibly to ensure that they work in your favor.
