<em>Question:</em> I am planning to get a car. I have some savings set aside for this purpose. Should I buy a car on cash or financing? Should I get a brand-new or a pre-owned one?—Kris Lim, via e-mail
<em>Answer:</em> The first thing you need to decide is if you really need a car. The cost of a car goes beyond its acquisition cost as cars require maintenance, meaning additional costs, and they depreciate faster than the US dollars (pun intended). A car is not an asset or investment in the strict sense because you can’t expect it to generate income (unless it’s a taxi or some sort of commercial vehicle) and its value will never appreciate. Buying a car is something you really need to think about and you should closely look at your budget first.
However, and contrary to what many “experts” say, owning a car is a reasonable aspiration. Cars help you become productive as it frees you from Metro Manila’s highly unreliable and cumbersome public transport system. During rush hours and rainy seasons, hailing a cab, riding the MRT or the bus, or getting on a tricycle becomes very difficult, stressful and, well, irritating. Owning a car gets you to your destination in a more convenient fashion which should ultimately help you become productive, in a way.
Your situation is a very relative one. A brand-new car means it is trouble-free for the first two years or so and your cost will be limited to routine maintenance. However, brand-new cars are much more expensive than pre-owned cars. A two- to three-year-old car costs 30 to 40 percent less than a brand-new unit of the same model. I personally prefer pre-owned cars since I’m always watching my wallet, but if you want peace of mind, you can go for a brand-new unit. Peace of mind has a price to be paid for and if you are willing to pay that price and understand the cost differential, then go ahead.
Let me be a bit more personal here and share my experience with you. I used to prefer newer cars for a long time but I got tired of high acquisition costs and the quick depreciation of cars. For some time now, I have decided to keep much older cars—as I said, I always watch my wallet. However, keeping older cars comes with a cost and not just financial (maintenance issues). I have found myself inconvenienced because my older cars would conk out on me at the worst possible times. Using them for long distance drive can also be nerve wracking.
Last week, I had the opportunity to test-drive a Chevrolet Captiva for a few days. Driving a nifty new SUV was such a surreal feeling as the Captiva is such a well-built car with a dose of nifty conveniences (DVD player, GPS, etc.) and it seems perfect for my family. My Captiva experience, though only for a few days, made me rethink about my ultra-pragmatic decision of keeping old cars.
Well, brand-new or pre-owned car? The decision is entirely up to you—assuming you have considered costs and all.
As to buying it cash or financing—buying cash is the most financially prudent thing to do as the interests on car loans can be substantial. Add that to the depreciation of your car will really make you think twice. However, if buying the car with cash is not a viable option, you may want to consider the following before you take out a car loan:
<strong>Shop for good rates.</strong> Check out different banks that offer financing. Ask for lower interest and you might be surprised that some of them are willing to lower their rates.
Go directly to the lenders and not course the loan through the dealers. Banks give commissions to dealers so if you go straight to the banks, chances are you can get lower rates. The same works for car insurances.
<strong>The higher your down payment, the better.</strong> Interests are charged as an add-on rate and not on diminishing balances which means the effective rate is higher for car loans. To reduce interest expense, pay higher equity—say 40-50 percent. Many programs entice us with low down payments because that means we will pay more interest. Nothing wrong with that, that’s how financial institutions earn but we must always be prudent at how we spend our hard-earned money.
<strong>Pre-owned cars.</strong> Contrary to popular notion, pre-owned cars can be financed.
Enjoy your new toy but I would like to remind you that if your buying of a car would result in a drastic restriction of quality living, better think about it harder. If you are buying a car as a status symbol, don’t.
“Some who are poor pretend to be rich; others who are rich pretend to be poor.”— Proverbs 13:7, NLT
<em>Randell Tiongson, RFP, is an advocate of life and personal finance. He is a director of the Registered Financial Planner (RFP) Philippines. For questions, write to randell@randelltiongson.com. To know more about RFP program, visit www.rfp.ph or e-mail info@rfp.ph.</em>