Is this wise / How unwise is this?

May 20, 2009 8:52 AM

Should I take out a car loan? I live in an expensive country but it looks like I'm about to get a steady job with a decent salary. My partner too. We're about to make the move from student style living to normal life and I want to finally buy a decent car that will last a while. But I'm not sure if taking out a loan on a car is a good idea, especially when the car won't increase in value.

Can anyone advise? Especially with regards what rules of thumb there are for car loans...I read somewhere above a certain percentage + number of years means the whole thing becomes extremely ill-advised, but under that percentage it's okay.

Obviously the best thing would be to pay for the whole car with saved up cash - but to do that I'll have to wait a lot of years.

posted by dance to travel & transportation (16 comments total)

Do you need a car?
posted by jerseygirl at 8:57 AM on May 20

yes
posted by dance at 9:00 AM on May 20

Only borrow money if you are putting that money to work to make more money.

Save your pennies and buy a reliable used car with cash.
posted by BitterOldPunk at 9:04 AM on May 20

Financing a liability never makes (strict) economic sense unless it will directly increase generated revenue. That is to say, it's a bad idea unless you will make more money as a result of buying a car now versus later.

With that said, if you need a car, you need a car. The rules of thumb (which vary from place to place, but the general rule is that you should not incur higher total debt payments than 30% of gross income) is only really to keep you from getting in over your head or decreasing your credit score.

Pay as much up front as you can, find the best rate that you can, don't ever go underwater, and pay it off as rapidly as possible. Do these things and you'll be fine.
posted by TheNewWazoo at 9:06 AM on May 20

I've been told by my father (who seems to be an expert at squeezing the most value out of a car) that the greatest depreciation in a car's value happens during the first three years of its life. If you can find a used car that's 3+ years old and in reasonable condition, it's likely to treat you pretty well for a long time, and cost far less than new. Of course, buying used (particularly from an individual seller) you don't get a warranty or anything like that, but in theory the money you save off the total cost offsets the maintenance costs. I live in the US, not sure if this follows in other areas. And, for the record, I drive a 1990 Camry that I bought used, so there's some value somewhere in this advice, at least sometimes.
posted by Alterscape at 9:08 AM on May 20

I'm fiscally very conservative, but I see no problem buying a decent car if you make a decent salary.

The only reason you care about the value of the car is if you plan to sell it in the short term (under 4 years), or if it gets totalled.
posted by smackfu at 9:12 AM on May 20

You will be paying for your car while you are benefiting from having a car. This is a good reason to buy and finance. There are a number of good deals out there on new cars, for obvious reasons. Your location may or may not have these good deals.

One rule I would use is to never finance for more than three years. If you cannot afford the payment on a three year loan, you are buying more car than you should.
posted by Midnight Skulker at 9:13 AM on May 20

Buy a 3 - 5 year old car that's known for reliability. You wind up with a car that's already depreciated, but has years of service left. Honda Civics and Accords, for example, commonly get 200k miles and > 15 years of service with just scheduled maintenance.

Depending on how much money you can put down, you'll either have a small loan, or no loan at all.
posted by zippy at 9:16 AM on May 20

I wouldn't make any long term financial commitments until you actually do have a steady job.

Also, modern daily use cars rarely if ever go up in value. These types of cars are not profit making investments.
posted by Brocktoon at 9:18 AM on May 20 [1 favorite]

I mean, if you can't get a car any other way and you need it for work, then yes, it makes sense. However, I know several people that have great cars they bought used, including myself. I drive a 2000 Corolla that had 94,000 miles when I got it and I bought it for 2000 bucks. Granted, that was a deal, but it's really not that had to get decent deals on cars, especially if you can pay cash. Then again, I love deals and will shop around till I find one. Also, look for older cars that have been sitting in a grandparents garage or something. My grandfather passed along a 1988 Camry with 54,000 miles on it which my parents then sold for 1500 dollars because it was just sitting and getting rusty. The car was in perfect condition.
posted by Rocket26 at 9:20 AM on May 20

A car isn't an investment, it's a means of conveyance. So don't worry that much about it not retaining its value. If you need one then try to maximize its value by taking good care of it. Now may be the best time to buy a brand new car, depending on your location, as the recession has not eased up as of yet. My wife just got very good deal on a brand new Honda that wouldn't happen last year, nor probably next year if things pickup as projected.

The general rule I've adopted is to buy something that's within a 18 months old, and has less than 20k and then finance for 36 months, with enough of a down payment to cover all taxes and then the equivalent of a few months of payments. Do a quick breakdown of how much you're willing to spend on a down payment versus savings in interest on amount financed and the loss of use of that money for other purposes.

If you do decide to buy a car, don't be afraid to lowball on the sales price, and don't get pulled aside by the friendliness of the sales staff. They're there to extract money from you. Once you get through the sales portion, you'll have to deal with a finance officer who will try to sell you various garbage and offer arcane reasons for varying interest rate deals. Don't be afraid to walk out on any deal if you don't feel comfortable. Do your research on individual dealerships before going.

Don't worry about a car loan affecting your credit score. If you already have a solid credit rating, obtaining a car loan and keeping current/ahead of your payments will only increase your score in the long run.

As an aside, we had one of the most painless and upfront experiences with the Honda dealership last month that I've ever had buying a car, and the Honda Accord is a super nice car. YMMV, of course!
posted by Burhanistan at 9:23 AM on May 20

The only reason I bought a new car last time (1999 Toyota Corolla, still kicking, knock on wood...and metal) was that as a single woman, I had neither the time nor inclination to keep screwing around with the series of used cars I'd had that kept failing on me / becoming unfixable. Total up what I spent on those used cars and I might as well have bought it from the get-go. So you should also take into account your own personal car-care skills when you decide new-or-used, though now that I'm living near my parents again, I'd be much more likely to buy a 3-5 year old car... for what it's worth, all the Corollas I have owned and that friends and family have owned, have lasted FOREVER and been great, low-maintenance cars.
posted by bitter-girl.com at 9:43 AM on May 20

Do you take care of your stuff? Are you the type of person that would keep a car for ten years? Do you need a car?

If the answers are yes I would say buy a new car. I used to be a fan of used cars but because cars are made so much better now than in the past and relatively reasonably priced I have become a fan of buying new so that there is no chance you are buying a used "lemon".

As long as you:
Can easily afford the payment and insurance
Buy an economical reliable car (Toyota's and Honda's come to mind)
Keep the car well maintained
Don't buy a Chrysler
Don't buy a General Motors car
Don't buy a Ford
Don't pay to much
Don't buy the extended warranty
Don't buy all those extras

I say go ahead and plan on paying cash for your next car. Take a look at the Toyota Yaris.

There is a lot of good advice in this thread. Good luck.
posted by snowjoe at 9:58 AM on May 20

Tempting though it may be, does it really make sense to invest a large ammount of your (none-existent) cash in an expensive car? If you buy new then you can expect to immediately lose 10's of % of the value. Buying 3-4 years old avoids this, but the depreciation is still proportional to the buying cost.

If I were you (actually, I have been...) I'd buy a much older, cheaper brand known for its reliability (Nissan, Toyota, Subaru, VW). Get a good one; full service history, buy from a garage etc. Buy it outright if you can; the last thing you want now is to tie up huge ammounts of your future earnings. Servicing is going to be a regular cost, but this is going to be largely the same for any car whether it's 20k or 80k miles (depending on service intervals etc).

I graduated and bought a Subaru Legacy, 92000 miles, for £1800. Ran it for 9 years and another 58000 miles without any serious problems before a helpful van driver destroyed it for me. Overall the car lost £1000 value. Servicing was not particularly higher than any other car. Petrol was awful, but that was a price worth paying for the fun driving it!
posted by BadMiker at 10:03 AM on May 20

I almost buckled to peer pressure a couple of years ago when the old red Toyota I'd inherited from my great-aunt bit the dust.

But I'm so glad I didn't. In the family tradition I found the proverbial used Honda on Craigslist and paid cash for it. It's a great car and I'm delighted not to be in debt for it.
posted by tangerine at 1:11 PM on May 20

A car isn't an investment. It's an expense. Don't worry about the "value" of a car you own- its value in dollars doesn't correlate to its utility. It could be worth $3 or $300,000- you need a car, and you've got one. That's all that matters once you own it.

(Buying it is a different story- figure out what you want and need, and find the best price that meets those goals. Maybe it's worth it to have a factory-fresh car. Maybe it's not. There are no rules- just what you are willing to pay for what you can get.)

I don't know what car loan rates are like right now, but I'd guess they are not very high. Consider this scenario: you buy a car for $15,000 on a 5 year loan @ 4%. Very basically, you will be paying $50 a month for the convenience of getting the car now, instead of having to wait until you've saved the cash up.
posted by gjc at 6:38 PM on May 20