- Source: Hoonigan

If it drives, floats or flies? Lease it

I wanted to talk a little bit about financial mistakes people make today to save money.

21w ago

Money is one of those things people get ultra-defensive about. And fair enough, in today's world money makes the world go round. It's the greaser and the catalyst for rust. But the funny thing is that there's no real guide for money or how to spend it. I wanted to talk today about the biggest financial mistakes people make when planning ownership of a vehicle.

Let's start by talking about the second-hand car market, my friends both here on DriveTribe and out in the big, bad real world all advocate for the second-hand car market. But when buying a car people seem to less presume that there is risk associated with buying second-hand vehicles and more treat them as a sure thing. They also have a habit of blaming everyone but themselves when things go wrong. Don't get me wrong, buying a second-hand vehicle, boat or plane can be amazing and you can save a hell of a lot of money by doing it. But you need to safeguard whatever you do invest in that car because it's not money you're ever going to get back for the convenience of full ownership.

It's important to recognise that as a part of this age, use, make and the type of vehicle you're buying need to be factored in. I'll give you an example, we have friends who last year bought a second-hand boat. My advice was that if you were going to go second-hand that you go to a dealer of some sort who can give you confidence that the boat was reconditioned before you put it in the water again (and that it would have some sort of mechanical warranty). It might've cost an extra couple of thousand dollars but in the long run, it's time, fun and convenience that you just can't trade for anything else.

To a point, the second-hand car market is being a walking talking bullsh*t detector.

The friends rolled the dice, bought a privately owned boat from a seller and had the water pump fail the first time they put the boat in the water. They'd also paid far less than expected for said boat and bought it far older than I'd ever been comfortable with.

To a point, the second-hand car market is being a walking talking bullsh*t detector. You need to know when something is too good to be true (which is almost always) and you need to be able to set an accurate price expectation for whatever vehicle you're buying. If the seller's expectation is too high you need to learn how to help them reset their expectations. If the expectation is way lower than it should be than there's probably something wrong with the purchase.

You also need to plan how you're going to pay for whatever vehicle you want to buy. Whether you're going to finance the vehicle or whether you're going to buy it outright or a combination of the two. I use a golden rule here which has kept me clear of financial issues in the past. Only ever buy a new vehicle on finance (whatever it may be) and always put some description of a deposit down. The deposit helps protect you for surprises (in the form of a high balloon payment if you've misjudged the car value) and only purchasing new vehicles on finance helps protect you from having a car that may fail without a clear way to repair the vehicle while still paying finance.

Finance on a second-hand car is bad credit, it's really really bad credit and it's actually a mistake a much younger version of myself made. I bought a 10-year-old BMW 5 series in my late teen years on finance which ended up falling into disrepair about 3 years after I bought it. I was lucky that I could pay the loan back off my own bat. But the fall in the value of the car in those three years could've put my credit file and financial health at huge risk.

Today I've adapted a bit of a different approach to machines with wheels, propellers or rotors, Treat your vehicles not as an asset but as an expense.

Today I've adapted a bit of a different approach to machines with wheels, propellers or rotors. It's one that more and more accountants take as well. Treat your vehicles not as an asset but as an expense. Assets, after all, are meant to be investments, they don't always gain in value but they're theoretically meant to. That means if there is a purchase you want to make that you know will lose in value you probably shouldn't treat the purchase as an asset.

It's more of an expense, money which is going to be spent and you're probably never going to get back, and that as a result changes entirely how you treat said purchase. It's much alike to buying milk from a store or renting an apartment. So how do you use this to save money? You get smart about the purchase.

Work out how much the vehicle you're purchasing is realistically going to be worth and plan when you want to sell said vehicle so that there aren't any surprises. For example, a Subaru WRX Premium Automatic in today's world costs about $55,000AUD. We have a fairly good idea of depreciation on the Subaru WRX (about 50-60% over 5 years), and so you use that to work your way back and create a finance plan which is cheap and works well (also by shopping an interest rate). If the vehicle depreciates well you can have a bigger payout figure (and presuming you do lower KMs on the vehicle). If you do high kms on the car and you know it's a money pit? You don't ask for a lump sum payout at all. It may be more expensive over the life of the vehicle but it means you won't be up for a surprise when your 5 year finance plan is over.

This way in 5 years you theoretically should be able to do a straight trade on the vehicle (new for old) and just continue the finance plan at the same amount (but with a brand new car). And if you're lucky enough and overestimated the cars depreciation and your payments you can occasionally change them over even sooner. This works exactly the same with all vehicles (boats and planes as well).

Long as you have a good grip on your own financial plan, valuations and payments your entire way of spending money on vehicles can change as well (and in the long run probably save and make you even more money if you invest whatever you have leftover well enough). As with all finance though the number 1 golden rule is never overextend yourself. The line may look grey when you're in the middle of a purchase and you may be emotional about it but the reality is there is a stark difference between being able to afford something and defaulting. Keep it black and white and you can normally be very safe. Other than that though, happy driving.

Feel free to leave your own car buying or financing horror stories in the comments. Sometimes the way forward to learning is about sharing that knowledge with others.

Please note: while I'm qualified in commerce I do not hold a qualification in professional finance or banking. If you want any further information about finance you should talk to a finance professional from either your local bank or your local broker. Make sure the conversation is honest and you very clearly set your financial boundaries.

Engine Economics is the DriveTribe destination of all things money and motors.

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Comments (14)

  • I get that and being a banking professional myself it makes sense and it’s how the rich do things albeit mostly with company money rather than their own. A few things to note however:

    1. You never own the asset

    2. Too much temptation to over extend just because the monthly’s are a tiny bit higher.

    3. There are contractual conditions which incur penalties if you breach them.

    4. If times get tough you still have to keep up repayments.

    5. Somebody else is making money out of you.

    Better to save and then buy, as it’ll be cheaper in the long run, better negotiating power, not trying to run before you walk, an asset to sell if times get hard and you’ll feel a whole lot better having worked hard to get it in the first place.

    Some don’t care about this stuff as it’s what the older generation did, today’s generation is too live for today!

      5 months ago
  • thank you

    but I will not lease anything and will keep buying second hand cars.

      5 months ago
  • Always finance? I think that's bad advice. Especially if you plan on trading the vehicle in every 3 to 5 years. I did a coat analysis of a my car before I bought it and found that over the course of 20 years, including depreciation, interest, maintenance, small repairs etc... that I had to keep a car for about 7 years in order to have spent the same amount of money compared to leasing a car for 5 years at a time. Not only do I get a new car 2 years sooner every cycle, I'm never completely out of warranty because most powertrain warranties are 5 years. So any major problems arent mine. In those extra two years I may need to do brakes and tires as well driving the cost up. I think the best advice is to compare your new car options, lease or finance. Lease payments are lower as well. When you finance you essentially pay a deposit that you get back when you sell the car. When you lease you only pay for the amount of car you used, the depreciation. Theres nothing to get back because you never paid the extra in the first place. Understand your options, your comfort level, your financial situation then make a decision. Don't just finance because you like owning your car. You'll likely have less cashflow month to month financing vs leasing.

      5 months ago
    • It's important to note Mike that in the finance world financing a car and leasing a car are treated in exactly the same way (here in Australia anyway). They both fall under credit law and both have exactly the same ownership implications when...

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        5 months ago
    • Ok fair point. I dont know know what goes on behind the scenes of a lease. And here in Canada it's the same as far as credit goes. I have a question then.

      My truck was $40 000. My lease is $230 every two weeks for 4 years. My trade was 5k. That means...

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        5 months ago
  • As Evil Knievel once said “If it floats, flies or f*cks...rent it!” Still Wise words to this day

      4 months ago
  • Second hand is the cheapest way to run a car, so long as you don't buy a lemon. Here in the UK I avoid lemons by paying the RAC ~300GBP for a comprehensive inspection. Even for ~1000GBP Jalopies it makes sense, as a jalopy can easily have expensive problems. Another benefit of an RAC report is that it gives me leverage for price haggling with the vendor. If the vendor refuses an inspection they're implicitly telling me the car is a lemon, so I walk. Being able to walk from a bad deal can be tricky if you've got the hots for a particular car; I only learned to do it through bitter experience! I've bought many cars over the last 20 years for myself & family, and the RAC inspection has never failed me. That said I currently run one lease (Golf R), and one second hand (E500 4.7TTV8 Cab). Naturally the E500 went through an RAC inspection. Fortunately my financial position allows me to run two tasty motors, so I don't need to extract the lowest costs, and that's why I lease the daily. Yes, the lease finance company is making margin on me. I'm OK with that margin as I get an all in fixed monthly cost to run a new vehicle that's under warranty.

      5 months ago