Tuesday, June 19, 2012

Spending money I don't have

Today I bought a used Honda Fit. I bought it using money I don't have: a loan from my credit union.

Buying a car on credit was a difficult decision for me. I vacillated among buying the cheapest beater I could find on Craigslist, to getting it over with quickly and buying a car at Car Max, to closing my eyes and just ordering a new car. ...Just kidding, I was never considering getting a new car. That would fly in the face of everything that Mr. Money Mustache stands for. If I'd gone down that path I would not be surprised if MMM himself showed up at my door step to personally deliver a punch to my face.

The decision for what car I would purchase, really, was a three-way one. The options were 1) cheapest beater possible, 2) something in the $10-15k range from a dealer, or 3) something in the $10-15k range from a private party. As I did a lot more research I concluded that dealers overcharge, and that really all they provide is convenience. This convenience is minuscule when dealing with used cars because inventory is all over the place. The inventory on Craigslist was comparable to inventory at all the local dealers I could find and Craigslist provided one website whereas each dealer has its own website.

I got lucky and found a 2007 Honda Fit Sport, manual transmission of course, with 67k miles. My insistence on a manual transmission explains the lack of used car inventory at dealerships. The guy I bought it from was really nice, explained how diligently he had serviced it and why he didn't need it anymore (he bought a used Saab). I paid $10,500, which is maybe $100 or $200 more than book value for this car in Very Good condition. I was happy with the price because the service record has been sterling and all it needs is new tires in around 10k miles (I'm estimating ~$500 at Costco).

$10,500 is more than I have in cash right now. Remember that I've been holding back cash since almost the beginning of the year in anticipation of buying a car. There was the possibility my mom would lend me her 2008 Yaris, but in the end we decided she would be better off selling it and using the money for her pending retirement. I have around $6k in cash, which does not include $2k that just last week I sent in to pay down my student loan (I hadn't told you guys about that payment yet). Tonight, now that my car situation is settled, I'm going to send in another large payment, probably around $4k.

Here is a copy of the relevant details on this used car loan of mine:
My Truth-in-Lending Disclosure for my used car loan
The obvious problem with car loans, or any loans for that matter, is the interest you have to pay. In this case I think it's an acceptable tradeoff. If I don't pre-pay any of this loan (unlikely!) then my total finance charge will come to $550.52, or a little over 5% of the loan amount. I'm not worried about the new monthly payment either since I'm basically swimming in free cash flow right now. Other things equal I'd rather have the $550 over five years, but even more I'd rather have the $6k in my bank account to pay down my student loans.

The really insidious problem with car loans is that they subtly and inexorably encourage you to buy more and more expensive cars. If I didn't have access to credit I would literally not have been able to purchase this car. What's worse, I could have easily gotten approved for a much larger loan, maybe even $30k. Can you imagine if I weren't relatively frugal? And I do mean relatively frugal: my Fit is a damn nice vehicle and I paid a premium for it over, for example, an early 2000s Toyota or Honda.

I'm sure I could be just as happy with an older and less expensive vehicle. But I did the calculations and I decided on the set of tradeoffs I describe above. Access to credit shifted my decision toward a more expensive vehicle and now I'm poorer because of it. The thing is, I'd still make the same decision. Debt is sneaky like that.

I don't mean to be all doom and gloom. But I do want to give myself up as a cautionary tale. The less automotive inventory you keep the richer you will be.

I think it's funny how everyone I tell is congratulatory. I'm happy about my new (used) car, too. I don't think congratulations are necessarily out of order. But it would be more reasonable, I think, if we offered each other condolences upon taking on new debt.


  1. Sorry you had to take on another monthly payment and are in a position where you might have to pay $550 more than you need to.

    I think a lot of people would be in a better spot financially if that is how we reacted to purchases. There would be a lot less credit card balances, that is for sure.

    1. Seriously! It's more sobering, and frankly, more honest.

      And thanks :)