A couple of years ago I saw a story about a man who died and was buried in his automobile. I forget what kind of car it was. I think it was a 1958 Pontiac, and the man bought it new and drove it his whole life. He loved that car so much he asked to be buried in it when he passed away, and his family respected his wishes. They dug a great big hole, slid him behind the wheel, and lowered the car into the hole. The kind of buried I’m talking about is similar … but worse.
Here’s the way most people buy cars. They put down the least amount of money they can, or none at all, and finance for the longest term they can get, usually six years (72 months). Unfortunately, this is also the worst way to buy a car. Financing for such a long time means you’ll pay more interest, and it absolutely guarantees that you’ll be upside down or have negative equity when you purchase your next car.
Negative equity, or owing more on your car than it’s worth, kills more car deals than practically anything I know of. Of course, no one in the car business wants to talk about it. We want you to fall in love with the brand new car sitting on our showroom floor. We want you to swoon over its fresh new styling, run your hands over the gleaming paint, sink into those luxurious leather seats, inhale the heady aroma known as new-car smell, imagine yourself cruising down the highway on a perfect spring day, and forget all about the financial dimensions of owning a new car. That’s the way car sales worked in 1950; that’s the way it still works today.
But, unless we’re talking collector cars, automobiles are not appreciating assets like real estate or works of art. Cars depreciate. A lot. And the depreciation starts the instant you buy it. In fact, just one minute after you’ve signed the paperwork on your brand new $30,000 Zorch L’ancora it will have depreciated about $2,600. The ink on the contract isn’t even dry, and you’re already behind! Three years later, the average car will lose about 42 percent of its value. In five years it will have lost around 60 percent. And in 10 years it will be worth about 500 bucks—if you’re lucky. Think about that the next time you catch a whiff of that new-car smell.
Does that mean it makes no sense to buy a new car? Is buying new the same as raking your cash into a big pile and setting it on fire? No, not quite. After all, you get good use out of a new car. If all goes well, it will reliably transport you and your family in comfort and safety for the next five or more years, and if it doesn’t you have a warranty to cover repairs. So it’s worth it. But because most people put so little money down and finance for such long terms, their cars will always depreciate faster than they can pay them off. They’ll never find themselves in an equity position. In the car business, we call this being buried.
Now, if you’re the type of person who keeps their cars forever, equity isn’t an issue. Once you pay it off, it’s yours. But most people don’t keep their cars forever even if they say they will. Most people get tired of their ride and trade it in after four or five years—long before they’ve finished paying for it. But that loan doesn’t just go away when you buy a new car. It still has to be paid off. So either the customer writes a check to the lender for the amount he owes—which almost never happens—or we take that amount and tack it onto the price of the new car. Presto change-o! Problem solved, right? Well, not really. That money might have disappeared into the bottom line, but it’s still there holding you down like an invisible weight.
Let’s illustrate this with real numbers: the Nguyen family wants to trade in their 2014 model on a new one. When they bought their 2014, they traded in their previous car, a 2010, which had some negative equity in it that got rolled into the amount they financed. Today, they still owe $17,000 on their 2014, and it has an ACV, or Actual Cash Value, to the dealer of $11,000. That means the Nguyens are in the hole, tanked, or buried six grand. The midsize sedan they want has a price tag of $30,000. Take that six grand of negative equity and add it to $30,000, and you’ve got $36,000. Now add taxes and fees, and you’re pushing $40,000. Another way to look at this is: if you have average credit, put no money down, and finance for five years, a $32,000 car is roughly $640 a month. But the Nguyens will be paying around $760 a month for their new car because they have six grand of negative equity they’re carrying over from their old car. That’s approximately $120 extra added to their monthly payment!
Another way to think of it is this: Imagine if you were to take a blowtorch and cut your old car in half, hitch it to the bumper of your new car, and drag that hulk of metal around behind you for the next six years. Who would do that?
The answer is almost everyone who buys a car.
Look out your window. See all those cars going up and down the street? Unless their owners paid cash or leased them, each of those folks is dragging the ghost of an old car behind them in the form of a huge chunk of change owed to some bank. Although they’re paying off their new car, they’re still paying the loan on the one they bought seven years ago, which is now sitting in someone else’s driveway. Does that make any sense?
So why do people do it? Two reasons. First because most people don’t realize that depreciation is the single biggest cost of owning a new car. They only think about today and getting the lowest payment they possibly can. They forget all about that day in the future when they’ll trade it in.
Second, we in the car business do it to them. Not because we’re evil. But because we have to. In order to make car deals happen, we have to find creative ways to deal with negative equity. So we apply rebates, overallow on the trade, roll it into the balance, congratulate our buyers, put them in their new cars, and send them on their way, hoping they don’t come back to us when it’s time to trade it in. Our mentality is like the buyer’s mentality. We don’t consider the future. Car salespeople only think about making the sale and getting that commission check. They forget everything else. In the back of our minds, we know how hard it will be four or five years from now when our customers tries to trade in their vehicles, but we don’t think about that. Instead, we make the deal.
How can you avoid being buried in your automobile? There are only three ways, and I will reveal them all in the next few installments of Car Salesman Confidential. Be on the lookout!
MORE CAR SALESMAN CONFIDENTIAL HERE:
The post Car Salesman Confidential: How to Keep Your Car From Burying You appeared first on Motor Trend.
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