Credit Cards, Car Loans, & Mortgages, Oh My! Part 2
By Keith Bunn Jr.
Buying Cars with Cash…
Smart Money Magazine says, according to the National Auto Dealers Association, if a car dealer sells you a new car for cash, their average profit is $82. The No. 1 profit area at a dealer is the garage. No. 2 is the finance office.
I kind of touched base on this subject in the Who wants to be a Millionaire blog, car payments are just stupid! A car loses 70% of its value in the first 4 years. It is the biggest thing that we buy that loses value like that. And if you’re a road warrior like me, you can forget about it, you warriors are absolutely destroying any value your car has by putting tons of miles on it.
Statistics show that one-third of car buyers take out a $26,000-six-year loan at an average interest rate of 9.6%. That means that one-third of the cars on the road today have a $475 payment attached to them. Put simply, after six years, you would have paid about $33,000 for a $26,000 car, that’s now worth maybe $6,000. What part of this sounds smart to you?
A car lease is basically renting a car. You pay “X” amount of dollars per month and at the end of the lease, you turn it back in. If you want to buy it, you are buying it for the market value they estimated it to be at the beginning of the lease.
If you pay $400 a month for 60 months, you have paid $24,000 at the end of the lease, before turning it in, it’s called the residual value. The car will not go down in value any more than that, because the car companies would lose money. You will have paid them more than the car has depreciated during that time when they get the car back. Now, if you rented the car for $24,000 and its value only went down $15,000 out of the $24,000, then the car company has made a profit of $9,000. On top of that, the Federal Trade Commission does not consider car leases debt so the interest rates on a vehicle leases are not disclosed because there is no federal disclosure involved. So you have no truth in lending disclosure sheet. Now if you knew how much you were being charged in interest you would then know how much you were being ripped off.
“The worse car accidents happen on the showroom floor.”
- Dave Ramsey -
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