By: Mike Earl, CFP®, CPWA®
I recently helped my mother purchase a 2015 SUV from a dealership. It was not a pleasant experience. Those of you that have purchased from a dealership know how long the process takes. Within 20 minutes of walking into the dealership, we were ready to pay all cash for the vehicle. We had done our research in advance, the test drive went well, and we were buying a reliable make and model.
Yet it still took us 3 ½ hours to walk away with the keys to the vehicle.
Even though we were paying with all cash, we were forced to sit down with a manager from the finance department. Going in, I knew that finance departments are where dealerships make a good chunk of their profits. Selling warranties is a lucrative profit center for dealerships. So when the finance manager started her pitch on the extended warranty, I politely but firmly said we weren’t interested. She then turned to my mother and said, “Do you typically not protect your investments?” Hmm…
The definition of an investment is something that you expect to go up in value over time. Since we know that new vehicles lose 60% of their value in the first 5 years of life, I would call them a lousy “investment”.
The finance manager continued to push the warranty very hard. We must all remember that dealerships are in business to make money (justifiably so). And finance managers are paid on commission to sell the warranties. Warranties are not created to be a good deal for you, the consumer. For clients of The Wealth Group that maintain a healthy Emergency Fund, unexpected car repairs down the line are no problem.
In a late 2013 survey of 12,000 subscribers, Consumer Reports “found that 55% of owners who purchased an extended warranty hadn’t used it for repairs during the lifetime of the policy. And, on average, those who did use it spent hundreds more for the coverage than they saved in repair costs.”
Our advice on vehicle purchases (best practices):
Aim to limit the purchase price to 10% of annual household income.
Don’t finance the vehicle.
Buy used. Preferably at least 3 years old (about 40% discount from initial MSRP), but 5 years old is even better (depreciation has knocked 60% off the initial cost by this time).
Don’t buy any kind of warranty, assuming you are buying a reliable vehicle.
Try to hold onto your vehicles for as long as possible. For some people, holding a vehicle for 10 years or longer is no problem. This of course depends on how many miles you put on your vehicle each year.
If you want a reliable and long-lasting vehicle, strongly consider buying from an Asian manufacturer such as Toyota or Honda.
Which vehicles do people keep the longest? Check out this list:
Notice a pattern here?
There is a reason Toyota has such a sterling reputation. Nine of the fifteen cars on this list are Toyotas! That’s 60%. Another three are Honda (which includes Acura, a part of Honda). Also note that 14 of the 15 car makers in this list are Japanese. Only one is European, and none are American automakers.
What does it mean to you, our client?
Vehicle decisions are a big part of your financial plan. In fact, they are the second-biggest consumption decision in your life (next to housing). Before you buy, let’s have a conversation about how vehicle purchases will impact your long-term financial plan.
Because The Wealth Group, Austin B. Colby & Associates is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions.