Is Getting A New Car The Right Choice Financially?

My car is a 10-year-old, 2-door hatch with low mileage and a few scratches. OK, more than a few. Like, zip ties hold part of the grill to the bumper.

Last week, the front passenger seat started flopping forward whenever I hit the brakes. That’s an actual safety hazard, and it means I’ve really got to do something.

But what?

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Get Rid Of It?
Fewer and fewer people, especially young people, are driving cars at all. They’re expensive, and if you live in a city, you hardly need one. You can always rent one by the hour or for a weekend if you do need it. And you skip all the hassles of parking, maintenance, and gas. The Blue Book says I could get about $4,000 if I sold it, which would buy me a bicycle and a ton of Zipcar and taxi rides.

Fix It?
The cheapest thing is to fix it. I’m spending about $2,000 a year to keep it on the road, but it’s still cheaper to fix than replace. On the other hand, that repair bill isn’t going to get any smaller. If anything major breaks on the car, it won’t even be a decent trade-in.

Replace It?
You can get a perfectly fine base-model econo-box for under $15,000. If I wait until September for the year-end clearance, I could be out the door for not too much over ten grand. I’ve got some money saved up, so I’d barely have to finance anything at all.

Or I could get a certified used car with a warranty. A 2011 or 2010 model would be better than my current car, and I might be able to skip a loan entirely. That’s appealing: Nobody wants ANOTHER loan payment, right?

Upgrade?
Then again, that base model looks pretty chintzy. I don’t need alloy wheels, but I’d like a little more than the minimum. And you know, it’s cold up here in Boston in the winter, and I want those butt-warmers. Maybe a moon roof. And definitely a little more zip to the engine. Sure, Consumer Reports says that turbo models are generally less reliable. But you totally need it for a busy highway merge, right? Besides, VROOOM!

I could even go luxe: You can get a barely used (excuse me, “pre-owned”) baby BMW for $25,000. It comes with luxury-car maintenance and insurance costs, but it is a bimmer.

What Would You Do?
How much extra would you pay to go from adequate transportation to sweet ride? Would you borrow it?

The car dealership would say you can keep monthly payments down if you stretch the term of your loan to 5 or even 7 years. If I listen to them, I’ll be paying for my new car long after it’s no longer new. That’s no bargain at all.

From a purely rational perspective, the only reason to borrow money for a car is if you need it to get to work and have absolutely no alternative. Unlike a college education, a new car isn’t going to increase your earning potential. In fact, it’s bound to be worth less money in the future. But if there’s one thing that I’ve learned about personal finance, it’s that nobody is capable of being totally rational about money all of the time.

Personally, I’m hoping to aim somewhere in the middle: something gently used, with a warranty. I’ll skip the navigation and the engine upgrades, but in my book, those seat warmers are worth every penny.

Marketing’s enthusiast problem

When you think motorcycle rider, you might think of a dentist on a big Harley cruising around on the weekends. But your average motorcyclists live in India or Southeast Asia and have a 250cc or smaller motorbike as the primary transportation for their household. The American motorcycle market consists almost entirely of enthusiasts, and they’re visible. But manufacturers, if they want to sell anything in volume, need to keep the meat of the market in their sights.

Automakers have a similar enthusiast problem: Their most dedicated fans are not, in fact, their best customers. And focusing on their most enthusiastic customers can lead them into serious trouble.

Honda, for a while, wanted to be the cool car company. So they made some cool cars, and they courted the aftermarket tuner crowd. The next thing you know, their brand was tainted by things like this:

Your typical driver is not a car enthusiast. Your typical driver has an appliance that takes them places. Jalopnik and the other car media may hate beige, but the enthusiasts are merely the most vocal segment of the market. If the average driver buys a car magazine, it’s the Consumer Reports car issue. And they only buy that when they’re in the market for a new car.

When you look for the enthusiast problem, you see it everywhere. Home electronics, video games, PCs, you name it. The enthusiast audience thinks it’s the real audience. In many cases, the industry leaders are enthusiasts themselves – that’s why they went into the industry, after all. But that means they often fail to understand that their audience doesn’t love their products the same way they do.

The average college student is not a 19-year-old fraternity brother. The average video-game player is not playing FPS games on a console and drinking Mountain Dew. The average car-buyer is not looking for an engaging drive. The average PC buyer is not actually chasing clock speed.

Obviously, you need to know your customers. And when you think you really understand them, you’re probably wrong.

If I Default, Can They Repossess My Education?

Wherever you work, there are bound to be people taping or tacking cartoons to the walls. Sometimes they’re just funny stuff, but more often than not it’s something related to your job.

At my desk, I recently took down the Toothpaste for Dinner comic about applying autotune to your loans, and put up one by Emily Flake about what happens when the student loan people come to repo your BA.

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These comics are silly, but I like them, because they point out just how hard it is to really get your mind around a loan—especially when most of the money went straight to your school and you never actually touched it.

I mean, you might be able to recycle a 1980s bassline, but it’s pretty near impossible to turn a 1099-E into a hit R&B single. It’s not at all hard to understand that if you miss car payments the repo man will come and take the car. But what will lenders do about a student loan?

They Can’t Repo Your BA … Can They?

No. They can’t. But there are still some serious consequences if you don’t pay:

  • If it’s a couple days late, send the money and you’ll probably be fine.
  • After 30 days, you’ll be two payments behind, and probably owe a late fee as well.
  • At 60 days, your credit starts to take damage.
  • When you get toward a year late, you can enter default. At that point, things go south quick.

If You’re In Default

The consequences of default are way worse:

  • Your credit damage will be severe. You will find it harder to get a credit card, a lease, a car loan, maybe even a job. (After all, employers may not trust you with their money if they think you can’t handle your own.)
  • You’ll be charged collection costs, generally 18%–25% of the amount you owe.
  • You’ll be charged interest on those collection costs.
  • You’ll be charged interest on your late fees.
  • You’ll be charged interest on your unpaid interest.
  • You could face wage garnishment, i.e., a chunk of your paycheck taken for your loans before you even get paid.
  • Expecting a tax refund or Social Security check? Your loans can take that, too.

 

So, while they can’t take back the education, lenders will get their money one way or another.

If you do default, there are ways to recover, like rehabilitation and consolidation. But trust us, it’s way better to prevent default with a payment plan you can manage.

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Grad School

I think that what I really object to is the way everyone always elides the intractable disconnect between credentialing and education. I don’t want to go to grad school just to check a box, and I have a hard time seeing any actual advantage to spending 3-4 years grinding through a series of online lectures about IT supply chain management, aside from that shiny piece of parchment.

I feel like one of those gold bugs who refuses to comprehend that money doesn’t have to actually be a physical object of permanent value, and instead dives into conspiracy theories about how fractional-reserve banking and the Fed are systematic theft machines. I refuse to accept that cultural capital is actually just whatever we say it is. I really want a degree to have a real and relevant value, and not just be a way to keep out the rabble and network Our Sort of People.