Repeat After Me: Never Buy a New Car (and other lessons for young adults)

“Everything I have is yours. My four lawnmowers. My sister. My 35 ferrets. My massive student loan and real estate debt. It’s all yours.” – Anchorman 2

I took this picture on June 2 from my hotel room.  Well, over a decade ago – in Anchorage.  Dinner that night was salmon, red wine, Caesar salad, and a beer for dessert.  I was still paying on my student loans, but I didn’t have a car payment . . .

It was about 10:30 on a warm summer evening.  I was sitting at a stop light in my home town.  I had my (then) best friend with me, a case of beer in the back, and we were going to go and watch HBO® over at my apartment.  I was a senior in high school.  Yes, I had my own apartment while I was in high school – it was amazing, thank you very much.  It’s a longer story – maybe I’ll share it sometime – danger it involves striking workers, cans of soup, and volleyball.

Anyway, back to the stoplight.

I looked behind me as I heard a squealing sound.  In the rear view mirror I saw a car (headlights off, even though it was night) heading right for the rear end of my brand new car.  Brand new!  I did the mental calculation.  It wasn’t going to stop in time.  It didn’t.

The squealing sound ended in a crunching sound.

My brand new car (I got it because I’d gotten a full-ride scholarship) now had a wrinkled back end, just like Cher®.  Crap.

So, off to the local auto-body place it went.  The car, literally owned by me for less than two months needed a lot of repair.  I went in to find out when my car would be done.  The manager (the father of a girl that had graduated a year before me) invited me into his office.  He had a fairly long speech that he shared, indicating that he had found some cheaper parts than he had originally quoted the insurance company, and, well, my $200 deductible could go down to $40 if I only paid him in cash, right then.

I’m not sure how he knew that I had exactly (and only) $40 on me at the time, but his cash radar was perfect.  I pulled out my wallet (brown nylon with a Velcro® strip that kept it closed) and pulled out my $40.

I felt vaguely dirty afterward, like I’d done something wrong.  Honestly, I still fill icky about it writing this down.

The reality is that he probably just needed money his wife couldn’t track for booze or lunch and saw an 18 year old coming . . . and decided to separate me from all the cash that I had . . .

Fast forward to today:

I was walking in a local department store and ran into a kid that I’d coached for a while.  She’d just bought a new car, and was excited about it.  But she’d had a “new” car two years ago – a 2008 vintage car.  What was up with that?

“Well, John, I’d had to replace the alternator and the starter.  And maybe it was leaking oil.  So, I was worried that would cost a lot of money to fix, so I bought a brand new car.  I know you only buy used cars, but this one is brand new!  Sometimes things are just meant to be!  And I got a loan – it’s only 21% interest!”

I wish I was making up these details, but they are true.

For those of you that are unfamiliar with my take on cars, it is my considered opinion (noted in this post: I’m gonna tell you about an accident, and I don’t wanna hear “act of God.” – Jack Burton, Big Trouble in Little China) that my rules are even more correct if you’re a kid.

John Wilder’s Hard Earned Car Iron Lesson One:  If you can’t afford to buy a car with cash, don’t.  Don’t.  Don’t. Don’t. 

My young friend violated this rule.  Now she has interest payments.  Two weeks ago, there were none.  Now, each and every month, like Cher™ at the fridge after midnight, they’ll always be there.

Why?

You can use someone else’s spare money RIGHT NOW to buy what you want.  RIGHT NOW!   Sounds awesome!  There must be a catch?  Yes, they want a fee.  That fee is interest.  You pay it every month until you’ve paid back the money you owe.

And to top it off, loans are “amortized,” which is Latin for “will cause you to die of stress because you have to figure out how to pay off all that money.”   At the start of the loan, say, of $16,000 at 21% for five years, your payment will be $432.85.  Yeouch!  That will buy a lot of Netflix®.

That $432.85 is made of two parts:  the first is the interest you pay back to the guy who loaned you the cash.  The second is the money you borrowed from the guy.  So, in month one you’d expect that you pay half of $432 as interest and half of $432 as principle, right?

No, not even close.  Your first payment would be $280 in interest and $152 in principle.

Why?  At the beginning of month one, you are paying 21% interest on the full $16,000.  At the end of month one, you’ve paid off that $152, so the next month, your payment would have less interest, since now you’re paying interest only on $16,000-$152 (which is $15,848 or something like that).

You pay lots of interest early in the loan, but not much of the money you borrowed.  If I were to graph it, (and I did) it would look like this:

This graph explains why, when you buy a car, you can very quickly owe much more than the car is worth, since the car is worth at least 10% less the second you drive it off the lot.  Your car is immediately worth $1,600 (if you paid $16,000 for it) less than you owe on it.

You’re trapped.

Never borrow for a car.

John Wilder’s Hard Earned Car Iron Lesson Two:  You can’t possibly afford a new car.

I have ridden in a billionaire’s wife’s car exactly once.  It was several years old.  The CD player was broken.  The case around the CD player was gone.  It was a nice car, but it was old.  As a billionaire’s wife, she had zero need to feel superior to anyone within a three state radius – she could get on a private jet at 8AM and have lunch in Rio and ski in Switzerland the next day.  Hell, she could send her dogs off to summer camp in the jet.  Who is she trying to impress?

Who are you trying to impress?  So why do you need a new car?

My friend had noted that I only bought used cars.  I had shared that with them hoping it would wear off.

Well, maybe next time?

John Wilder’s Hard Earned Car Iron Lesson Three:  If the car is worth more than 15% of your gross income, don’t buy it.

This is the kicker for my friend, and the bitter lesson they’ll learn over the next sixty months.  This car is (probably) valued at 75% of their gross income.  75%.  That’s like Elon Musk® buying a car that that was worth $7.5 billion dollars that year his net worth went up $10 billion dollars.  I guess that’s a really cool Tesla®.

I digress.  Nobody needs a car worth 75% of their gross income.  Nobody.  The last car I bought was 5% of my gross income.  It was for The Mrs.  She likes it.  The one I drive is six years older, and the oil in it is only four!  I like it.

My friend would have been better off buying a car that was closer to $3,000, and having a bike ready if it ever broke down.  She has a job, but she rarely travels farther than 10 miles on any given day.

Let’s look at the details – at 21%, a $16,000 car will cost nearly $26,000 in payments.  You’re paying an additional $10,000.  How many fixes on a used car would that pay for?  Lots.

It’s actually worse.  If you don’t own the car outright, you MUST pay insurance so whoever loaned you the money isn’t out if you wreck the car into a deer at 7:15AM.  Not that anything like that ever happened to me . . . .

So, in addition to the $10,000 in interest, my friend will be paying another $150 a month in insurance.

My friend makes (I’ll guess) about $15,000 a year.  After taxes, that’s probably about $875 a month.

This car plus insurance is costing them $580.  That’s 66% of every dime they take home.  OUCH!  And you thought the government was bad.  Cars cost even more.

John Wilder’s Hard Earned Car Iron Lesson Four:  It is no longer 1940.

Used cars last longer today.  In 1940, a car might last five or six years.  We’ve had 80 years of engineering excellence driving cars to be amazingly reliable (shh, don’t tell my car I said that).  Cars are more expensive, sure, but a good car from between 1998 and 2015 or so will last for a very long time.

New cars (like my friend bought) might have issues:  in order to meet government mileage restrictions, car companies are having to make the automatic transmissions (who drives stick anymore except Wilders learning to drive?) so complicated an expensive that a car may become a disposable item when the transmission goes out.  There’s a mom joke here, but I’m going to skip it.

Do your research and get a good car with a decent transmission.

People Keep Taking Advantage of Kids

Yes, at 18 you’re technically an adult, although an adult that can’t drink but that can certainly sign their figurative life away to debt.  Or their actual life in the military.  I could have done that at the age that greasy body shop guy swindled me out of $40.

But the $40 was cheap.  I never trusted ANYONE who tried to tell me that what I should do was good for me if was going to put money in their pocket – it’s a lesson that probably saved my job a time or two.

Thankfully we now allow 18 year olds to get themselves in thousands to hundreds of thousands of dollars in college loan debt that they’ll never repay because they have a degree in the anthropology of ancient Greek testosterone supplement commercials.

Because, you know, it’s good for them.