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Automotive - Buy
Written by Omie Ismail   
Thursday, 22 October 2009 00:00
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Buy and Hold: The Cheaper, Greener Strategy
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Car manufacturers have huge problems these days.  It isn't just GM or Chrysler either, its every major automaker.  The biggest problem they have is that the models they build are very durable and can can last for a very long time.

How the world ever decided that that people should buy a new car every 3 or 5 years is beyond me. Do you trade in refrigerators that often? lawnmowers?  men's suits?  I can understand the temptation of embracing new technology and exchanging your laptop every few years, but a car? As a technology enthusiast, I can even sympathize with the guy drooling over the 60 inch HDTV. But, with the possible exception of hybrids, car technology hasn't made any quantum leaps in the last 15 years.

So what are the rational reasons that someone needs to buy a new car every 5 years?

Most new car buyers are not just buying - they're getting rid of their old ride. Now there might be sound rational reasons to dump the old bird, but if you are trading in your car every 3 or 4 years, there are only several rationale reasons:

They bought a lemon. Unless they purchased the vehicle from a shady used car dealer, new cars pass through some very stringent quality control and a lot of the manual assembly has now been automated. So human error or negligence have been drastically reduced. Back in the 70s and 80s, poorly manufactured cars and primitive technology made for a lot of lemons.  Not so today.

A life change. Single guy buys two door Camaro - Girl falls in love with car - Triplets arrive seven months after the wedding - Girl falls in love with minivans.  'Nuff said.

High Mileage.  After driving 30,000 miles a year, the commuter car is requesting a change of ownership to some nice old lady that will drive it gently once a week.

Switch to a more fuel efficient car. One of the things that amazed both economists and car manufacturers was how quickly consumers dumped their four wheelers when gas went north of $4.00/ gallon. If there was a single reason for the decline in the fortunes of the auto industry - it was there failure to anticipate consumer reaction to such a sudden surge in gas prices.

Any of the above are sound, reasonable rationales for why some people might want to abandon a car before it reaches its fifth anniversary.  But the reality is that emotional factors drive the impulse that drives many people to abandon their relatively new car every three or four years.

They feel that they need to for status, personal satisfaction, or they have the impulse to get a shiny new model.

Yep, bottom line is people associate their personal value with what they drive and a 7 year old car just doesn't look good.  Amazing, especially considering that many men will often wear suits that are nearing double digits.

Fortunately, there is a way to maintain your self-esteem and keep your car long after the loan payments have dissappeared?  It's actually quite simple - buy the car that you really love and hold it for 10 plus years.  That's right, I am going to advocate you go over-budget and get the car that promises ever-lasting happiness and eternal youth - even if the monthly payment seems a little bit high.


Lets look at an example of how this will work.  Lets say your dream car is a BMW 328i and it will cost you about $31,000 plus tax.  The sticker price is a real shocker for you but for your emotional health, you know this car is the cure.  A Toyota Camry makes more sense  and you can snag a nice one for $25,000. But, let's face it, who really falls in love with a Camry? It's such a reliable car - even the mechanics hate it.

Your mind tells you that the Camry is the rational economic choice but your heart swoons at the sight of a fully loaded silver BMW.  For some personality types, the rational economic solution is to listen to your heart.  Maybe you should go ahead and buy the BMW after making a solemn promise that they will cherish it, take good care of it and never succumb to the five year itch. You can't make that promise to a Camry - few people can. If you keep your promise to the BMW, you might be making the right decision.

Just look at the math:

The BMW will cost you $31,000 plus tax or about $33,500.  Fully financed over 5 years at 7% would total $39,800.  Maybe you get some repairs at the end of life that cost you another $3,000.  Call it $43,000 or $4,300 a year to drive your dream car.  You probably will unload it for $6,000 when you are done leaving you with a net cost of about $3,700 a year.

Because you never develop an emotional 'thing' with your Camry, you'll trade her in after five years no matter how good she's been to you. In, any case, you'll probably end up buying a similar vehicle. In effect, you'll buy Two Camrys over a ten year period.

The first Camry will cost you $25,000 plus tax twice. So will the second one. The total will be $60,000 over the 10 years financed at 7%.  Of course, you got some trade in value both times which for a Camry is quite good -- about $8,000.  So we are left with about $42,000 or $4,200 a year to drive a car that you never 'connected' to. That's about $500 more each year than what it would have cost to marry the car you really loved and held onto her for ten years or longer.

The financial benefit is actually lot bigger than you might imagine.  Sure your payments are going to be more upfront but you are going to have 5 plus years of zero car payments.  Let me tell you, when you have no auto payments, you are going to loathe signing another car loan contract and will likely want to buy your next car in cash.

There is one more reason why I think it makes sense to hold a car for ten plus years. It's environmentally correct.  How much energy and resources are used and how much pollution is generated to produce a car?  Turns out between 100 million and 200 million BTUs (British Thermal Units) or the equivalent of 900 to 1,800 gallons of gasoline - enough to fill up your tank for several years.  So unless your new car has much better fuel economy than the last one, you are going to be far greener hanging on to your old car.

Of course, you don't have to stop at 10 years, any good independent mechanic will let you know at what mileage your car is going to start running into problems.  Typically for a good car, its going to be between 120,000 and 150,000 miles depending on your driving and maintainance habits.

And if you can't make it for ten years and get the seven year itch, do yourself a favor, don't buy a new one, Jazz it Up!

 

 

 

 

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amp  - Goin' on ten |2009-11-03 11:25:04
As I am goin on 10 yrs with mine, hoping to get a few more years - not because I am being cheap, but rather I want to put the money aside now for that $30k car, rather than payments to the bank (no matter how low the interest) or at least much lower payments for much shorter time(I love car payments less than $250/mo). So if you save that car payment each month you get $3-6k/year and $30k-60k by ten years - cash for your car not your clunker!
Tom @ Canadian Finance Blog  - http://canadianfinanceblog.com |2009-11-02 17:24:12
Good points. I fully intend buy cars a couple years old and drive it for 10 years. So far that hasn't been possible since people keep hitting my car (2 cars in a row) and writing them off!
 
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