Do You Really Need It?
Finding the right car, negotiating the price and choosing a smart financing option are very difficult tasks but before you even get there, you should first consider whether you really need a new car right now. The low monthly payment is very tempting but you should not be fooled by it. You can always do something else with your money and when you consider let's say a $300 per month payment for a car loan, you may want to consider what else these $300 you pay every month can buy you instead of a car. Your long term objective is to maximize your income and that is the only way that you can come up ahead and create some real wealth instead of consuming more and more of your future income now. Never forget that if you don't consume your savings now, they will be much more in the future. Here is the quick and simple math behind this statement:
Choice 1: You put $20,000 for a new car NOW. After 5 years, you have a vehicle that sells for about $10,000.
Choice 2: Your neighbor puts $20,000 in a hedge fund that generates 15% a year on average. After 5 years, he will have about $40,000. He can then buy a car just like yours but he will also have $30,000 in the bank from his investment and you will have zero.
If want to get ahead of your neighbors and colleagues and you do not need a new car badly, then you should not buy one!
Let's say however that you have decided that you really need a car. The cheapest option is to pay the price in cash. That way you won't have to pay any interest. However, you may not have enough money in cash. That's why you will have to get a loan. Here is a statement that should be obvious:
The less money you pay per month for the same loan, the more money it will cost you.
For example, if you are offered a $10,000 loan for 5.0% a year, you will have to pay $438.71 per month for 24 months or $230.29 for 48 months, and of course, you will pay a total of $524.93 more for the second option with the smaller monthly payments which is more tempting. This additional $500 can buy you a new personal computer.
The conclusion here is to repay a loan for as short period as possible without putting a strong financial pressure on your monthly budget. The last one is very important. The financial pressure translates into emotional pressure and the emotional pressure translates into foolish mistakes, which will cost you more money and increase the financial pressure even more. So you have to stay away from financial pressure as much as possible by being disciplined and restraining yourself from unnecessary consumption.