Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Wednesday, July 24, 2019

I Want It and I Want It Now

by Joseph Martin
All I wanted was another 4Runner. Having previously owned a 4Runner and traveled across the country in it, from the beaches of Washington State, to the mountains of Montana, and down to the Port of Miami, the “Dark Knight” never failed me. Yes, I named my car after Batman. Laugh all you want, but I loved that car. It was the perfect fit for me and my backcountry adventures. It seemed fitting that the only thing that could replace the “Dark Knight” was another 4Runner. So, my quest for my next 21stcentury steed began. 

The Dark Knight, my former steed and constant companion.
Having located the exact car I wanted, with the color, trim, and all the bells and whistles I wished for, next, I had to figure out how to pay for it. If you’re willing and able to throw down some cash, buying a vehicle in its entirety in cash will negate many of these anxieties. However, only about 10-15% of all car buyers have the cash to do this.
As it is 2019, I could not simply barter my way through the purchase of this new steed. Financing was my option. However, there are a multitude of options available when choosing a loan, be it a local bank or a dealership. The rate offered by the dealership or that of a local bank may vary drastically. So again, check all options.
Be sure to have an up to date idea of where you stand in regards to your credit score, as this will significantly impact the rate you will receive. These rates may vary from 0% up to 16% APY, depending on your credit standing. Currently, average car loan rates are sitting around 4% to 6% APY for Good to Fair credit. This is another important piece of information that ought not to be overlooked. The higher your credit score, the more likely you are to receive a lower rate on your car loan, so shop around for loans.
As a majority of buyers bear the burden of paying monthly car notes, choosing the right financing option will determine the weight of the monthly note monkey on your back. Many of us could care less about the long term costs. I wanted what I wanted, and I wanted it now. At least for myself, all I cared about was getting my new “Dark Knight” at the lowest monthly cost. Be thorough in your pursuit and this monkey of a car note can feel like cute little Curious George. Don’t, and it may feel like the wrath of King Kong is upon you. 
The longer the term of the loan, the lower the monthly payment. However, the longer the term, the higher the cumulative amount of interest will be. So, here lies a trade off in pursuing a deal which offers the lowest monthly payment or opting for a shorter term to reduce cumulative interest.
Assume the following: you’re seeking to buy a $30,000 vehicle and making a $5,000 down payment. Below are a few examples of common financing options, with both average and high rates. You can calculate payments with your own parameters using the calculator.
  • 48 month @ 10% = $634 per month, $5,436 total interest paid
  • 72 month @ 10%= $463 per month, $8,350 total interest paid
  • 48 months @ 5%= $576 per month, $2,631 total interest paid
  • 72 month @ 5%= $403 per month, $3,983 total interest paid

In addition to financing a new vehicle, leasing is another option. Leasing is often chosen as it offers the lowest monthly payment; however, the vehicle is not yours, and leases often come with stipulations. These may include mileage ceilings or exit costs. As you can imagine, mileage limits would not be an ideal fit for me and my cross country voyages. 
I had considered all options, done my investigation, and the time had come to for a decision to be made. A shorter term and lower rate loan with a higher monthly note for a used vehicle? Or a longer term slightly higher rate loan with a lower monthly note for a new vehicle? Cumulatively, the used vehicle would have demanded less interest paid, but have you ever smelled a new car? 
Personally, I opted for an extended term 72 month loan on a new vehicle financed through the dealership at 5.6% I chose this option because it offered the lowest monthly payment. That’s all we care about, right? Searching for the lowest monthly payment was my way of ensuring the steed of my choosing had a place in my stable. All things considered, I could have received a 4.59% rate on a used vehicle from my local bank. However, although the bank offered a lower rate, its term options were significantly shorter causing the monthly note to exceed that of a new vehicle financed through the dealership at a higher rate. 
Not only do I encourage you to make your own inquiries surrounding loans, terms, and rates, but it is important also to consider costs that come with purchasing a new vehicle in addition to the vehicle itself. These include tax, title, insurance, tag, fuel, and maintenance fees. Depending on the vehicle chosen and location of registration, these expenses can be surprisingly high if not prepared. Often, a county will provide a rough idea of the amount of your tag on their websites. Be sure to check these expenses in advance, or you may find yourself in a hole. 
Furthermore, dealerships often offer exclusive deals which are often not available through used and secondary dealers. These may include special financing options and rebates. I chose a new vehicle that offered a significant dealer offered rebate. Additionally, I simultaneously happened to qualify for a bonus rebate being a recent college graduate. These are a few advantages that may come from purchasing a new vehicle directly from the dealership that otherwise would have been overlooked in purchasing a used vehicle.
When considering purchasing options and deciding financing terms, choose an option that optimally suits your economic standing. Make sure to choose an option that allows you to live comfortably within your means. Do not stretch yourself too thin. Buying a thoroughbred when truly you can hardly afford a donkey will end badly. I hope you keep these suggestions in mind, and I wish you luck in finding the “Dark Knight” of your own.