On Cars
Can You Buy Your Personality at the Car Dealership?
Let me answer this easy question first: um, no.
The automobile industry, aided and abetted by the advertising world, wants you to think that your car is your personality.
Are you Ford Tough? GM Patriotic? Audi Sporty? Toyota Dependable? Volvo Safe? Mercedes Classy? Lexus Svelte? BMW Engineered? Volkswagen Quirky? Hyundai Thrifty? Tesla Green? I can conjure a car to match each adjective as quickly as I can type the words. I bet we can all match the advertisement to the adjective without pause.
We know that a car is not our personality—our car is a highly engineered transportation machine for moving our physical self from one location to another, on roads. Our car is a modern-day horse, or camel, or ass. Our car is a horse-drawn carriage, pulled by mechanical horses.
The automobile industry would like you to forget that prosaic ass. Instead, folding yourself into the driver’s seat—according to the car-industry advertisements—should be a heady combination of comfort, power, and sex.
They want you to think your car will inspire oohs and ahhs. They hope your car makes the neighbors say, like the lady at Katz’s Diner says of Meg Ryan in When Harry Met Sally: “I’ll have what she’s having.”
Between the airbags and the 0 to 60 acceleration, your car company wants to sell you a Ring of Power, so that you can be the elven queen Galadriel proclaiming, “All shall love me and despair.”
The problem is that, despite their advertisements, none of this really happens when you buy a car. The real ass, if you try to buy your personality at the car dealership, is not the one you’re riding on.
The more you try to purchase your personality at the car dealership, the more you will pay for something you don’t need, and can’t buy. This moves you further from the goal of getting wealthy.
On Paying Cash for Your Car
This next bit may not apply to you right now, but for the 5% of you for whom this applies today, and to the 95% of you for whom this could apply some day: you should aspire to pay cash for your car. Some day.
Paying cash at the dealership does two great things for you at the time of purchase and one great thing later.
First, paying cash for your car eliminates a whole series of complicated ways in which a car dealer can fleece you, and we’ll talk more about that a little later in the chapter.
Second, paying cash forces you to budget, ahead of time, for your car. Paying cash just might impose some helpful modesty in your purchase.
If you have $10,000 in real cash, meaning actual money in your hand or in your bank when you walk onto the car lot, then you are much more likely to acquire a sensible, boring, used car that you can afford for $10,000, rather than your new, sexy, great-smelling, false personality that the dealer would like to sell you, for $28,000.
The $28,000 new car—of course—you can afford (with those Low! Low! Monthly! Payments!) but also—of course—you don’t need.
The difference in this example, at the time of purchase, is that you didn’t waste money on a false personality. Rather, you acquired an amazingly engineered machine to move you from place to place. And, you immediately have an $18,000 higher net worth, all as a result of paying cash.
The great optimistic thing later on, for the life of your car, is that you will benefit from the absence of monthly car payments. That means hundreds of dollars, every single month, which you do not owe to anyone. Since we know that the simplest way to become wealthy is to reduce your monthly costs, you will have made a great step toward wealth, by paying cash for your car.
Hundreds of dollars per month not owed to anyone means dozens of hours per month freed up to spend however you like. Or, hundreds of dollars per month can be saved and invested, making you wealthier still in your old age. That’s up to you.
Sophisticated Borrowing?
A finance-guy friend of mine told me that it’s best to borrow money to pay for a car because a car is a depreciating asset, and we should only pay cash for appreciating assets and use loans to pay for depreciating assets.
No doubt he could build a probabilistic scenario in which the annual return on his invested capital would exceed the interest rate cost of a car loan, leaving him richer at the end of 10 years by borrowing the money to buy the car.
I’m certain there’s some clever financial wisdom in there somewhere, but what works for a sophisticated guy like him is really not the simplest approach for the rest of us. And his financial sophistication unnecessarily violates our core principles, specifically of modesty and skepticism.
The simplest approach, the one most likely to preserve and build your net worth, is to pay cash at the car dealership.
OK, now that I’ve said all that, I’m almost sorry for this small tangent into the importance of paying cash at the car dealership. I will now return to the real world, as it pertains to 95% of us, right now—and in particular the plain and simple fact that we don’t have that kind of cash. We need a loan in order to buy the car.
First: Bring Modesty in Order to Minimize the Merciless Fleecing at the Car Dealership
The first thing to realize when buying a car, on loan, is that you know nothing. Bring modesty to the process.
If you buy a car with cash, by contrast, you don’t need to know anything. All you need to know is that you have $10,000 in your hand, and that’s enough to get you a fine transportation device. This next part is about the far more complicated process of buying a car with a loan.
You may have spent many days online, researching articles on car-buying tips and with value-comparison mobile phone apps before you walk onto the lot. Good for you, that’s better to do than not. But still, you don’t know anything compared to the car dealer. I’ll explain why.
When you walk on to the car dealer lot you may have the illusion that you’re buying a car.
Instead, the reality is that you’re simultaneously buying a car, maybe trading in your old car, negotiating a loan, attempting to determine an affordable monthly payment, picking automobile accessories, and discussing dealer warranties and services.
Many of us associate purchasing a car with financial trickery. This association is well earned—indeed the “used-car salesman” stereotype is no accident. But the problem isn’t necessarily—or even primarily—the unscrupulousness of the salesperson. I really don’t mean to disparage the auto sales industry. They’re trying to make a living, too.
I merely mean to point out that this is the largest consumer purchase most of us ever make, and the dealer and salesperson know everything, and we know nothing.
You should understand that with this kind of information and power differential we will not “win” the transaction.
You will do these transactions a few times in your life—maybe one time every 5 or 10 or 15 years. Your salesman from the dealership? He does this multiple times a day. The information and skill disadvantage between you and the car salesman in this transaction is insurmountable.
So first you need to know that you’re at a massive information disadvantage. You know nothing compared to the salesman.
Second: Bring Skepticism
Next you need to bring skepticism to each aspect of the car-buying negotiation.
That’s because each parallel or simultaneous transaction presents an opportunity, for the car dealer, to get the better of you financially.
The goal for you is not to “win” the transaction, but rather the goal is to get out with a serviceable consumer transportation device with the least amount of fleecing.
When your salesperson tries to combine multiple parallel negotiations into one package—and he will combine these, believe me—you just need to remember that healthy doubt is your friend.
In simplest terms, your best defense is to try to negotiate only one thing at a time, and to understand each step as best you can. The most important negotiation you should actually do ahead of time is to line up a car loan before arriving at the car dealership parking lot.
One Transaction at a Time: Your Car Loan
Here’s the question your car salesman will ask when you walk onto the car lot:
“Hi folks, how much can you afford to pay per month?”
Big smile. Crinkly eyes. White teeth.
With this seemingly simple, seemingly straightforward question, the car salesman has tilted your head back to better expose your throbbing jugular to his surprisingly pointy canines.
His question is the classic way to combine multiple negotiations without you realizing it.
You see, “How much can you afford to pay per month?” skips over all of the more important questions and negotiations about buying a car with a loan. The important questions should be, in order of importance:
By focusing your attention on the monthly payment, the rest of the answers to these questions can be manipulated in the dealer’s favor.
Once he knows how much you can pay per month, he can raise the price for the car, raise the interest rate on the loan, and extend the amount of time it will take you to pay off that loan, all of which are detrimental to your personal wealth, but beneficial to his personal wealth.
The simple fact is almost any car loan terms can be made to seem “affordable” if you stretch out the payments long enough. A related fact is that many overly expensive cars can be purchased on credit by manipulating the terms on the loan.
Have you noticed that most automobile advertisements tell you how much per month it will cost to buy or lease the car? No? Well, I hope after reading this you will notice. It’s all about focusing your attention on the wrong thing.
Line Up a Car Loan from Your Bank or Credit Union
How do you avoid the canine-teeth-into-your-jugular problem?
The best way, if you need a car loan, is to try to get this loan lined up ahead of time, ideally from your bank or a local credit union.
When you talk to your credit union about a car loan ahead of time, for example, you separate that part of the negotiation from the distracting excitement of obtaining a new vehicle.
Your credit union or bank will want to make money on the loan also, and that’s fine, but at least you can review and understand the loan terms—your credit, the loan amount, the interest rate, the loan length of time, the monthly payment—in a quiet, clear manner. Once you have those terms lined up, then and only then is it time to head to the dealership.
As mentioned in Chapter 8, the best kind of car loan from a bank is a low-interest prime loan. If you do not yet have good credit to get this kind of loan, all the more reason to keep your car ambitions extremely modest. A high-interest-rate car loan represents the fast-moving monorail that will keep you poor. If you have to get one, try to keep it as small as possible.
If all goes well, you begin your car shopping at the dealership with a known price limit for your car, a known interest rate, and a known monthly payment amount.
If you got your loan approval ahead of time at your bank, “How much can you afford per month?” is an irrelevant question that you can ignore. You just refocus that salesperson’s question back to the all-in price of the car you want.
If—at the end of your car purchase—the dealer can do better than your bank, then so be it.1 That’s great and not uncommon. But the loan negotiation must be kept separate from the car price negotiation, if you want to prevent fleecing.
At the risk of stating the obvious, if you got the best price possible on the car itself and the interest rate is acceptable, then the monthly payment will be fine.
Or it won’t. But it will be the best you can get. The bottom line: You should know your acceptable car price and interest rate—based on your income, your credit rating, and the local cost of money—before walking onto the dealer lot.
One Transaction at a Time: The Trade In
When we go to buy a new car, we also frequently muddy the negotiation waters because we have an old car that we need to trade in. This muddying represents another vulnerable point at which we need our skeptical hat firmly screwed to our head.
When we simultaneously trade in our old car to buy a new car, the dealer has the opportunity, for example, to offer us a fabulous (One-Time-Only!) deal on the new car we want, (Saving You Up to $3,000!)—by paying, say, $4,000 less for your old car than what it’s really worth.
We may be so sick of the old clunker, and so excited by the shiny new one, that the numbers don’t register clearly.
Well, guess what? The numbers register very clearly for your car dealer.
You will probably—although only probably, because I can’t be sure on this point—do just as well or better trading in your car at a different used car dealer lot than where you purchase your new car.
You will definitely—and I am sure about this point—do better overall by checking on the value of your used car with other used car dealers apart from the dealer where you purchase your new car. It only stands to reason that multiple potential buyers—if you go to the trouble to check with multiple dealers—enhance the value of your trade in.
Also, you may think it’s just plain hard, and annoying, to check at more than one dealer for a price quote on your old vehicle.
But you know what? Being wealthy is hard, and sometimes annoying, and it requires effort. Think of it this way: your car is the single largest consumer item you will ever buy. Unlike almost anything else you could choose to “shop around” for, doing the “hard” thing here is potentially worth thousands of dollars to you.
I don’t mean to be harsh; I’m just suggesting that if there was ever a time to go the extra mile on negotiating a good deal for yourself, this would be that one time.
If you need to trade in your old car, I understand you may find it most efficient and convenient to drop off and pick up a car in the same place, so I can’t frown too much on the practice, for nonfinancial reasons. Creating a true “market” for your used car trade in may seem like more hassle than it’s really worth.
However, you should know that the introduction of another moving part to the car-buying negotiation allows for another opportunity for that friendly car salesman to dip into your wallet. Hassles like this are worth thousands of dollars, either for you to keep or the car dealership to keep. It’s up to you.
One Transaction at a Time: Cash Back
Car dealerships have gotten in the nasty habit of offering you “cash back,” when you purchase a car from them. This cash back deal is a violation of the principle of “one transaction at a time” when car buying. Be very skeptical of cash back offers.
Buying a car “with cash back” means you are doing two transactions:
With cash back you are purchasing your car, as well as taking out an unsecured consumer loan, similar to a credit card advance. You will pay significant fees for this privilege of simultaneous transactions.
Wealthy people do not take cash back from their car purchase, and it’s not because they don’t need the money. It’s because, one way or another, that cash back is a terrible deal for you. If it were a good deal, wealthy people would do it. Wealthy people like cheap money just as much as you. Cash back from a car dealership is the opposite of cheap money.
If you’re walking away from a car dealership with extra money cash back following your car purchase, you’re doing it wrong.
What about 0% Interest Car Loan Financing at the Car Dealership?
This is the same bad idea here as cash back. File this one under the category: there’s no free lunch.
Because we know from our lessons on the time value of money and compound interest (see, if you’ve forgotten, Chapters 3 and 4) that money today is not the same as money tomorrow, it makes no rational sense, on its face, for a car dealer to offer 0% car loans. And yet, they do this frequently. Why would they do that?
The only way a 0% interest rate car loan makes sense is if the dealer overcharges you for the car. And the overcharging is probably by a significant markup.
Any business that offers you a costly consumer good like a car on credit terms of a 0% loan knows, in their heart of hearts, that they are fleecing you on the price of the car. I don’t know if you’re overpaying by 15% or by 25%, but you’re overpaying.
You have fallen into the trap of conducting more than one transaction with your dealer—buying a car, getting a loan—and the bundling will not work in your favor. It’s not much of a clever deal if you get a “great” 0% loan for 6 months but then pay 15% more for the car than you should.
The Right Price for Your Car
I have yet to say anything about what price you should pay for your car.
I cannot know—without knowing your whole financial picture—how much you should pay for a car. I do know—without knowing anything about your finances—that you enhance your chances of being wealthy by paying as little as possible for your car.
How can I be so sure of this? Because cars are not investments. Cars are consumer goods.
Unlike say, houses, cars only lose value over time. Cars are big consumer goods that depreciate in value. Buying a new car means you’ve got 1 day to enjoy your higher value consumer good. After that 1 day, you own a used car. With a significantly lower value once it leaves the lot.
Wealthy people understand that the value of their car the very next day, should they choose to sell, is significantly lower than it was when they bought it the day before.
As a result, all money you put into the car purchase—as well as all money spent maintaining your car—evaporates. You never get it back. Yes, I understand there’s a special category of collectible cars like vintage Ferraris, but if you’re participating in the collectible car world you have too much money—and too little wisdom—to spend time reading this book.
The more you pay for your car, the more money you’ve vaporized with consumption. Since mass model car prices—as of this writing—range from under $10,000 for a used but solid transportation device to around $70,000 for a luxury car with all the trimmings, the most specific I can be is to push you toward the low end of the range. The rest is up to you.
Financially savvy people seek out a used car that scores highly on ConsumerReports.com tests for long-term performance, safety, and low maintenance.
Finally, here’s an optimistic thought. While most of us cannot avoid buying a car, we can determine our loan status ahead of time, we can determine how much we can afford, we can do a tremendous amount of online research into car makes and models, as well as about the accident and repair history of any particular used car on the market, and we can look to save as much money as possible by buying our car.
There’s a bit of complexity to the car-buying experience, so let me summarize.
SUMMARY LESSONS:
1Incidentally, the only relevant way the car dealer should be able to beat your bank is through the interest rate, in other words the “price” of the money loaned. Do not be fooled by some different monthly payment based on an “extended loan,” because your bank could also do something like that as well.