Sunday, 8 September 2013
Buying cars on credit... what does it cost you?
A couple of weeks ago, I had the privilege of attending the Financial Literacy Educators Summit put on by the Investor Education Fund. This workshop was very well designed and provided inspiration and training to the elementary and high school teachers attending.
One of the speakers was Preet Banerjee, who did a great presentation called "Why 2.5 Billion Heartbeats Might Change The Way You Think About Money" and had some new ways of looking at some old topics that really got you thinking. One of them started by taking the fact that people on average will own 9 cars in their lifetime and looking at the extra money you would pay over your lifetime by purchasing cars on credit (via car loans) compared to paying for them without borrowing. In the example he used, if a person purchased without borrowing, they would be able to buy an additional 2 cars over their lifetime compared to the borrower.
This was a very powerful image and thought I'd try it out with my nephew. He graduated from college recently and as soon as he got a full time job, bought a brand new truck on credit. Perfect. I'd ask him the particulars about his purchase, do some calculations and tell him how many additional cars he could buy.
Our talk started out well. He told me the cost of his vehicle and the month payment and payment term. So far so good. It fizzled when he said it was zero percent financing. No calculation could be done telling him about his additional vehicles. We did have a good talk though about what that means. Basically, he knew he had probably paid more for the vehicle than he could have without the zero percent financing. He had lost some of his negotiation power by accepting the deal.
I decided to do a bit more research. I found some of insightful reading. One article claimed buyers who receive zero percent financing frequently don't negotiate the price thinking they have the best deal possible and in some cases the zero percent financing costs more than if the person used a regular car loan. Other articles talked about the limitations of these financing deals (e.g. shorter terms/higher payments than normal car loans, the requirement for near perfect credit scores to qualify, application to only limited car models). More than a couple recommended negotiating the best price possible before talking about financing.
My nephew's experience definitely matched the observation about not negotiating. The message in most of the articles was to evaluate the different options available. Seems like sound advice because as the old adage goes "if it seems too good to be true, it probably is".