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Ask Dave

Financing Is Mathematically Dumb

Gina wants to know how to argue against car financing with someone who throws out a lot of mathematical figures. Dave advises using some figures of her own.

QUESTION: Gina in North Carolina wants to know how to argue against car financing with someone who throws out a lot of mathematical figures. She's coordinating an FPU course, and a class member is arguing for car financing. Dave advises using some figures of her own, such as how quickly a car goes down in value.

ANSWER: The reason a car dealer can offer a better price is because they make so stinking much off of you on the financing. The other thing is he's doing all of this based on a new car sale, which is absolutely ridiculous. A new car loses 60% to 70% of its value in the first four years according to Kiplinger's Personal Finance magazine. When you take a $28,000 car and turn it into an $11,000 car, you're going to have to figure out some really cool financing to make that smart. When you turn 28 into 11, this is called dumb, mathematically speaking. There's not any mathematical financing that makes sense.

Here's what you've got to remember. Number one, his brother's a car dealer, so the likelihood of convincing him of anything is about zero. If he's spoiling the FPU class, the coordinator needs to tell him to shut up. We're not going to spend our time arguing with a brick wall that can't be argued down. But the actual facts for your benefit—logically—are these. Number one, you've got to decide that you are going to make purchases that are going to lead you to wealth. You're going to make the right purchases, and you're going to make them in the right way. The way to gauge that is not what some car dealer says.

The way to gauge that is to figure out what millionaires do, because that's our goal. We want to be a millionaire. So we read Tom Stanley's book, The Millionaire Next Door, or his new one, Stop Acting Rich. In his new book, he says 87% of millionaires have never leased a car, and 80% of the luxury cars are not driven by millionaires. The typical millionaire drives a two-year-old or older car. Why? Because you get your butt kicked in the first two years on depreciation. Mathematically speaking—based on how fast cars go down in value—the optimum time to buy a car is two years old or older.

When you take the new car thing off the table, his argument completely goes away. We've got to do what millionaires do, and they don't lease cars, and they don't buy new cars. The typical millionaire buys a two-year-old or older car. If you finance a new car versus buying a two-year-old car for cash, you've created two problems mathematically that you'll never recover from. One is you bought something that's going to go down in value super fast. Two is you're going to pay a premium to get to do that monthly. If you take this in and say the average person who has a car payment is not a millionaire and the average person who buys new cars is not a millionaire, so I don't want car payments, and I don't want to buy a new car because I want to be a millionaire, then that starts to shut down all the gyration of this character running these numbers.

When I bought a new car not long ago, why did I do that and pay cash versus finance it? Did I pay more for it? No, I didn't. I look up and find out what the new car is actually selling for and what the invoice is, and I'll give them a little bit over invoice because they get tons of dealer incentives from their manufacturer. They'll sell $50 over invoice especially in a market like this to keep inventory moving and keep their floor plan moving.