Whether you know it or not, buying a car is one of the absolute worst investments you can ever make. Unless you are buying a brand new Bugatti Veyron Super Sport for the bargain price of $2.4 million, you can only expect your new purchase to lose value, especially the moment you sign the paperwork on it. That’s right, the second you take ownership of a car it only depreciates in value.
Now that you have spent a few years paying for your investment, you finally own the car free and clear. Now what? If it were 10 years ago when your home was worth more than you owed, I might be inclined to suggest you upgrade to a newer vehicle. However, in today’s economically challenging times, you might need to take a different approach to keeping quality wheels under your frame. This means keeping your wholly owned, paid off car, for a little while longer while you keep making car payments, to yourself of course.
Here’s the Theory
Instead of turning right around and buying another new car, you might want to hang on to it and keep making the car payments, only you will be making the payments to a high yield savings or money market account. Of course you won’t make as much money as you want by placing your “car payments” in a savings account, you still get access to it anytime you want without paying early withdrawal fees.
As of June 2012, you can earn as much as 1.01% on all monies deposited into a saving account in a U.S. bank. Although that might not seem like much, it does add up over time. Conversely, you will be spending, on average, as much as 7.7% on a car loan. While this difference may not seem like enough to even bother with, consider this: the more you have towards a down payment, the lower your payments will be. Additionally, the less principle you have to pay off by giving a sizable down payment equals the lower overall price of your car.
Obviously, the less money you borrow, the less interest you have to pay on the principle amount. Additionally, when you buy a car using a sizable down payment it actually helps raise your credit score by showing banks that you know how to handle your money.
If you can hold out on buying your old car replacement for two years or more, the better your situation will be. As you earn more interest on your bank deposits, and your bank account grows, your credit score once again goes up. Be sure you don’t walk into the dealership with your cash in hand though, you want to keep the money in the bank until the very last moment. When the dealer runs your credit report and it shows the sizable amount in your account, you can get a better interest rate on the car loan.
Essentially, waiting to buy a new car is better for you financially, in both the short and long run. Save your money now so you can save more money later when you sign for your shiny new ride.