The Financial Side of Buying our Car
Jul. 26th, 2021 07:56 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
canyonwalkerWe've owned our car for just over 2 weeks now. (We officially bought it on July 11.) It feels like a lot longer already, probably because the buying process took so long. I've written a bunch of times about the process of finding the right model, color, and options. Now I'll write a bit about the financial decisions we made. The timing for that seems apropos as the first bill for our loan has arrived.
![The bills for our car start coming due [Jul 2021]](https://ic.pics.livejournal.com/canyonwalker/33413618/754849/754849_original.jpg "The bills for our car start coming due [Jul 2021]")
Yes, we chose to finance through the manufacturer; that's one of the decisions I'll write about.
We went into this process thinking certified used was where we wanted to be. There's a lot of value to be had in buying a used car that's in good condition. Cars generally depreciate a lot in their first year. "Cars lose 25% of their value just driving off the lot," is a common saying. Why not let the first owner take that hit and buy a carefully chosen car in near-new condition.
As I considered the numbers on used vs. new cars a few different ways I decided that, in this crazy current market, new and used are equal values. Again, normally a good used car would be a win in the value category, but right now the prices are high enough that new cars are equally compelling financially. Thus we shopped both new and certified used with our focus primarily on finding the right model in a desirable color and with the right options.
Along the way we simplified the three-way decision down to two choices. We crossed off plain (non-certified) used cars from our search. That was partly a decision about what we wanted in a car. Non-certified used cars were typically a bit older than 3 years, putting them far enough back that they had older engines and infotainment systems. It was also partly a financial decision. With used car prices so high, buying an older car with no reconditioning and no warranty seemed absurd relative to paying a modest amount more for a certified used or new car.
We're well off enough financially that we could buy this car outright if we wanted to. That's the simplest option and in some ways the cheapest. But in other ways it's not the cheapest. The funds that could pay for a major purchase could also be invested. The question, then, is whether the interest you pay on a loan or in a lease is higher or lower than the rate of return you figure you can get on your investment.
Here, too, we simplified the three-way decision by narrowing it down to two choices. We crossed off leasing as a consideration. That was partly because leases are complicated. There are deals to be had, but you really have to know your stuff to find them and negotiate them. But even more basic than that, it's because BMW dealers weren't really offering leases on used cars.
"That depends," I answered. "Tell me what your rates are."
Be careful if you do this, BTW. Numerous self-help guides will warn you that asking dealers such a question without doing your research first is a trap. Dealers may offer you a loan with a poor rate. They may disguise a poor rate by drawing your focus to monthly payments.
Ultimately the dealer we bought from offered a set of no-BS loan options. By "no BS" I mean that the rates were good and they were all simple interest. Simple interest means there are no up-front financing fees, you're paying the stated rate on the remaining balance each month, and you can pay the loan off early without additional fees (sometimes called prepayment penalties) on the back end. For a rate of 0.9% annually for 36 months we decided to keep our money invested and just make the payments. Though because of simple interest we still have the option to pay off the balance and be done with it whenever we want.
Yes, we chose to finance through the manufacturer; that's one of the decisions I'll write about.
New, Used, or Certified?
Our first decision was whether to buy new, used, or certified used. Certified is when a dealer has inspected and reconditioned a used car per standards set by the manufacturer. The manufacturer then puts an extended warranty on the vehicle. Certified used cars are typically 3 years old and are returns from 3-year leases, though some we saw were younger than that.We went into this process thinking certified used was where we wanted to be. There's a lot of value to be had in buying a used car that's in good condition. Cars generally depreciate a lot in their first year. "Cars lose 25% of their value just driving off the lot," is a common saying. Why not let the first owner take that hit and buy a carefully chosen car in near-new condition.
Used Car Prices are Crazy Right Now
While we were leaning toward buying a certified used car we weren't committed to it. That was good, because the used car market is crazy right now. As a result of supply and demand changes during the Coronavirus lockdowns and since coming out of it, used car prices are at all time highs right now and availability— of new cars as well as used— is low.As I considered the numbers on used vs. new cars a few different ways I decided that, in this crazy current market, new and used are equal values. Again, normally a good used car would be a win in the value category, but right now the prices are high enough that new cars are equally compelling financially. Thus we shopped both new and certified used with our focus primarily on finding the right model in a desirable color and with the right options.
Along the way we simplified the three-way decision down to two choices. We crossed off plain (non-certified) used cars from our search. That was partly a decision about what we wanted in a car. Non-certified used cars were typically a bit older than 3 years, putting them far enough back that they had older engines and infotainment systems. It was also partly a financial decision. With used car prices so high, buying an older car with no reconditioning and no warranty seemed absurd relative to paying a modest amount more for a certified used or new car.
Buy? Finance? Lease?
Once you decide which car you want you have to decide how to pay for it. Will you buy it outright, finance it with a loan, or lease it? Actually you should start thinking about this as soon as you start shopping. We did.We're well off enough financially that we could buy this car outright if we wanted to. That's the simplest option and in some ways the cheapest. But in other ways it's not the cheapest. The funds that could pay for a major purchase could also be invested. The question, then, is whether the interest you pay on a loan or in a lease is higher or lower than the rate of return you figure you can get on your investment.
Here, too, we simplified the three-way decision by narrowing it down to two choices. We crossed off leasing as a consideration. That was partly because leases are complicated. There are deals to be had, but you really have to know your stuff to find them and negotiate them. But even more basic than that, it's because BMW dealers weren't really offering leases on used cars.
Simple Interest FTW
"How will you be paying for this?" various salespeople asked early in the process as we shopped various vehicles."That depends," I answered. "Tell me what your rates are."
Be careful if you do this, BTW. Numerous self-help guides will warn you that asking dealers such a question without doing your research first is a trap. Dealers may offer you a loan with a poor rate. They may disguise a poor rate by drawing your focus to monthly payments.
Ultimately the dealer we bought from offered a set of no-BS loan options. By "no BS" I mean that the rates were good and they were all simple interest. Simple interest means there are no up-front financing fees, you're paying the stated rate on the remaining balance each month, and you can pay the loan off early without additional fees (sometimes called prepayment penalties) on the back end. For a rate of 0.9% annually for 36 months we decided to keep our money invested and just make the payments. Though because of simple interest we still have the option to pay off the balance and be done with it whenever we want.
