I recently came across an article that was attempting to help millennials not make money mistakes. One of the topics was how millennials make the mistake of buying new cars when they should drive used cars.
The author was not only advising them to buy used cars, but to pay cash for this used car. They went on to talk about how they haven’t had a car note in blah blah many years and how life is great yada yada yada. (This anti-leasing sentiment seems to be a theme among personal finance writers.)
The feeling of not having a car note must be great, I get that. However, the idea that people who lease new cars are wasteful and not careful with money is wrong. Paying cash for a used car is not the best use of money in most cases.
When you look at the used car market to find a reliable car, you are looking at paying $5K or more. Anything cheaper than that may not be nearly as reliable as it needs to be. If you’re not sure your car will start in the morning, potentially causing you to miss work, it is not a good buy.
The idea that a millennial will have thousands of dollars to spend on a car is also not realistic. Most thirty and forty somethings don’t have thousands of dollars to spend on a car if we’re being honest. Taking that money out of savings or their investment accounts is also not a good use of capital.
Remember, cars are depreciating assets and using money that could be compounding in an investment account is a mistake. Yes you’re going to pay interest if you finance a car, but missing out on years of compounding can be devastating to any long-term savings.
There are responsible ways to purchase cars and those aren’t talked about enough. Our previous post ( Buying v Leasing a Car ) goes into why leasing is smarter than financing. If you are looking to lease a car and are interested in saving money, the car you choose is very important. The average millennial will need to pay less than $300 a month.
To ensure my information was still accurate, I did the payment calculator on the Hyundai website. A 2017 Hyundai Accent can be leased for $216/Mo with only the first month’s payment down. Even if the payment fluctuates a little, you’re still well within $300. (This also worked for a brand new Nissan Versa, Chevy Trax and Nissan Sentra to name a few.)
Choose a car that has a high residual value in order to keep your payments lower
If the residual is high, you will finance less of the car during the lease term.
Look for lease specials on cars
Car makers will use special lease deals to help sell certain models. These will be your best bet to get the lowest car payment.
Choose the car that has a payment lower than you want to pay
The advertised payment will be on a particular trim level and it assumes a large down payment.
Do not put any money down
Giving the dealership thousands of dollars to lower your payment is not the best use of that money. Remember, lost compounding.
Look for a Demo
Demos are cars that were driven by the dealership employees or as loan cars. They have miles on them, but they have never been titled so are technically new. These are goldmines. Because they have miles, the dealer has to discount them well below the MSRP. And they are still eligible for all the usual rebates and cash back rewards.
One last point that I’ll address is the idea of establishing car credit. Our previous post ( 5 Ways to Increase Your Credit Score ) goes into some ways to improve your credit score, one way is to have various types of credit. It is a mistake for a millennial to miss out on the chance to establish credit. And if they need a cosigner, that is an easier sell on a 3 year lease than a 5-6 year purchase. When they go to buy their first home or even lease an apartment, having credit history is vital.
For those of you who live in urban areas where you do not drive very often, a cash car might be a good way to go. You may only need to drive on the weekends and the reliability of the car is not a huge concern. That $5K car may last for the better part of a decade with minimal repairs. If so, this article is not for you.
Following these rules of thumb will help your next car buying experience.