Back in 2005, I sold my VW GTI so as to not have any payments. I purchased a used 2001 Ford Focus and paid for it in full. The car is running well but will probably need about $1K of work to keep it maintained and safe (i.e. new shocks, tires, probably a timing belt, etc).

One thing that happened to the car that makes me nervous is when I purchased it, I changed the plugs immediately. Well, the old plugs were so badly worn that a piece of the ceramic end of the plug chipped off and fell into the engine block. Needless to say, I didn’t realize it until the engine fired up again. The noise wasn’t pretty but the piece went out the exhaust port and things cleared up. Now the engine has a bit of a clattering sound when cold. It worries me because I think there was some damage done although I experience no oil burning or power loss or poor fuel mileage.

Anyway, my point is that the car needs some maintenance work. Now…the kicker. My sister needs a car but can’t afford one. So I was thinking I’d give her this car and she can pay me monthly for it interest free…at a lower price than what I’d sell for outside.

The dilemma…I need to get another car. Frankly, I don’t want to get another used car. I;d rather get a new one and keep it for a while. I already made the mistake of selling my GTI (economically speaking) but I don’t regret it. Being payment free is wonderful but obviously my Focus doesn’t have the safety and comfort of a newer car.

What do you guys think? I’ve had the Focus now for about 2.3 years. It has about 60K on it. I bought it for around $6.5K and will give my sister a price of $4K and she can pay me whenever, however monthly.

I’ve been looking at the 2007 Nissan Sentra SER model with CVT transmission…slight better fuel mileage than the Focus even though it’s more powerful and larger. I can get one for $16,995K +T/L…a very good deal considering the INVOICE is like $19K. I guess they want to move these things for the 2008’s.

Insurance I checked is like $60 more per year than the Focus believe it or not.

Any opinions? Suggestions?

/my two bits
/homeowner 10 years
/family of six

However you may want to go ahead and invest if you are paying significant amounts for car repairs, or if you feel unsafe driving. Look for a used car if saving money is your object. I think the conventional wisdom is 2-3 years old gives you a big savings off the sticker price without having to worry about repairs.

Good luck!

You can make the same cost estimate on a used car. Remember to add in the transaction costs involved in the purchase as well as taxes, pollution tests, registration, & whatnot.

These exercises might breed a deeper appreciation of the Clunker.

Finally, Toby, I love see where you got your information on billionaires. The most comprehensive study I’ve seen on millionaires is the book “Millionaire Next Door” by Tom Stanley. In his study, he found that the average millionaire bought a 2 year old car for cash.

If you are a grad student using it for commuting, most likely you are not using it for long road trips. Keep the junker as long as you can till you get a job or work on your post doc.

If you have to buy a car, go with a used car, we are still a good 10 years away from a real “fuel efficient” society. Grad students always walk or take the subway.

Say what? Please be careful with absolutes like always and never. They are seldom accurate.

If you have enough to pay cash for a car but you can get an extremely competitive interest rate (3% or less) then I would argue that it is rather foolish to hand over that money. Sure, in a vacuum, if you consider financing versus paying cash, you always make out better paying cash. But if you consider the Opportunity Cost of spending that money on a car instead of investing it over 4 years, you’ll probably think twice.

Even billionaires finance their cars, yachts, and jets because having their money continue to work for them is more lucrative then paying a lump sum for a depreciating asset.

Opportunity Cost – key concept for business, key concept for life.

I think this is the wrong way to look at it. Total cost of the car is much more important than “payments”. Also I would really quibble with the questioners frame of mind. They are not “investing” in another vehicle and if they can save 800$ a month then they could afford a fairly large car payment. For example, they could buy and pay for a 10K used car in little over 5 months. A car in that price range could last for a long time and the idea of paying it off quickly will make them much more price sensitive. Running their current car until it breaks might also start to seem more appealing.

Also this seems like a false dilemma, yes they need to be saving for a home, but as grad students, they need to graduate and gain a little stability in job before they purchase home. Keeping liquid money now (using longer term credit for the car, say 2-3 years) doesn’t really help. Its sounds a little like they just want a new car, but are sad to see the house fund go. Hopefully this post will help them think about the tradeoffs.

I would buy a quality used car. Given the housing market I wouldn’t buy a house for at least 2 more years. But as you say, I think I would first calculate exactly how much I would save in gas, and maybe even try and estimate how much house I wanted to buy and when, so that I could see whether I would realistically have enough for a downpayment by the time the house buying option becomes reality.

Dboy

The logical thing for this couple as graduate students is not to be taking on monthly payments, as you stated. The marketing folks want them to believe that having monthly payments is logical.