Iowa Trunk Space – Des Moines Automotive Community – Des Moines Iowa Car Blog

It wasn’t long ago that our friend Hogan was writing about his very first car purchase, and now it’s my turn. However, this will be my seventh purchase and hopefully I’ve learned a few things about the process.  I’ve bought cheap cars from cheap dealerships, relatively expensive cars from very expensive dealerships, borrowed and paid, leased and paid more, but never really paid cash. With the market and economy in their current states, I don’t really feel like handing over any more of my hard earned cash (again relatively) to the banks or bankers. I’ve been considering a plan to get away from the vicious cycle of loans and leases.  I’m no financial advisor, but here goes… 

Let’s say I was interested in a 2003 BMW M3 with 45k miles and they’re asking $25,000.  Since this happens to be the make and model that took me from an interest in cars to a life revolving around them, my first instinct is to take the loan and drive away in my dream car.  Unfortunately, I’ve made similar mistakes before and it’s not so sweet in the long run. I’ve done a little math to prove this.  If I figure a 60 month loan with a 6% interest rate, then I end up paying $485each month and $29k total for a car worth $25k. Worse yet, by the time I actually own the car, it’s worth little more than half of that.

If I’m willing to sacrifice the immediate gratification, I think there is a better way. It’s going to be painful in the beginning, but if I can suffer through it, there should be benefits in the end. I’m not starting this by taking another car loan, so I’m going to need some cash. I’ll start sending a “car payment” to my savings account every month just as if I was paying a loan. Since this is the painful part, I’m going to send $300 per bi-weekly paycheck and in a year I’ll have $7800.  By that time I’ve done the research to find a car around that price and I can make the purchase with cash. That’s the first and most difficult year.  It gets easier.

Now that I’m in a $7800 car, I’m going to lower those bi-weekly payments to $200 each.  After driving that car for just one year, I’ll have another $5200 in the bank and it’s time to trade. Figuring a 10% depreciation over the last year, brings the car’s value to $7020. Add the $5200 cash and I’ve got $12,220 to spend.

After the second year, that car is worth $11,000 and I have another $5200 in the bank.  Now I can buy something worth $16,200. Again another year goes by, and I can by a car worth $19,775. The forth year is a $23,000 car and after five years I’ll have almost $26,000 to spend.

So the first couple of years will be rough, but it works out in the end.  After 5 years, I end up owning a car that’s worth what I paid for it, and I save $4000 compared to taking out a loan like I discussed in the beginning.  Not to mention the fact that I only paid $400 per month instead of $485.  Also, if there happened to be an emergency of any sort, not only would I have some money in the bank, but I could stop making the monthly payments if I had to.  You can’t do that with a loan. 

From that point on, I think I would probably leave the monthly payments the same, but wait 2 or 3 years between trades and have an extra $10k or $15k cash to put towards the next car.  And really, once I’m at that point, it would be much easier to stay in a nice car without ever taking a loan.  This also means that the bank managers won’t be taking their private jets overseas for the weekend on my dime.

This turned out to be a longer (and more boring) post than I had originally intended, but there aren’t many local automotive events in the winter, and I want to post at least once a week.  So, if you happened to read this far (you’re probably a family member), check back later for upcoming posts about tires, local warranty frauds, and hopefully used car shopping.