Buying a used car is the perfect way to set yourself up to be wealthy in the future. I know this is a powerful statement, but it’s true. Most of us love our vehicles and take pride in what we drive. The way our vehicle looks, the new car smell, the reliability of it – all of this comes into play when we decide what ride we want to use for transportation.
However, new cars lose their value like a sinking ship. I’m sure you have heard the rumors of how much less a vehicle is worth after it rolls off the lot. To combat this loss of value, insurance companies offer additional insurance known as “gap insurance” to supplement our already high insurance rates.
Speaking of insurance rates, check out Gabi Auto Insurance. I have been impressed with how cheap their rates are compared to mainstream companies.
Buying A Used Car May Be Your Secret Weapon
This post will give you everything you need to know about buying a used car. From how old is too old to which vehicles last the longest. Check out the table of contents to navigate this page.
I wrote earlier about only spending money on things that add considerable value to your life. You may be one of those people who absolutely love their car. You may still enjoy going out for a weekend drive, or rush hour may not actually be that bad in your air-conditioned leather seats.
Your vehicle makes you happy and adds value to your life, I get it. But at what cost was that value added?
What have you given up by financing that vehicle? $400, $500 a month? If you make $5,000 a month, $500 isn’t really that noticeable, is it?
5 Reasons Buying A Used Car Can Make You Rich
If we understand what is making us poor, and why it’s making us poor, we can better identify what we can do to build wealth.
1. New Cars Depreciate – Quickly!
When I spend my money, I like to spend it on things that add value and hold value in my life. The truth is, on average, that new car you financed will lose 20%-25% of its value in the first year. It will continue to lose approximately 10%-15% of its value each year after that until it is basically worthless.
If you financed a $25,000 vehicle with a $4,000 down payment at 3.5 % interest for 60 months, you would be paying about $2,000 extra for that vehicle by the time the loan was paid off. On average, after that 60 month time period, your $27,000 investment would be worth around $13,122 – if you’re lucky.
I know this may sound absurd, but why don’t you just buy a 3-5-year-old vehicle (with cash) and save a large chunk of change?
How much can you save? The amount may shock you.
2. Unexpected Repair Bills Are Never Expected
Since you’re already paying $400 a month for your vehicle, keep in mind that the air conditioner will go out – right after that factory warranty expires. Do you have a few hundred extra dollars lying around for that repair or will it go on the credit card?
Oh wait, did you buy the extended warranty?
It would have been cheaper to decline the extra warranty coverage and to pay for the A/C with cash. Let’s do the math.
According to Consumer Reports, the average extended warranty is $1,214. Owners who actually use their warranty only claimed $837 in repairs on average. That’s not counting those who didn’t even use their warranty.
Also, remember you will need to pay for oil changes, routine maintenance to include new tires, brakes etc.
Let me guess, they threw in the oil changes for “free” didn’t they? Don’t be suckered into thinking anything they are giving you is actually free. You’re paying for it one way or another.
3. Finance Games You Will Always Lose
If you have ever financed a vehicle, you know what I’m talking about. The salesperson will throw a bunch of extras in if you use their financing. Hopefully, it’s obvious to you that they make more money off you if you finance rather than pay in cash.
The dealership does not stay in business by giving things away for free so rest assured, all those “extras” they are throwing in are being paid for by you.
Another game they like to play is to draw your attention away from the list price and have you focus on the monthly payment. They want you to ignore how much you are actually going to pay over those 60 months and instead focus on how much you are “only” going to pay each month.
Is that monthly payment too high? No problem! They now offer 72 and 84-month loans to drastically lower your monthly payment.
No, I’m not kidding, and some of you may even have these loans. If you are purchasing a vehicle, do not discuss monthly payments – discuss the total price.
4. Buying Used Cars Can Be Just As Reliable As New
Confession time – I hate my car, I really do. It has 200,289 miles on it.
The front driver window does not roll down and it doesn’t have cruise control. It was made in 2007. I didn’t know they made cars without cruise control in 2007 until I bought it. The seat is starting to tear and the front bumper doesn’t sit flush because my wife ran over a large object in the road years ago.
Secretly I’m hoping I can keep it for 25 years so I can get a historic plate for my Nissan Sentra, just to embarrass my wife even more.
I absolutely want a new car but I know I don’t want a new one enough to spend the money right now. I have other financial goals that are more important. My car gets me from A to B which is what it is supposed to do. It’s not fancy, but I promise you, no one (except my wife) cares what I drive.
5. Financing Cripples Your Retirement Goals
If you took that $400 a month and saved it for a period of 20 years rather than spend it on new vehicles, you would have saved $96,000. Over a 20 year period that may not seem like that much money.
Now if you had invested that money and made an average of 10%, your $400 a month investment could realistically grow to $302,412. By financing vehicles for a 20 year period, you are throwing away $206,412! This is not voodoo math my friends, this is the reality.
As I stated earlier, arresting your debt and building your financial future requires a complete shift in your mindset. While the rest of America will finance vehicles for the next 20 years, you could be ahead of them by hundreds of thousands of dollars by being content with a mediocre vehicle.
It all depends on where you want to be in the end.
How To Find The Best Used Vehicles
Buying a used car is a great idea unless you buy a lemon. Nothing is worse than buying a used vehicle that requires way more work and money than you have. This section will detail what you should look for when considering a new to you car.
– Find A Vehicle In Your Price Range
Before you ever consider shopping for a used vehicle, make a firm decision about how much money you are willing to spend. Promise yourself you will not spend more than this amount.
Failing to set a strict budget for a used vehicle that fits within your financial plan is like going to the grocery store while you’re hungry. More than likely you will come home and wonder how much you just spent while trying to not regret your decisions.
Set a price and stick to it.
– Vehicle History Reports Are Worth The Money
For $39.99 or less, you can get a complete vehicle history report that can reveal hidden issues with a vehicle. Sites such as CarFax can provide this information to you and often you can make the seller pay for the report.
CarFax reports include information about:
- Past Accidents
- Previous service histories such as oil changes or other major repairs
- Mileage reports
- Previous and current owners
– Consider Taking The Vehicle To A Mechanic
Many auto mechanics offer pre-purchase inspections for around $100. If you’re buying from a private individual, the individual should allow you to take the vehicle to a nearby mechanic to have this service completed. If the seller refuses, do not purchase the vehicle – this is a big red flag.
When I was younger I purchased a used vehicle and failed to have it inspected. I took the vehicle for a test drive and did a courtesy “look under the hood” which all looked normal to my untrained eye.
A month later after the car started stuttering and sputtering, I found there was a major oil leak into a gas line that had been there for some time. In the end, I had to replace the engine because it was unrepairable.
Save yourself the time, effort, and money by paying the $100 inspection fee to uncover any other hidden mechanical problems.
– An Ugly Car May Be The Perfect Fit
Here in Arizona, we had major hail storms a few years ago that left many vehicles damaged and dinged up. The exterior of the vehicles have all types of defects but the engines and interior parts are still in great shape.
Lucky for you, a hail damaged car is worth much less than a vehicle without the cosmetic damage. This can be a great way to purchase a relatively new vehicle for a great price – if you’re willing to drive it around with hail damage.
Not all damage is good damage. If the vehicle was involved in an accident but still runs, the frame and other safety components may be compromised. Don’t sacrifice safety to save a couple of bucks.
- New vehicles lose their value faster than you can pay them off
- Expect to spend money on repairs. If you’re living paycheck to paycheck, a new car is going to put you further into debt
- Financing a truck or car makes other people rich
- Used vehicles that are well maintained can last longer than you may think
- Buy a used vehicle with cash
- Check a vehicle history report and pay for a prepurchase vehicle inspection
- It’s not what’s on the outside that matters – only the inside!