hOwning your first car is a thrilling experience; as a matter of fact, your pulse races every time you own a different car! Probably the freedom a car represents is intoxicating. But after the euphoria, we know several people who get a twinge of buyer’s remorse because of unexpected costs that pop up. An improperly evaluated decision can therefore have financial consequences for a number of years.

In reality, buying a car is a complicated transaction that could have many components: considering pre-owned (used) vs new; evaluating models and features; financing options; how much you can afford; insurance; warranties; and sale and transfer of your current car. To the car industry’s credit, these steps have been simplified to such an extent that you can observe persons transacting in cars as if they were buying groceries. The purpose of this post is to identify the main points you should consider when buying a car, so you can enjoy the wind through your hair for many years, regret free.

A car is not an investment

Let’s say we give you a proposal: we’ll lend you TT$150,000 for five years and invest the proceeds for you. And we also say, there are a few costs involved, so we’ll need another TT$50,000. So, in total give us $230,000 (includes $30,000 interest costs). We then say, don’t worry, in five years time we’ll give you back TT$50,000.

What would your reaction be? Probably to chase us away. Welcome to your car “investment”.

We’ve sometimes heard persons equate buying a car with having an “asset”. Based on our proposal, it sure looks like a lousy asset unless you are really using it to earn an income, meaning without it, you can’t earn an income. So, if the income issue isn’t the case, mentally it’s better if you don’t consider your car an investment. For most of us, it’s a means to an end (transport) and you get an emotional high from owning and using it (either as a social status symbol or because of the independence it offers).

Why is a car not an investment? Because a car is a depreciating asset – it is worth less over time. You must have heard that a new car loses, on average, 20% of its value immediately as it leaves the dealership. It gets worse. After 5 years, your car would have lost 65% value on average, (according to Kelley Blue Book, a California-based valuation company that determines the resale value for used cars).

If it were really an investment, you would earn a return from the car, e.g dividends, interest, or capital appreciation. But with a car, your return is best described as intangible: utility. And instead of earning income, you actually have more expenses when you factor in interest and other costs.

For the majority of us, therefore, a car does not add to our net worth, but will instead decrease it (unless as we said before, without it you cannot earn an income).

Financially, a vehicle is best viewed as a bundle of costs that you are incurring over time. So, the balancing act for most of us is: do the benefits of having a reliable form of transportation and the other intangibles we identified, exceed the total cost of car ownership.

Think total cost over 5 years (at least)

Two potential cost mistakes could be made when car buying:

  1. Only considering affordability in the present time and not over the longer-term; and
  2. Not considering the total cost of ownership (we touched on this above).

We’ll cover these in more detail in the follow up post: Buying a Car – Your Budget.

Trade-in vs Sell it yourself

If you currently own a vehicle and are considering upgrading to a new one, you’ll be confronted with the choice of either selling your “old” car yourself (and presumably put down the proceeds as a deposit on your new car) or some dealers may offer you a trade-in. A trade-in means the dealer will assign a value to your car and reduce the price of your new vehicle by the trade-in value.

It is easy to get a bad deal on a trade-in, so you should treat the two transactions (disposing of your old car and buying a new one) separately. Test the used-car market first to know what your vehicle is worth and compare that to the trade-in value offered. The trade-in value does not have to be the same (it is likely lower), but the difference between the two should be the value you place on the convenience (less hassle) of trading in.

Transfers

If you’re dealing in a pre-owned car, you’ll have to go through an ownership transfer process, so you should know the details in advance to be prepared. A few include:

  • You need a VAT letter indicating the seller is not VAT registered. If either party is VAT registered, you need a valuation to determine VAT on the sale (VAT is calculated on the market value)
  • The buyer is usually responsible to pay the transfer taxes on the transaction, as follows:
    • Under 2 years, TT$6,000.
    • Between 2 years to 5 years, TT$4,500.
    • Between 5 years to 7 years, TT$3,000.
    • Between 7 to 10 years, TT$1,350.
    • Over 10 years, TT$150.
  • A few other documents are needed

Bundling

Sometimes, you may be offered a bundled deal e.g. the price includes insurance and/or maintenance. On the face of it, this should improve the overall cost to you, but you should do a sanity check and investigate the cost of each option separately. This way your bundled price should be lower when compared to the sum of the individual costs. Also make sure you know if any conditions apply that could either end the bundled deal or make it more expensive in the future.

General Points

Salespersons on commissions & Marketing

Try not to make a car purchase an emotional decision. Car manufacturers are expert marketers by making you want something you either don’t need or can’t really afford. Look at car commercials – they make you want to rush out and buy every new model! Be realistic and practical.

Also remember vehicle salespersons most likely work on commission, so listen to what they say, ask a lot of questions, but make your own decision after doing a proper investigation (for example using information on the internet). Be informed.

Additional features

Usually cars are sold with a basic set of features (or trim), and features can be added for an additional cost. Who wouldn’t want a sunroof, or sports package, or fancier rims, etc. The point is, you need to walk into the transaction being clear what you wish to spend (i.e. your budget) and be prepared to stick to it. This may take a little discipline when faced with so many must-have additional features…

Public transportation

Presumably, if you are evaluating a car purchase, this means public transportation is either not safe, reliable, available or convenient. If so, just remember you’ll be trading these problems for new ones: substantially higher costs, grinding traffic jams, road rage, and inevitable car mechanical problems.

Regularity of change

Having an idea of how often you intend to change vehicles may influence your choice of car. For example, if you change every few years (a financially unwise choice), then resale value would be important. Also you’ll need to pick features and colours that would appeal to a wider potential group of buyers.

Resale value / Stick to reliable models

When buying it makes sense to choose a reputable name that has a history of reliability and higher resale value. Do your research. Some vehicles lose value more rapidly than others or some are in higher demand in the used-car market.

Buying Pre-owned (Used)

If you are deciding to buy a pre-owned vehicle, here are a few points to consider:

Have a reliable mechanic check out the car

To avoid buying “trouble” definitely take a mechanic (or someone knowledgeable) along with you to detect potential problems with the car. It would obviously be better to know about these upfront, and possibly negotiate them into the price, instead of finding out after you’ve bought the car. A couple hundred dollars for the mechanic could save you thousands later.

Mileage

Always check the mileage. High mileage may indicate that the car has been run down and may need a new engine or other major parts.  

Stick to reliable models

The comments under “General Points” above apply here as well.

Driving and accident history

Try to learn about the car’s history. You may prefer a single-owner car to multiple owners (which could imply persons passing off a lemon). Low mileage may not mean much if the car was previously a rental. What was the owner’s maintenance practice (frequency and dealer maintained vs private mechanic). Was the vehicle ever in an accident – probably you should mention you’d like to do a small agreement and have them sign to the fact that the car was not involved in a major accident.

Wrap Up

As you can see, several points should be kept in mind if you are deciding to buy a car, whether new or pre-owned. The next part of this discussion (Buying a Car – Your Budget) will help you with some of the financial aspects of your decision. Stay tuned!

We hope you enjoyed the post so far. If you have thoughts or experiences to share, please feel free to use the comments area below!

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Hi. I hope you enjoy reading the posts! I have 20 years regional and international experience in financial services, and I am passionate about helping others achieve Financial Freedom by making wise financial decisions. Keep coming back!

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