The truism that the second most expensive purchase most people make is a car tends to ignore the part that houses usually appreciate in value, whereas cars almost always lose their value. The pandemic/chip shortages/trimflation inverted this for cars, with people getting offers for more than what they paid for their cars. According to a new study, this has dramatically screwed up how car buyers view what their cars are worth, with many being off by $5,000 or more.
Tesla buyers are the worst off in this study, which is no surprise given how heavily Tesla continues to discount its vehicles. That strategy seems to be working for Tesla, especially in China, where a rise in car sales may help the company overperform in the third quarter.
Toyota, on the other hand, probably had a bad quarter for production due to a bunch of problems. Will Volkswagen have issues with the ID.Buzz? You better hope your local dealer sold a bunch of ID.4s, otherwise don’t expect to be able to find an ID.Buzz. A lot to contemplate in today’s Morning Dump.
1-in-3 Buyers Are Underwater On Their Cars And May Not Know It
The period of 2021 to early 2023 was an extreme fluke when it comes to car sales. The global pandemic, and the hamfisted response of automakers, led to new cars getting way more expensive. There was such a shortage of new cars that used ones in good condition were suddenly worth as much, or more, than their original sales prices. (Many of you might remember the crazy Carvana offers you got at the time). At the same time, government stimulus and job protection put extra money in the pockets of consumers.
The market is now past this period of constrained supply, and all of that spending (as well as other factors) led to a period of inflation. Interest rates were raised in response, which means that even though cars are getting cheaper, the overall cost of buying a car remains stubbornly high for individuals who need to finance.
While used car values haven’t completely plummeted, almost any car purchased in the last five years is not worth what it was at the height of the supply shortage. I’ve talked before about how auto loans from 2022 are probably the worst to hold given the cars in that period were sold at prices that were above market values, and now, given that there’s plenty of new car inventory, people are still paying those inflated prices every month.
While all of this is obvious to you, dear Morning Dump reader, it may not be so obvious to consumers according to the Q3 Negative Equity Report from CarEdge/Black Book. The survey of over 1,000 drivers found that 31% of drivers who financed their car purchases had negative equity (in other words, they owe more than their car is worth). This number rises to 39% for buyers who purchased a car since 2022, likely reflecting both the above-market transaction prices and the fact that fewer payments have been made compared to a pre-2022 car.
I was disappointed to find out how many buyers misunderstood the value of their vehicles, but I’m also not surprised. From the report:
61% of respondents believed that their vehicle was worth more than its actual trade-in value, based on data from Black Book. Furthermore, 17% of respondents overestimated their vehicle’s value by $5,000 or more. This disconnect between perceived and real value is an important factor contributing to the financial difficulties many car owners face when trying to trade in or sell their vehicle. The belief that a vehicle is worth more than it actually is may lead some drivers to underestimate the extent of their negative equity. Many drivers are encountering this unpleasant surprise at the car dealership when attempting to trade-in for an upgrade.
It’s not great, and the trends make a lot of sense in terms of who has more or less equity (the longer the loan term, the lower the equity, and the more likely you are to be underwater). The people most impacted by this are not surprising, either.
This is graphic shows the equity versus loan-to-value ratio for different brands, which is determined by taking the amount of the loan and comparing it to the value of the car. Above 1.0 is bad, the closer to 0.0 the better. Luxury cars, which are historically the biggest and fastest depreciators, tend to be close to 1.0. So why is Tesla at the bottom? It is a quasi-luxury carmaker but most of its cars are Model Ys and Model 3s.
The cheapest Model 3 in 2022 was about $50,000 (before incentives). Today, the cheapest Model 3 is a full $10,000 less. The KBB trade-in value for a 20,000 mile 2022 base Model 3 in excellent condition is about $23,000, or less than half (worth noting that private party sale value is a little over $27,000). Unfortunately for Tesla buyers, the company has been continually lowering the prices of its cars to attract new customers. This is good for new buyers and bad for old ones. And to make matters worse, Hertz dumped a bunch of Teslas on the used car market this year.
So long as the economy stays strong this isn’t likely to become catastrophic, though in a recessionary period, this could lead to even more delinquencies than expected.
Tesla Probably Had A Great Quarter In China
Tesla is the automaker that is most opaque about its car sales. Every three months, without warning, it’ll drop production and delivery numbers (its analog for sales) broken down only by “Model 3/Y” and “Other Models.”
Thankfully, most developed markets report more detailed numbers, including in China, where it’s starting to sound like Tesla had a super strong Q3, leading analysts to increase their targets for the automaker.
At least four analysts have boosted their estimates for Tesla’s third-quarter delivery numbers, which are due next week. All point to signs that sales are starting to pick up in China, a key area for Tesla and a major market for electric cars globally.
“This China strength comes at a very opportune time for Tesla, helping to offset ongoing weakness in the US and Europe,” said Dan Levy, who follows the company for Barclays. Levy now expects deliveries of about 470,000 vehicles in the three months ending in September, up from 462,000 previously.
A healthy delivery figure next week would go a long way in allaying fears about weakening demand amid an industry-wide slowdown and the emergence of competitively priced rivals.
Elon Musk may no longer view his company as a car company, but it’s still a better car company than most. I’m curious to see how well BYD does in China in Q3.
Toyota Is Taking It On The Chin This Quarter
Toyota is in the enviable position of having a strong brand and a product line that offers something for almost every consumer. The Japanese carmaker is in the less desirable position of being caught up in numerous testing scandals and stop-sales for its extremely popular three-row crossovers.
Those issues are being dealt with, but August was the 7th consecutive month of decreased output according to Reuters. There were lots of reasons, including the aforementioned scandals and production pauses, as well as a typhoon in Japan, where production dropped by 22%.
So, if you’re waiting in line to buy a new Toyota, stay in line. They’ll make them, eventually…
VW Dealers Are Only Being Promised ‘One Or Two’ ID.Buzz Vans At Launch
I am excited about the Volkswagen ID.Buzz, even if I’m not totally sold on its high price. The EV retro van seems like an ideal use case for an EV, which is why it’s a bummer that it’s felt like 900 years since this thing was first revealed.
If you want to buy one, it’s going to feel even longer than 900 years because, according to Automotive News, the rollout is going to be slow.
Andrew Savvas, VW’s head of U.S. sales, said each VW dealership will get one or two ID Buzz models for the vehicle’s U.S. launch. That will equate to a ramp-up that Savvas described as “quite tight.”
He said VW’s allocation policy is based on the size of a dealership’s market, along with its ID4 sales performance.
“We want to obviously give the cars to the dealers who did a wonderful job on ID4,” Savvas said.
If you live in a large market with a dealer capable of moving ID4s you might be in better shape.
What I’m Listening To While Writing TMD
This video might be a bit much for work, FYI, but the Addison Rae short film for her lusty “Diet Pepsi” continues the trend of pop stars using giant, Malaise Era American cars (Sabrina Carpenter’s “Please, Please, Please”) in their videos. Is this a trend? Are these cars ripe for a comeback?
The Big Question
How much money do you put down as a down payment (as a percentage) when buying a new car? I just did about 25% on my Honda, meaning I am thankfully not underwater.
Topshot credit: YouTube (Family Feud)
I typically don’t put any money down, unless I’m trading in a car, in which case it’s that amount. I don’t put anything down on leases ever (I don’t lease often, but I’ve gotten a few cheap ones over the years). I tend to count on my loan length to keep me above water. I don’t do any longer than 5 years on a new car and 3-4 years on a late model used car. I try to keep them at least 8-9 years for new and 5-6 for used. Then I have a good couple years of no car payments.
The fun cars like the MGB and the Miata have been 100% cash.
I also have a separate credit union account with direct deposit that has all my fixed and minimally variable monthly payments (car loans, power bill, gas bill, cell phone bill, etc.) come out of it. The money going in covers all the auto-pays plus a little extra. It makes budgeting easier.
The amount of clients of mine that pay cash blows my mind. Average return of investing very conservatively right now, is around 5.5%. If financing is offered at less than that, why would you pull your money out and then also potentially pay tax on it?
I personally rarely put a large amount down on a car. Just leased a new vehicle with $0 down. Putting money down on a lease is just pre-paying to reduce the cap cost and thus monthly payment. You still end up paying the same amount as it does not reduce the money factor or rent charge you would pay, unlike say, financing and reducing how much the loan would be and thus reducing the amount on interest charged.
Not to mention if you put a large amount down on a lease and it gets totaled, you are most likely out a large percentage of that money.
The peace of mind of pure ownership is worth the difference. Having the title in hand and not worrying about payments, moving, banking mishaps etc. causing it to be threatened or repo’d somehow…it gets some stress out of my mind.
The feeling of not being in debt is worth something.
“The feeling of not being in debt is worth something.”
I’ll add that it’s worth everything.
Personally, I prefer to invest my money in assets that appreciate rather than a rapidly depreciating asset. That being said, to each their own. I will concede it is a bit more complicated than just forking out the money up front.
This viewpoint is 100% valid. Not everything in life is a spreadsheet. When you take out a car loan it’s not like it’s hard to manage, but you do have monthly payment reminders even on autopay, you gotta keep track of which account it’s being paid out of and communicate with your spouse to keep that account funded and move the payments if you ever switch banks, you keep a password for their website etc etc. You also have to do some paperwork at loan or lease-end and (in my state) visit the DMV to transfer title after the loan is paid off. You can’t sell the car on a whim, you have to keep collision coverage on it, etc etc. Again, none of it is that hard but not worrying about any of that is its own kind of luxury. My life is already chock full of that kind of menial shit so I personally need more than 100 basis points to compensate me for that mental overhead, no matter how seemingly small
it is. Now, if I’m buying a $50k car and I can get zero percent financing without giving up any other incentives (often that kind of promo rate is in lieu of cash on the hood), and a high yield money market is paying 4 or 5 percent then sure, yeah, give me the loan. Otherwise you can keep it.
If I have the money to pay cash, I also have the money to pay off the remainder of the bank note at any point in time. There is way more comfort to me in having extra cash on hand (well, in pretty liquid investments) that could theoretically be slowly bled down if I somehow couldn’t/didn’t work or whatever other horrible scenario should happen. Affordable financing means I go much longer without touching my rainy day funds than if I just paid cash; paying cash is the riskier move.
Absolutely this. If I’m running my cash reserves down, I’m putting myself at higher risk of a tough position down the road.
To be fair, yeah, I guess we’re all talking in terms of new car prices, and that makes sense.
With used cars, if it’s (hopefully) a smaller percentage of your liquid assets, then it’s not as risky.
But point made. Much as it’s not sound financial decision-making, it is pleasant emotionally for me to pay off early.
— signed, someone with an accounting degree
And there is something to be said for the emotional aspect, of course. And something to be said for knowing how much of your cash can be put to work, how much you want to keep liquid, and how much to tie up in these purchases. There is no perfect formula that will work for every person in every situation, and we all just make the decisions that work for us.
Meh. Put the whole amount into staggered CDs or money market and have payments come out of that.
I’m very much the kind of person that pays careful attention to cashflow, lending costs, and what I can earn investing. But, outside of real estate, I prefer to pay cash for everything. I’ll never take it out of my portfolio, mostly my cash equivalents.
The reason is that it makes me comfortable knowing that if things went to hell financially tomorrow (for example if I was laid off in the middle of a recession like so many during covid) it would cost me very little to continue my way of life. That peace of mind and the convenience of not dealing with lending/payments is worth more than the marginal return I could get.
Not saying it’s for everyone. But I have no interest in doing all that work and worrying for the extra 1-2% I could make on $30k over the next 5 years. That’s maybe… $1,500 (just a guess, I don’t want to do npv). The average household probably spends more than that on Starbucks in 5 years. So I skip Starbucks in favor of financial independence.
100%. Your time and your mental energy are worth money. They are valuable assets. Everyone values them differently and that’s fine. I am also fine potentially giving up a percentage point or two on my net worth to have something in my life be a little less damn complicated.
I see both sides and also recognize that I’m fortunate enough that I can give up that 1-2% to help simplify things.
Do the deal and get out with no entanglements.
Dealerships are like hookers. You don’t pay them for sex, you pay them to leave.
Lol I haven’t heard that saying used in relation to dealers. We aren’t all that bad, but some dealers reputations are deserved.
Since I tend to keep most of my vehicles until they’re no longer worth much, I’m kinda curious… what’s the best website on which to check the value of vehicles? Is it KBB?
It’s not usually all that relevant to me, so I don’t really pay attention to what’s the current best source of info.
Given that KBB really doesn’t mean dammit in the real world, I just do a search on Autotempest.com to see what the average asking price is (dealer and private seller) in my area for similar mileage and features.
That makes sense.
I’ve never put money down, mainly because both of the cars I’ve financed have been purchased as a reaction to a new job, meaning I had no money in the present but plenty in the future and a sudden need to commute. Both were nice, neither one was new. Probably never will be, unless the manual Prelude happens and is great. Even then, I’ll probably wait for a lease return.
(I’m in the Canadian market, pricing is much different)
How much (or little) varies wildly depending on the situation at the time. For instance, my Sorento has entered the “Whack-a-Mole” stage of maintenance issues, and based on current used offerings I’m ball-parking $8k of trade-in value.
So whatever the price of the vehicle I buy in the next 6 months is, subtract 8k.
I’m also shopping models that dealers are getting motivated to move, thus the deals are better.
Current short list:
-2024 Frontier (back seat may not work, but low financing and cash on the hood)
-2024 RAM 1500 (not a V8 guy, but most affordable 1/2 ton ATM with 0% and big discounts)
-2024 Tundra (the engine recall scared folks away, financing dipping below 3% and discounts)
-2022/23 Grand Cherokee 4xe (I’m already seeing $15k off MSRP advertised, before I begin my Bazaar-level haggling)
Basically, I’m looking for a tow pig that’ll haul at least 6000lbs and carry a family of 3 plus a 110lb dog. What limits my midsize truck options are financing (ranger/taco are both over 7%) and rear seat space. My wife wears a 37″ inseam, so back seat space gets eaten by her seating position.
“My wife wears a 37″ inseam”
I don’t think anyone is upset about this flex.
Well done, good sir.
is that a flex? because he also said he needs to be able to haul 6000lbs.
Ow, my pride. The hauling is for my love of project cars. The 6000lbs gives me leeway.
What’s funny is I only wear a 28-30″ inseam.
It’s the gender role reversal when it comes to seat positions. The time she spends holding the seat adjustment in reverse after I’ve been driving almost feels like a comedy sketch.
One of my favorite creature comforts is that my acura can remember two seat positions tied to two key fobs. Does your car do that?
The ’16 sorento yes, the ’86 mercedes yes, the ’13 optima no.
We have 3 dogs all over 70 pounds my is of the mindset that “no pickups” because the bed is too hot and cold for the dogs, Where we live there is a 130 degree temp range over the year. We have friends that use the back seat of their full sized truck for their 4 dogs all over 70 pounds and it is too much hassle for me. Hope you find a good deal on a truck.
I’m a truck guy over SUVs, but I kinda want the 4xe to work out cause I’m all about a PHEV tow pig.
Being in the same province as Hundal, he can attest we see our own massive temperature swings. (-35 to +38 Celsius in an average year)
My wife and I were in a similar situation (both tall). We had a Toyota Sienna which was great for our family of 3 plus 2 dogs, but it was lacking in towing capacity for our travel trailer. Our trailer is only 2300lbs dry, when towing into upstate VT mountains you quickly realize the Sienna is not the right tool for the job.
We went with an off lease F150 Crew Cab. The back seats on all mid-sizers were just too small. Ford has discounted finance rates (in the US) and the local dealers are dropping prices on their used inventories. I always try to buy 3-4 yrs old vehicles. Let someone else eat the depreciation.
Up here there’s no benefit cause the used rates are still sky high and trucks lose the least amount of value up here. F150s are the most expensive 1/2 ton.
Which is a shame. I had a 2018 F150 that I loved.
Coming from a life that started at poverty, dipped into homelessness, took 10 more years to reach lower middle class, and annual average earnings as an adult that place me in lower middle class, I most often put down 0%.
I hate it. I know it’s not smart. It is what it is. Maybe one day I will have the luxury of a two income household, or solo earnings sufficient for 100%. If I get the job I’m hoping for with the salary I’m hoping for, it’ll take me two years to clean up the last eight months of unemployment.
I just wanted to throw this out there in case anyone else is seeing the “100%” numbers and feeling discouraged.
Dude, you’re the reason she’s running.
Let’s not do that here
^^^Not all heros wear capes…^^^
Let it go. Not everyone has an easy life. Kindness matters.
I hope so. I know she can’t do it alone, but there’s definitely more of a chance of improved worker protections and stronger labor laws if she gets elected.
Her opponent certainly has let us know how he feels about unions.
I get it, that’s why I’ve always bought and even financed used. Been unemployed in the past and it sucks.
I’ll never judge a person as long as they are doing the best they can. Keep your head up and don’t be afraid to continue sharing your story. It matters to more people than you might think.
Good luck on the job!!
“How much money do you put down as a down payment (as a percentage) when buying a new car?”
I’ll probably never buy a new car; even though I could afford to, they’re too expensive for what I’m getting. I’d much rather have my fleet of 5-6 older cars that I owe no money on, that combined are worth about as much as one new car.
I *have* financed 2 used cars, a 2001 Cavalier Z24 in 2010, and a 2017 Kia Forte5 SX in 2019.
The Cavalier was barely over $3000, but as I had almost no money at the time, I put the absolute minimum down that I could. I don’t remember the interest rate, but it wasn’t bad, and I intended on paying it off within a year or two. I sold it less than a year later after borrowing money from my dad to pay it off, so I guess it was paid off ahead of schedule.
The Forte was quite a bit more expensive, and the interest rate wasn’t amazing, but I think I put about 25% down. Ended up selling it to Carmax in mid-2021 for only a couple grand less than I paid for it, with 25,000 more miles on it, so I feel like I did ok.
If I was going to buy something new though, it would depend on the interest rate, since I’m going to put as little down as I can if it’s lower than my investment/high-yield savings returns.
I had a ’96 z24. Also financed it 100%. I enjoyed that car.
It all depends on the financing. If I’m getting a 0% interest deal, I’ll put as little down as possible. I’m not too worried about being underwater, since I’ll just keep using the car until after it’s paid off anyway.
Right now, my new car loan has the highest interest rate I’ve ever had on one (5.49%–I purchased outright back when rates were higher and only financed recently), so I financed about 65% of the car, then paid down the balance to about 50% before the first payment came due (I’ve found that my credit score stays higher if the bank reports I took a loan for X and now only owe X-Y instead of initially taking the lower loan amount). I’ll continue to pay it down faster than required, but also keep some money relatively available earning 5% interest. If I can’t keep getting decent returns, I’ll pay even faster.
100% down on my car. But that was money from a motorcycle wreck that broke my collarbone.
My wife’s was 25% down (the value of our trade in). We may be slightly underwater on hers as the loan payments are basically keeping up with how it’s losing value.
Depends entirely on the rate and terms of the loan and the rate and terms of other available products. If you are offering me 3% financing, and I can get t-bonds at 5% then for sure I am putting as little as possible down and taking that free 2%. If it’s the other way around, then I’m probably not financing the car, or putting something like 50+% down.
Also, lol at the VW Buzz allocation. There is not going to be a wait, and 1-2 cars per dealer is not a problem, because that’s all they are going to sell. It looks fun, but it’s like $20k too expensive for what it is. Like, I can cross-shop a lot of frankly much nicer cars at that price bracket. There’s a very specific customer for it, one with a lot of nostalgia and too much money, but that’s a very saturated market.
I check on the values of our cars to kill time on occasion, but unless a 6-8 year old Accord or Mazda3 unexpectedly becomes a desirable collector’s car worth more than the price of a new one I’d have zero interest in selling. Right now these cars are worth more to us than they would be to anyone else.
I usually pay 100% cash. but when 0% financing was a thing, I did 100% finance for 60mo because why not. I had the cash but might as well hold it as long as possible.
I think this car is in the video because its interior is spacious enough for a film crew.
Also, regardless of what one thinks of the song, the singer, or the video, it’s a rare thing for the final chorus key change to modulate down, so props for that.
Yeah if your routine involves moving back and forth without exiting you need the extra clearance between the seat tops and the roof that you generally don’t get in a modern car. I’m sure there was something about the malaise aesthetic that drew them to this particular car over a pre-malaise car that also had a bounce house for an interior
Bounce house made me bust a gut!
100%
I make it a habit of not owing anyone money ever.
Give me your tax evasion secrets!
If you have enough withheld from your paycheck you don’t really owe them anything. Actually, they could owe you money. Tax evasion is like the opposite, you owe them all the money.
Except the property tax guy. You pretty much owe that f*cker more every year.
The education system really need to emphasis on financial literacy. Though I think the majority of the American businesses would rather the curriculum be stuck in the 60s.
I’m sure students would pay as much attention to this as they did sex education and the dangers of drug abuse.
I learned it by watching you!
Take your smile.
I’m surprised that more people aren’t underwater, and significantly considering the change in car values. Seems like a good percentage of buyers roll negative equity into the next car or put down the bare minimum.
The last new car that we purchased we put down ~30%, the one before that I put down as little as I could since it was a 0% interest rate and the long loan term meant that I was underwater for a long time on it, which was a good thing. It is still sitting in the driveway, granted currently my daughters, 20+ years later.
I generally lease, rather than buy new, so I put as close to $0 down as I can. Why?
Most leases include GAP coverage. By putting a down payment and getting ahead of the depreciation curve on the car, all I’m really doing is helping the finance company decrease or eliminate their GAP payout.
Might as well hang on to those funds to cover a few payments.
That being said the Grand Cherokee 4XE is significantly upside down, so none of this is surprising. I’ll just keep it through the end of the lease rather than roll negative equity.
Gap is a word, not an acronym. No need to spell it GAP.
Guaranteed Asset Protection
“Tesla buyers are the worst …” You could’ve just stopped right there. Kidding, I’m kidding.
I haven’t purchased a new car in 38 years, but when I did, I put down 50 percent and financed for two years. Those days are gone.
Now own 4 cars, all paid off and bought used.
2005 Acura MDX 175000 miles
2007 Toyota Corolla (wife’s car) 136000 miles
2014 Camry Hybrid (my daily) 237000 miles
2009 Pontiac Vibe (college age daughters car) 263000 miles
The next to be replaced will likely be the Acura due to encroaching rust issues. My insurance fees are low and I have no car payments on overall bulletproof vehicles.
I am certain everyone here knows this, but if not, the impressive mileage on the Pontiac is because it is a rebadged Toyota Matrix.
So, sort of, the Acura is your only outlier…. 🙂
Bought her the Vibe knowing it was a Matrix/Corolla without the Toyota tax. It was an absolute steal.
Have had 2 Acura’s and now 3(4) Toyota’s. Toyota seems to have overall better corrosion protection and more rugged (if not luxurious) interior materials. Honda seems to be a bit more needy maintenance wise and the transmissions can be fragile. TBH I have replaced more major parts on the MDX than the ’99 Grand Cherokee it traded in to buy it. I think the difference is ease of repair and frequency (less small annoyances). The Honda has definitely rusted less than the Jeep. If you want to keep it forever just buy a damn Toyota.
BTW I’m equipped to do about anything not requiring a lift. If I don’t do it myself its because I choose not to based on time/aggravation. I farmed out the MDX timing belt due to work travel and general PITA factor (when my big impact gun wouldn’t loosen the crank pulley I called no joy). I often do the same with suspension and exhaust work (Western PA so salt rust).
That’s a lot of miles. Do you buy cars from people commuting from mars?
I keep cars until they are junk so I do not care about resale value. My bumper-to-bumper warranty is still going for my 12-year-old vehicle.
As long as it moves i’m probably gonna keep any new car I buy from a dealership. If I ever do…
Hilarious. And probably has to do with stupid salesman calling it an investment. It’s the complete opposite of an investment. It’s a rapidly depreciating asset.
The road to hell is paved with overconfidence.
I did 25% down on my Chevy Bolt EUV, got the tax credit and used it to reduce my tax liability. Right now I am under water based on how values dropped fast but I don’t consider myself underwater based on that, I know the car is great and the cost to run its pretty low. I am not planning to sell it, I will give it away to my kid in 6 years when he is allowed to drive to go to school.
We already drove it for 20,000 miles, 3.0mi/kwh lifetime average. Running an estimate (65kwh battery), 195 miles per charge, 103 full battery charges, $0.20 per kwh, $1339 total for one year*
*I also charge at work so the cost is probably half of this quick calculation. According to Onstar I save on average 60 gal per month.
I was gonna say “hell no malaise era crap is pure garbage” but cassettes are coming back and you can buy a 35 year old walkman for $1200. The only thing that will keep the youths from malaise era crap is the fact that most 40 year old cars are pure iron oxide by now.
Depends greatly on the financing rate.
If it’s a 0% or 0.9% promotional rate, I’ll finance every penny of the car, or at least as much as they let me.
My next car will probably be around 50-60% down because I don’t like paying 6-7% on a six figure purchase.
I think both “pay cash for everything no matter what” people and “trade in an underwater car and roll it into a new loan at 110% of value” people are financially illiterate. Context matters.
Exactly this. If you can finance below 3%, you’re throwing money away vs investing the cash (or pulling from an investment).
Many don’t think of the delta between earning potential and low interest debt.
For that are possibly confused (I was one for a long time):
Let’s take an investment return of 4% and a finance rate of 2% and really simplify things by using a year of payments or interest earned and a $100 000 baseline.
Add in compound interest earning over 5-7 years on your investment and the math gets much worse for paying cash.
It was always so hard explaining this to people when I was a financial advisor. I had a couple who had a 3% mortgage and would put an extra $10k-$15k a year towards it on top of standard payment. I was showing them that even the most basic and conservative financial product was putting out 5-7% APY and that the extra money would do better in that product. They looked at me like I had 3 heads and green skin.
“Dave Ramsey Thought” is beneficial only for those who don’t know that they need it, and is actively harmful for the diligent sort of people who would actually listen and follow its guidelines.
As someone who both understands and eschews the financial markets, I totally get why they did that. Some folks are just not wired to think about money in that way. I also get why you, as someone in the business, would find it ludicrous that people aren’t working their asses off by micromanaging every penny at every moment to maximize financial gains.
Putting your money in index funds or T bills that return more than a loan rate is the opposite of hard work or micromanaging your money.
That depends. For some of us, it’s best to have enough money that we don’t have to think about money, but not so much money that we have to think about money.
That’s what roboinvesting or treasury notes are for.
This isn’t micromanaging on any scale, simply playing the interest rate game. Plus, managing it was my job not theirs. They just had to make the call to put the money in a different location than the mortgage.
It’s more of a philosophical thing, some just see the world differently.
I didn’t follow it completely for our mortgage as I don’t want a lien on my house (a lot easier to find a way to pay municipal tax and utilities than mortgage payments if I get into a bind).
But, I’m Canadian, we can’t claim mortgage interest at all on our taxes, but when we sell our principle residence, there’s no capital gain tax to worry about.
Obviously, everything you are saying is correct. However, I think you miss the point of why some of us pay cash for cars. I pay cash because it limits how much I spend. If I have $50k in cash, the most I am spending is $50k. If I had the self discipline to buy the same vehicle regardless of payment method, a low interest loan probably makes the most sense. I know I won’t do that, though.
I have no objection to car loans and, if used appropriately, loans can allow you to optimize your finances. However, most buyers are using loans to buy more expensive vehicles than they need which is the opposite of optimizing their finances.
Yeah same. My specific rule is that I only buy cars that I *could* easily pay cash for at the time I’m buying. Then I make a completely separate decision on how much to finance or not based purely on the loan terms I can get and the various opportunity costs of that money at the time.
This way I don’t have to concern myself with whether or not my car is right side up or not on a loan at any given time. In my own record keeping I assign zero value to any of these cars, since that’s what they’ll all be worth in the long run.
This is the way, if you can afford it.