Things you never knew about purchasing a car

Working at an automotive dealership has certainly been an eye-opening experience. I have seen things from, what generally most would consider smart, people that has really made me shake my head in disbelief. During this experience, it has become blatantly clear that our country is in desperate need of a financial wake-up call. I firmly believe that we, as a community or country, must begin to educate ourselves and those around us on some common principles of financial wellbeing.

A perfect example of this was a young woman, who works for a bank, came to us with an import SUV that she had purchased roughly a year prior.

So, let's begin at the beginning of her journey with this vehicle.

Approximately 3 years ago, she purchased an imported SUV from a new dealer. During this process, she didn’t prepare and simply signed her name and financed the entire vehicle, fee’s and tax’s Roughly $2000.

Unfortunately, this was her first mistake and a very common mistake most car buyers make. The problem with this is that there is no resale value on fee’s or taxes. In this scenario, she begins with a payment of $445 and it will take her 5 months (with interest) to pay off the fees. This means, that for the first 5 months, there isn’t any capital going toward her principle at all. We now compound this error with the challenge that the vehicle is now depreciating with time and miles in the highest depreciation time of a new vehicle.

Now, we look at the loan as well. Most commonly, consumers are sold on the longest-term loans possible. In this case, she was sold a 72-month loan, which means that almost $100 per payment (with good credit) is going toward interest.

Our young consumer, unfortunately, became “tired” of this vehicle and decided in just under two years that she must make enough money to purchase a nicer vehicle.

In itself, this isn’t a problem. The problem becomes that she hadn’t kept the vehicle long enough to become positive in equity.

Mistake number 3 (if you’re counting) is that she didn’t decide to use the common tools available to determine her equity point in that vehicle and determine if it was a good or bad time to rid herself of it.

Mistake number 4, she didn’t take the time to save up any down payment, essentially repeating the very first mistake.

Mistake number 5, she didn’t take the time to research the vehicles resale factor for the new vehicle.

Finally, completely unarmed with any research, she went to a dealer to purchase her new SUV.

As she purchased her new import SUV, she rolled $6,000 in negative equity and $2,700 of fees into her new SUV and happily drove off with a $637 payment.

Certainly, her payment is doable and not a huge issue until the magic point a year later when she decides that she no longer wants this vehicle.

At the “just over a year” mark, she hasn’t touched a dime of her principle on the SUV. In fact, she won’t begin paying on the equity until month 16!

Now her vehicle has depreciated over time and miles and it has a value of $16,000 and she still owes $33,000. Yes, you read this correctly. She is now $17,000 up-side-down on an imported SUV! If we continue the math, it will take her 32 months more, to get to the point of just paying off the negative equity of today. Now add the 3 years of depreciation that she will face, and she will need to keep this vehicle for at least 4 1/5 more years to break even on equity!

At the end of the conversation with this young woman, I asked… How much do you have in savings? Her reply, “a couple of hundred dollars”. While she made decent money for somebody her age. (She was 28 and grossed around $4,600 a month).

I just feel that, in general, we need to slow down on purchasing “things” and instant gratification. We must start learning to prepare for the future and be more like the ant in the story of the ant and the grasshopper.

I know it seems weird, but at the end of the call, I asked this young woman to wait it out, pay it down and talk to me in a few years. I explained that I was sorry, I simply wouldn’t sell her a car.

Yes, we are here to sell cars and make dreams come true, but I feel that my store is better than praying on people like this and would rather do the right thing at night and be able to sleep soundly and with a clear conscious.