Financing Car: How to Throw Your Money Down the Toilet | From ...

Financing a car is what we all do, it is part of our culture.?Mathematically, an automobile is the worst purchase to finance. So why do we do it?

photo credit:?Supermac1961 photo credit:?via photopin cc

Since I was 21 years old, I have had three auto loans and two auto leases. Why? I have no idea except that it?s what everyone does so I followed the culture. By nature, I am a math nerd, but until a few years ago, I?didn?t?understand the true?mathematics of an auto loan.

The Math of a Car Loan

• Annual Percentage Rate: The cost of your credit as a yearly rate
• Finance Charge: The dollar amount the credit will cost you
• Total Payments: The amount you will have paid after you have made all payments as scheduled
• Depreciation: The amount or percent a new vehicle loses value. A new automobile loses about 60-80% of its value in the first four years.

Here is an example of how much it would cost to finance a new Toyota Camry LE over 5 years with standard options (which I did in 2006):

• Price to purchase: $21,344
• Annual Percentage Rate: 6%
• Finance Charge: $1281
• Total Payments: $22625
• Depreciation: $16628
• Net loss per year: $3326

At the end of 5 years, you would have spent $22625 for a car that is worth $4716. That is assuming that you drive around 15000 miles a year. I drive more than that so the?depreciation?is even greater. The math shows a net loss of 79%!

The depreciation of $16628 is like flushing $277 down the toilet monthly. Now that is some expensive toilet paper!

Is There a Better Option?

The purchase of a vehicle is not an investment and you will lose money. However, you can limit the damage by doing the following:

• Buy with cash and buy to avoid finance charges
• Buy used. You can buy a?reliable?used car that is 2 to 5 years old. Most of the?depreciation?will have been realized and will save you some cash.

Here is an example of how much it would cost (if buying with cash) to purchase a 2009 Toyota Camry from a private party and hold it for 5 years:

• Price: $12,727
• Depreciation: $5549
• Finance Charges:?ZERO
• Car worth at the end of 5 years: $7178
• Net loss per year: $1109

Instead of flushing $277 down the toilet monthly for a new car, you would be flushing $92 a month.

Reasons Why We Engage in the Stupidity

I believe Americans engage in this madness because:

• It is the culture
• We don?t pay attention the math
• We lack discipline and patience and we want it now
• We want to look good in our new?vehicles
• We believe a new vehicle is more reliable. This is a myth, if you take good care of your vehicle, it will take you a long way. I have a 2006 Camry that has $170,000 miles on it and it is running very well.

Question:?If you have an auto loan, what rational did you use to finance the purchase? Is it based on math or the culture??

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Source: http://www.robertjacobs.org/2013/06/10/financing-car-how-to-throw-your-money-down-the-toilet-part-1/

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