May I Please Finance My Car? – Friday Q&A
[Editor’s Note: Our question/guest post this week comes from Jonathan Clarke, MD, an emergency physician practicing in Texas. Jonathan is one of my former residents, who is not only nearly as cheap as me, but twice as good at practicing emergency medicine. We have no financial relationship. ]
I currently have a financial dilemma that I’d like to share with you and perhaps your readers. The topic has been covered before, but my ultimate decision may fly in the face of conservative financial wisdom and advice. The decision is whether to buy a new or used car and whether to pay cash or finance. I know what you think (used, cash) and I would typically agree, but some other factors may skew my decision.
1. I’m 37 years old and I’ve never bought a car. My current daily driver is a 1998 Jeep Cherokee Sport (not the Grand Cherokee) that my parents bought for me in college. It’s been my daily driver now for 15 years and has racked up over 206,000 miles. It’s mean and green and it just keeps running. The only reason I would even consider getting a newer car is that the Jeep has become rather unsafe/unreliable as my primary commuter, where I’m currently driving 40-80 miles per workday in Dallas, Texas. If you’ve never driven in Dallas, it’s NUTS! So, I’m in the market for a newer car which is very safe, reliable for years to come, relatively inexpensive and also fits my off-duty lifestyle, which includes cycling, camping, sailing, kayaking, etc. In other words, a Subaru Outback.
First of all, the car in question is NOT a luxury vehicle or a status symbol. It’s an average-for-our-day-priced (about $30k) wagon and the difference between new and 3 years old is about $5k (Subarus hold value well). First I’ll tackle the finances… DEPRECIATION. Yes, I understand that the new car will statistically lose 15-20% of it’s value in the first year. But, I statistically drive my cars for a decade into the flat part of the depreciation curve! And I’m not planning to sell the car – I’m planning to drive it into the dirt. So depreciation isn’t really a factor that’s relevant to me and I’m willing to pay an extra $5k to get the car I really want.
First of all, I’d like to correct a few of your misstatements. I have no problem whatsoever with someone buying a new car. You can’t take your money with you when you go. So long as you’re putting enough away for retirement (and you are), you get to spend (or give away) the rest however you like. I don’t care if you use it as firewood to impress your friends.
Second, it appears you’re not looking for just basic “Subaru Outback” transportation. You’re looking at a top of the line tricked out Outback. The basic one goes for $22,600 new and about $16,000 when 3 years old. The top of the line version goes for $30,300 new and $25,200 when 3 years old according to Kelley Blue Book. An outback might not be a luxury item, but those seat warmers and the sun roof probably qualify.
Third, Ally’s savings account is only paying 0.84%. That’s less than the price of your financing, and after taxes, quite a bit less. Now while it’s probably true that if you invest the money in riskier assets you’re likely to come out ahead, you won’t do so using that fully-taxable Ally savings account.
Living Beyond Your Means
The problem I have with people financing depreciating assets like cars isn’t so much a math issue as a behavior issue. As you mention, financing $10K at 1% for a year is only going to cost you $100 in interest plus a few hundred dollars in fees (and perhaps a few hundred dollars that you could have knocked off the price by paying cash.) Given your salary, it’s peanuts. Even Suze Orman would agree you can afford to finance this.
The issue I have with it is the habit. First it’s the car, then the house, then some nice vacations, then private college for the kids and before you know it you’re that 65 year old doc still working 15 shifts a month because he has to who seems to detest his patients, has no tolerance for new nurses and overall seems to hate his life. Financing a depreciating asset is by definition living beyond your means. It’s a slippery slope. Knowing you, I doubt you’ll go far enough down that slope to matter, but it’s worth at least recognizing what you’re doing.
Justifications Are Just That
Now, just for fun, a few words about your justifications. You say you “drive your cars into the ground.” No you don’t. You sell them in order to get a safer car when you hit 206K miles. For most modern cars, 206K miles is a long way from the ground. As a general rule, the longer you drive a car, the better deal it is financially. It’s okay not to get a good deal on a car, as long as you can afford it. But driving it for 10 years or for 200K miles isn’t the same as driving it into the ground. Driving it into the ground is driving it until it doesn’t run and the repair to make it run costs more than the car is worth, and sometimes even further if it’s close.
A common justification for upgrading is to get a safer car. The likelihood of you being in a crash or near-crash where a new safety features actually makes a difference in your health is statistically very low. If you were really concerned about your safety you’d hire a driver, sleep over at the hospital after a night shift, or move closer to the hospital, not just upgrade your car so you get an extra airbag or better anti-lock brakes.
My favorite of your justifications is “I’m 37 and have never bought a car” because that type of thinking is so common among doctors. “I’ve been in school and training for 15 years and all my college roommates have great houses, drive fancy cars, are about ready to retire, and go to Fiji every year and I deserve to have the same things even if I have a negative net worth!” All I have to say is “patience, young Paduan.” I was commenting to my wife last night about what an awesome life we have. We’ve got a three car garage with two SUVs and a boat in it attached to a huge house with a 100 mile view in an outdoor recreational paradise, our kids go to one of the best public schools in town, we have a rapidly growing nest egg, and there is pretty much no single consumer purchase my wife could bring home that I couldn’t pay for with cash by the time the credit card bill comes due. How long did it take to get into this enviable position? 7 years out of residency. Given your habits, you’re not far away. But the world doesn’t owe you the good life just because you went to med school. You still have to earn it with hard work, good financial decision-making, and just a little more delayed gratification.
A Couple Of Other Options
You presumably make something in the neighborhood of $30K a month. You save 25%+ of your income. That’s $7500 a month. Even if you don’t want to touch your emergency savings at all for this, you’re only looking at saving for four months in order to get your desired vehicle. Less if you can get a few thousand for your beater. You can probably still get your 401K maxed by the end of the year so there’s no opportunity cost. If you were really antsy to get a new car, you could sign up for a few extra shifts in the next 2 months. If your group is like mine, as soon as the kids get out of school for the summer there are plenty of docs willing to give away a few shifts.
You could also use the emergency fund, and replenish it over the next 4 months in the same manner. It isn’t like it’s paying you anything anyway. Yes, I suppose you could get burned if you needed it in the next 4 months, but I suppose you could always sell the car in that situation and get most of its value back if it were that dire, or even raid retirement investments if needed.
At the end of the day, there are a lot stupider things to do than to finance a car at less than the rate of inflation, so if you can’t help yourself, go get your Outback and quit feeling so guilty about it. But don’t make a habit of it.
[Update prior to publication: In his next email Jonathan said his wife was mad at him for not getting the car yet. At which point I told him happy spouse = happy house and happy wife = happy life and told him to go buy it. He did and managed to get a very good price ($27K.) I hope both kayaks fit on top of it.]
What say you readers? Is it okay to buy cars on credit? Do you pay cash or finance at a cheap rate? Comment below!