As my car loan has whittled down to a paltry three payments remaining, I can see the light at the end of the tunnel. Once that’s gone, it will essentially be my first time experiencing adult life without the financial burden of a monthly car payment. But getting rid of that 5 year loan represents a bigger milestone to me, because to this day it shows the lingering effects of what I consider to be my greatest financial mistake. It’s the story of how I paid $31,410.46 for a $23,831 car, despite having a 0% interest loan.
This tale actually goes all the way back to the summer following my sophomore year of college, when I was 19 years old. Living on campus I previously had no need for a vehicle for most of the year. However that summer I managed to land an internship that paid pretty well at $18 an hour, much better than my retail job where I earned $10 an hour. The money combined with the relevance to my chosen field of study in engineering made it a no-brainer to accept. The only issue was it was 40 minutes away, and the 20 year old hand-me-down Saturn that I shared with my sibling over the summers was barely running at that point.
I needed a reliable car with a payment that fit a college budget. And for some ungodly reason, I thought the Smart ForTwo was the coolest thing around. So I did what I thought made sense: I leased one for $1,000 down with a $169 monthly payment, with a term of 3 years and 15,000 miles per year. It was kind of fun to blast around town in my little go kart and park it in places where nothing else could fit. All things considered, it was a fairly decent minimalist car that suited my needs for the last two years of college. And it had heated seats for those New England winters!
Unfortunately as I graduated college with a year of lease payments remaining and got my first post-college job, I learned that my car really wasn’t that great for long highway commutes. The short wheelbase meant that every bump in the road was a jarring thud. And after the umpteenth time of nearly being hit or run off the road because someone didn’t see my tiny car in their blind spot (I’m sure that motorcycle riders and Miata drivers can relate), I realized that I needed a more practical commuter vehicle.
I decided to break my lease early and buy a used 2014 Ford Focus for $14,000. I lost about $2,000 by turning the lease in early, but the dealership gave me a check for the balance and added it to the loan. I was happy with the new car as a much more comfortable commuting option… for two months, until I started having transmission problems. Yup, a car that wasn’t even 2 years old, with 35,000 miles or so having transmission problems. The clutch was replaced under warranty, and I thought that was the end of it. Yet 5,000 miles later my transmission was shuddering and grinding once again. After some research on the internet, I found forums with dozens of Focus owners reporting they were on their 4th or 5th clutch replacement; the fixes never lasted and the warranty coverage ran out at 50k miles, at which time they had to start paying out of pocket for repairs at over $1,000 per occurrence.
I checked out the maintenance records and saw that the previous owner had replaced the clutch as well. Unfortunately, other than performing the repairs under warranty, Ford wasn’t admitting that there was a systemic problem with these vehicles. It actually took until a few months ago in February 2020 for a lawsuit against Ford to settle and force them to take action.
Needless to say, I was terrified that I had accidentally purchased a lemon. I was so anxious about it that I ended up trading in the Focus just 4 months later. After being burned by that unreliable used car, I went right for the opposite end of the spectrum: new and reliable. I did my research this time and went for one of the top-rated cars for reliability, a 2015 Toyota Prius. I managed to negotiate about $4,500 off the MSRP, but got absolutely hosed on the trade-in — that only fetched $8,000, which laughably was rated as a “good” price for dealership trade in. Unfortunately private sale wasn’t even an option, since being fresh out of college I had nowhere near the amount of money required to pay off the loan and get the title.
Add that all together: roughly $2,000 from breaking my first lease, plus nearly $6,000 lost on the Focus in the span of a few months, plus $23,831 for the purchase of the new Prius, and the total balance of my new loan was $31,410.46. That’s the story of how I lost $7,539.46 in less than half a year, making this my biggest financial mistake ever.
I have to cut my past self a little bit of slack seeing as I was only 22 at the time, but I’d be a fool if I didn’t learn from those mistakes. As much as I’d like to claim that I’m an infallible personal finance master, that’s simply not true. Mistakes are all part of the learning process. I’d like to share some of my lessons learned from this experience that shaped my philosophy around car ownership and money in general, in case anybody finds it valuable.
For most people, cars are their second biggest expense
According to the BLS in their Consumer Expenditures Report, transportation consistently ranks as the second highest expense category for US consumers. I’ve found that to be true for myself as well in my past budget reviews. The benefits of finding ways to spend less in such a large budget category are obvious. Next to housing, spending too much on a car is the surest way to wreck your budget and hurt your chances of building real wealth so that you can retire early.
Be assertive and willing to walk away
It look me too long to figure this one out. Nobody is looking out for you and your money except for you. Possibly nowhere is this more obvious than when buying a car: the dealership has an incentive to sell you the most expensive car they can, while getting you to sign the worst deal that you’d be willing to accept.
A common thread in those first two dealership experiences of my adult life was that I was afraid to say “no” after they’d already drawn up a contract, which as is typical for most dealerships, always included some unexpected expenses in their favor. You can be assertive and polite at the same time. If you’re not firmly standing up for your own interests in this scenario, nobody is.
Leasing is almost always a bad deal
Mathematically, it’s a bum deal. You’re essentially just paying for the depreciation of the vehicle over the lease term. And since depreciation is highest as soon as the car is driven off the lot, all you’re doing with a two to three year lease is paying off the highest window of depreciation. It’s just buying a new car and trading it in every few years, with one less step.
At the end of the lease term, you’re left with nothing. Sure, you can take out another lease, and look, the payment is lower than buying the car outright! But this is just a recipe to get you into a perpetual cycle of payments. We could run through some actual numbers, but I figured out a way to save some time with one simple question. Let’s be honest, if leasing didn’t make more money for the dealerships over the long-term, would they even offer it as an option?
View your car primarily as an appliance
Obviously this piece of advice doesn’t work that well if you’re a diehard “car guy” (or gal!) who views vehicles as a hobby and is able to responsibly budget for it as such. I’m never going to rag on someone who buys a performance car but can still manage a respectable savings rate. That’s what finding a balance is all about.
For me though, I’m not big into cars and I’ve learned to view mine like a tool or appliance. Does it get me from point A to point B safely, economically, and relatively comfortably? If so, then there’s no sense in spending money on a newer model to do essentially the same job but with a few more bells and whistles.
My Prius may be boring and slow, but it does the job that I need it to do dependably, and it’s got a surprising amount of cargo room when I need it.
Only buy from highly reliable manufacturers
This was a lesson I learned the hard way with my Ford. The surest way to make sure you spend less on vehicles is to buy one that lasts a long time with no major issues. Vehicle manufacturers are certainly not created equally in this regard! My 2014 Focus had a reliability rating of 2 out of 5 from JD Power. By contrast, my 2015 Prius has a perfect 5 star rating for reliability.
My Prius is sitting pretty at over 150,000 miles (I used to have a really long commute) and I’ve had zero issues. So far I just do the preventative maintenance and that’s been enough to keep it running smoothly. After my experience with that Ford Focus, I have my doubts it would have even survived into the six digits without becoming a money pit.
There’s a reason that you can buy a 5 year old BMW 3 series for about the same price as a 5 year old Toyota Prius, despite the MSRP on the BMW being $15k higher. The maintenance costs will eat you alive. No matter what type of vehicle you’re shopping for, go for reliability above all else — your wallet (and your sanity) will thank you.
One big tip, always search the web to try and find a dedicated forum for the specific model of car you’re considering and see if the owners are having any big issues. I could have saved myself a lot of trouble if I did some reading on the “Focus Fanatics” forum before making my purchase, instead of stumbling upon it later when researching my transmission issues.
Always skip the extended warranty
Don’t be fooled by the back room scare tactics from the finance guy. I remember when I bought my Prius, the guy trying to sell me the extended warranty went on some spiel about how the car had four transmissions, motor generators, the hybrid battery… Basically trying to scare me that the car was high tech and had a lot of components that would be expensive to replace if they broke. And also, blatantly lying: 5 years later, I’m still trying to find my other three transmissions.
Besides, wasn’t the salesman talking up the reliability and factory warranty just an hour ago? Quite simply, dealers and manufacturers would not offer extended warranties if it didn’t make them money on average. It’s expensive insurance, and most people who buy extended warranties either never use them, or get nowhere close to their money’s worth. That’s all by design.
Buying new can actually be okay
Many prominent personal finance gurus act as if buying a brand new car is the worst possible thing that you can do, and say that you should only ever shop used. I don’t think it’s valuable to speak in absolutes.
Looking at reliable manufacturers like Honda and Toyota, my research indicates that those vehicles depreciate in a more linear fashion, and tend to hold closer to 60% of their value after 5 years with an average amount of mileage. So yes, you’re getting a discount by purchasing used, but you’re also getting 5 less years of vehicle lifespan. The calculation to find the break-even point is complex with many factors. But based on my figures, if you’re buying a new reliable car with low depreciation like a Honda or Toyota, the premium for buying new versus a 2 to 5 year old used model is essentially negligible after 8 years when amortized over the period of ownership.
As the depreciation rate increases, the break-even point pushes out further and further to where buying new makes no sense, because it exceeds the expected lifespan of the vehicle. For our 5 year old BMW 3 series maintaining about 40% of its MSRP, we’re out around a 13 year break-even to amortize the premium for buying new to a negligible amount. Good luck keeping a Bimmer on the road for anywhere close to that amount of time without breaking the bank in maintenance costs. Obviously this is an extreme example based on a vehicle with one of the higher depreciation rates on the market, but it’s good for framing expectations.
Buying a new car isn’t the cardinal sin that some financial gurus try to make it out to be, as long as you follow these simple rules:
- Make sure that both the manufacturer and the vehicle model have a demonstrated history of above-average reliability for the auto industry.
- Buy only as much car as you need. Chances are good that your vehicle needs can be met with a $20-25k econobox hatchback. Unless you’ve got a crazy high income or a net worth in excess of a quarter million, you’re probably not at the point where a more expensive car should be on your radar.
- At a minimum, aim to drive your car for a decade. Ideally, keep it until the wheels fall off.
On frugality versus cheapness
Is my strategy to buy a brand new car every 10+ years the method to save the most money? Absolutely not. You can get a decade old Toyota Corolla for $5,000 and probably get at least another decade of life out of it if you take care of it. That’s the cheap way to do it. And for those who do so out of necessity or out of stoicism, more respect to them. But that’s not for me, as I’m trying to find a balanced path between saving for the future and enjoying myself now.
To me frugality is about getting the best value for my money and not necessarily the absolute lowest cost. In that regard I’d like to be comfortable during the 50-60 total minutes I spend commuting per workday. I’d also prefer to have relatively modern safety features on my vehicle. Spending $20-25k on a car every decade or so to meet those desires seems reasonable to me.
It also helps to know where to draw the line — and to do that I like to compare differences at the margin. Say you bump your price range up to $35k. That gets you more luxury, more power, a bigger vehicle, or a bit of all those categories. But are those marginal differences worth an extra $10,000 over the features you’d get on the $25k vehicle? Does a Toyota Camry Hybrid, an Avalon, or a Highlander (all ~$35k cars) do anything that my Prius doesn’t to justify their higher price? Not to me at my current income ($90k) and net worth ($166k).
Final thoughts
With only three car payments remaining, I’m almost done paying for my past car buying mistakes that resulted in $7,539.46 of losses. I’m hopeful that I’ll get another 5 years out of my car after that. I imagine that it will be hard to justify replacing it early once I finally get a taste of adult life without a monthly car payment.
I’ve written this article so that others can learn from my past mistakes, as well as to have my thoughts written down for my own future reference. It will be interesting to see if and how my opinions change over the coming years as my net worth and income march steadily upward.