In some of my first posts I spent some time getting real about my budget and trying to portray the importance of tracking all my expenditures. Since then, I’ve been noticing lately the way ads and, as a result, people in general think about finances and spending, and the illusions and spells we seem to be under when it comes to the real cost of things. So, I am here to introduce a new series on the Freedom Thirty-Three Blog, called “What Shit Really Costs”. And, after seeing an ad last night where Ford offers their customers up to $1,500 in the form of the first 3-months payments free on a new Escape, I’d like to start this series by focusing on the real cost of a new car.
You’re still foggy-minded from your Holiday spending hangover, and your spending spidey-senses are super heightened at the moment. You’ve been wrestling with the idea of getting a new whip that you really don’t need in order to help you numb the pain of your spending withdrawals. Don’t feel bad, I get it. I once went from deciding to sell my motorcycle in order to practice fiscal responsibility to trading it in on a brand-new, more expensive bike that cost me a few thousand more dollars to get into a week or two later. I still have that bike. It has 2,500 kilometers on the odometer after 2 years and is sitting in storage in a place I don’t live collecting dust and depreciating (and I am paying to store it!!! What a nightmare).
So you’ve probably considered all the maintenance, gas, etc. that goes along with owning a vehicle, even though I bet you undercalculated in order to justify the purchase to yourself and those around you. But even still, there are some other, less-often-realized costs that the car commercials don’t often bake in to their messaging to you. I want to enlighten you on those, so that you can see what that new car will really cost you in the long run. And hey, maybe that’s fine, but you really ought to have a real handle on it before you make a decision. No looking the other way. No plugging your ears. No ostrich-ing.
Anyway, here are the things that we love to ignore or are simply unaware of.
Point of Sale Costs
So, you’ve struck a deal with the salesman and got him down from the $39,000 sticker price to a nice, round, $35,000 (he’s going to take half the difference off of what he offers you on your trade-in anyway, cause he can see that you’re already so clearly picturing yourself in your new rig and all he needs to do is hold your hand until you’re driving off the lot in it).
Next, you go into his office and he starts working up the paperwork. He adds on taxes, dealership fees (WTF is that!? isn’t being a dealer like being a business, in that you have costs and you have revenue? Why do you need to pass it on to the customers so blatantly? It’s like a Taxi driver asking for gas money on top of the cost of the service instead of just baking it into the costs.
So, the cost of your vehicle is now:
$35,000 (agreed price)
+ $4,200 (12% sales tax)
+ $1000 (warranty)
+ $800 (dealership fees
$41,000 (actual price)
If you’re like the guy in the Ford commercial that inspired this rant, and you’re going to bump up your $40,000 purchase by 3 months because of a $1500 incentive, then I am going to assume that you’re putting very little down (let’s say $5,000, on your trade-in that is really worth closer to $9,000) on your new rig, and that you are borrowing for 5 years.* So let’s do a little more math, shall we? I’m going to assume a 3.45% interest rate, just to be generous and give you the benefit of the doubt. Lower interest rates exist, as do much higher rates, and general consenses is that they are due for a rise. In fact, in Canada, they have begun to rise in 2017.
So, on a loan of $36,000 at 3.45% APR, you will pay $654 a month for 60 months, or $39,240 total.
So let’s do a quick tally of all our costs so far.
$35,000 (agreed price)
+ $4,200 (12% sales tax)
+ $1000 (warranty)
+ $800 (dealership fees)
+$3,240 (total interest costs)
Now that’s a pricey rig.
Now there’s one more thing I’d like to point out. Of course, if you have a car it is because you ‘need’ a car, and make good use of it, otherwise you wouldn’t have one, right? It serves you, rather than the other way around. Your car should never be seen as an asset that is worth much, unless you are willing to go without it. Otherwise, it is an asset you have and to replace it would be costly, as we have seen above. That said, we can’t ignore the value lost on our trade-ins when buying a new vehicle. A car that was probably worth about $9,000 and would have served you well for several more years to come (i.e. at least the duration of your new fancy loan on your new fancy car) was traded in for $5,000, a loss in value of $4,000!
Your new car is now over $48,000 when all is said and done, despite striking a deal with the salesman for $35,000. And like I said, your car is not an asset with which you appreciate value. If you wanted to turn around and sell that new ride to someone else the moment you drove off the lot with it, you’d be lucky to get $30,000 for it (consider that $5,000 was taxes and fees that are of no value to the new buyer).
So now youre making payments on a depreciating asset, as much as 19% in your first year. Your new ride will probably be worth about $15,000 when the 5-year loan is up. An asset that you just finished your payments on will, at that time, cost you almost a third of the price you paid to buy yourself. And you could have easily saved this much in the meantime while driving around in your previous (and perfectly good) car those 5 years, now able to buy this well-loved 5-year old vehicle at a good value with cash in hand, avoiding a lot of the costs of a new vehicle, including interest altogether.
If you can’t afford to lose something, then you can’t afford to buy it. And I know that when I once had a new truck, I found it less enjoyable than when I had a previously-loved truck, as I didn’t have to feel bad about every new nick and scratch that I noticed. There’s no denying how sweet it is to drive your brand new vehicle. But I can assure you, that novelty wears off very quickly, many years before you finish paying for the vehicle. And for a modern spending addict, there’s nothing worse than feeling like something you owe nearly a year’s salary on still is starting to lose its shine and lustre.
The bottom line is if $1500 is the difference between you buying a new car now or in 3 months, the truth is you can’t afford a new car, period. In fact, I would suggest never buying a car with a loan again. Always with cash. Adjust accordingly. Unless you want to work as much as you could possibly need to, that is. Then, join the crowd and fill your boots. My plan is to be spending my time how I want to.
*it’s possible to borrow for up to 8 years these days, which should be illegal in my opinion, and eventually will be following the effects of the looming ‘sub-prime auto loan crisis’