A couple weeks ago my wife was rear-ended by a cement truck and our Volvo was totaled. I’m happy to report that the station wagon went out a hero’s death: apart from a rattled 8 year old and some apparently not too serious back pain to my wife, everyone’s fine and the stalwart Swedish engineering held up just as it was designed to do.
But, now that the insurance has paid, the Campbell family has some decisions to make about how to replace the car. Apart from selecting which type to buy, per practical and aesthetic inclinations, we also have to consider the financial implications. Should we buy new? Recently new? Older? Should we buy or lease? How much should we spend, either total purchase price or monthly payment?
Taking money out of it, a new or certified used Toyota 4Runner looks like a pretty good contender. It fits our needs and lifestyle, is reliable, holds its value well, and clicks off all the other non-economic boxes. The price on a Trail Edition 4 Runner runs about $40,000 and the average rate for a 36 month auto loan are currently 3.40%. So, assuming I put down, say, $5,000, my monthly car payment will be $1,025 and I will have spent a total of over $1,800 in interest.
Sure, I could lease the same vehicle for maybe half that monthly amount, but then at the end of the lease I’m either in a position to return the vehicle or still needing to buy it. Since the value of a comparably equipped 3 year old 4Runner right now is about $33,000, leasing followed by buying would increase my total expenses dramatically. Depending the lease program, it wouldn’t be unrealistic to spend $18,000 in lease payments over 3 years, followed by another 3 year loan. Spending upwards of $60,000 on what is today a $40,000 product is not a good deal.
The other reality that is often overlooked when it comes to car purchases is the opportunity cost associated with dedicating resources to service the purchase, whether paid for all at once or on a monthly basis. To my way of thinking, if I can afford to pay Toyota $1,000 per month at 3.4%, it means I can also afford to pay myself $1,000 a month. If the rate of return on my investment account averages a modest 8% (compounded annually) over the next three years, I could turn $36,00 into $41,000… which is interesting because that is about the same amount I would have paid on the hypothetical car loan. In 20 years, with continued contributions, my investment account would become almost $600,000.
Of course, I could put down more and have a significantly smaller loan. That obviously makes good sense. Or, ideally, I could just pay for the vehicle all at once and not deal with any monthly payments or financing. Both scenarios, however, still carry with them the fact that a significant amount of money will be tied up in a car and therefore unable to be productive toward my larger financial goals.
But I still need to replace the old Volvo. So what to do? I’ll tell you. I’m going to spend a couple thousand bucks to get my 20 year old Land Rover, that has up till now served as an irregularly used third car, outfitted with some modern, more reliable parts, and apart from fuel and insurance, drive that for free and pay myself the difference. If it stalls on an overpass somewhere or spontaneously combusts in our driveway, then I’ll think about buying another car.
– Chad Campbell