Buying a Car
I’m planning on buying a new car this week. I’ve been doing a lot of research, and I want to find a car that my family and I can enjoy for the next decade. I love my Toyota RAV 4 - it’s been such a nice car to me over the last (almost) 10 years. I commuted in that car, did small roadtrips in the car, I moved (several times), I drove it to the beach with the dog. But, now with two kiddos (two car seats), a dog, and the occasional visitor, the SUV has become quite crammed. So, I am looking for a minivan, and I am so excited! I’m excited for the extra room, comfort, and reliability. I plan to have this for the next decade.
But, it’s intimidating buying a new car. Will it be exactly what I want, and will I be able to afford it? Should I save the money or invest it instead? What are interest rates these days, and will I buy with cash or will I finance? Some of these questions are emotional fears, and others are practical concerns about tangible money… decisions that will impact my future cash flow. There is a range of cars I can choose from and each one represents a different financial impact.
When looking at the cost of cars today, there’s a huge range. I am looking for a minivan made within the last 5 years and with low (ish) miles, so there is some flexibility there. I can buy the newest version and spend a considerable chunk of my savings, but that doesn’t make me feel good. Savings is meant to build and grow. Do I really want to make such a dent? Or, I do I buy one with higher miles for less money, but does that affect the reliability? Do I just want the newest of the new because it will make me feel good, and is that feeling fleeting? Am I just trying to keep up with the “Joneses,” as they say? I can also choose to finance to save some money now, but I will end up paying more with the considerable amount in interest that is required.
All these questions are important, and at the end of the day, it’s about making a decision and lining up with it. When I bought my current car back in 2015, it felt like a big purchase to me. I financed at the time, and interest rates were below 3%. I paid $23K (including tax) for my SUV, which had less than 30K miles and was about a year old. That seems like a pretty good deal now. I’m sure I can calculate how much interest I paid, but I surely didn’t think to do that at the time. It was just a necessary part of making the purchase, and that is the case for many people who want to buy a reliable car today. Most times, buying cash isn’t even an option. However, now I do think it’s important to look at the total cost of the purchase, so you know exactly what’s the impact.
Interest rates today are above 7% and things cost much more. As frustrating as it is, there is no getting around inflation, and a friend recently told me, “this is just the cost of things.” I can’t go back to the prices we had ten years ago (same as I have to remind myself about housing prices… a topic for another day). I simply need to come up with the right combination of features and price and make a decision. But again, whether I find something I can afford with cash, or I decide to finance, I think it’s important to know the total cost. Let’s look at some numbers.
I got a quote from Chase for a potential car loan. I selected a 2020 Honda as my sample car, and it quoted a 7.34% interest rate for a 5 year loan for someone with good credit. These rates will change daily and differ depending on the car, your credit, the loan term, bank, etc. But, we will use that percentage and term as an example.
Let’s then look at three different price points and calculate the interest to find the true total cost of the car. Additionally, whether financing or not, we have to pay sales tax. There is a minimum 7.5% sales tax on cars sold in California, but the reality is that the tax will differ per city. I am planning to purchase my car in Fremont, CA, so I will use the tax rate of 10.25% (yikes!). (Note, I did look into buying a car in Oregon, since they have no sales tax, but once I register the car in California, I will be required to pay local sales tax anyway.) I am also adding in an additional $500 in “fees” which is just about how much I was quoted for smog, documentation, registration, etc. Here are the three scenarios:
$25,000 (base price) + $3,063 (taxes + fees) + $5,548 (interest) = $33,611
$32,000 (base price) + $3,780 (taxes + fees) + $7,074 (interest) = $42,854
$42,000 (base price) + $4,805 (taxes + fees) + $9,254 (interest) = $56,059
It’s easy to base your purchase off the list price of the car alone, but as you can see, these additional costs add up and they’re not insignificant. The trouble is, these are hidden costs that we don’t always think about before we make the final purchase decision. But, we should know the facts upfront. I also believe that with financing we may choose the more expensive option since we’re just looking to see if the monthly payments fit within our budget. And, that’s a valid choice! Why not get what you want, if you can afford the payments? Regardless of which option you chose, I believe it’s important to know your total price because this is your hard earned money that you’re spending. And, as you can see with the numbers above, you are paying between $8,600 to $14,000 MORE than the listed base price. That’s a lot!
I’m looking forward to this new purchase, and I’m excited I’ve finally decided to do it. I’m not sure which car I will end up with, but I plan to account for the cost appropriately in my budget and make sure I’m comfortable. It doesn’t necessarily feel good to spend the money (I’d rather save it), but I feel blessed that I even have the opportunity to do so, and I look forward to more abundance coming in my future. At least I know this will make our lives easier while we are raising our kids, shuttling our dog, and entertaining friends and family when they come to visit. Wish me luck!
