3 Things To Do Before Giving into The New Car Delirium
What was I thinking!?
Like some of you, I have succumbed to the Saturday afternoon drives by the car dealership.
I will admit: the new car smell and shiny chrome has seduced me into a test drive (or two) of a brand new car. I have even gone as far as discussing the price, the financing options, and warranty details.
Then, I am knocked out of my new car delirium as I realize that there needs to be more consideration before driving off the lot with my hair blowing in the wind in my new convertible.
Here is a True Story:
Mary (not her real name) fell in love with a new car. She bought the car and financed it at 3.5% for 6 years.
Three years later, her life has changed a bit. Her daily expenses have increased (groceries, child care, property taxes, etc.), but her salary has not. Mary went to the bank and asked for a line of credit to cover any emergency expenses because she was starting to feel the pinch of an increased cost of living. She was also thinking of paying off her car loan. She was tired of seeing the car payments come out of her bank account every month. It was emotionally draining and she still had another three years of payments.
She used the equity in her home to access a line of credit at 3%. While on a visit to the bank, the loan managers suggested that she pay off the car loan using her 3% line of credit. This seemed like a good idea at the time. She thought it would save her 0.5% in interest.
This is what I would have advised Mary had we met before her visit to the bank:
Her dealership financing was structured so that the interest was already lumped onto the purchase price of the car.
The first three years of the car financing was already spent paying mostly interest.
The amount still owed on the car was extremely high. Therefore, refinancing the dealership loan to her line of credit would have her paying interest on something that she already paid the full interest amount on during the beginning years. She would have been better off keeping the dealership financing and continuing her payments.
Mary should have:
- initially saved for a down payment on a new car purchase
- financed the new car purchase for three years, not six (at a manageable monthly cost that fit into her cashflow plan)
- after the three years (once the car is paid off), continue the habit of monthly savings into a savings account designated for the down payment on the next new car purchase
It is easy to give in to new shiny objects. (I am guilty and human!)
We are bombarded daily with television and media advertisements that promise a better life if we surrender to instant gratification. My suggestion is to take a deep breath and make a plan before your next big purchase. You might just enjoy it more and feel more at ease with your decision.
PS - The good news is that four years later Mary has paid off the line of credit and has her own savings to cover the purchase of her next vehicle.
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