Car Purchase: Save Enough To Avoid Financing

At some point almost everybody resorts to financing when purchasing a car

. However, it is a good idea to avoid doing so if at all possible. The reason? The costs of financing will add up to an asset that depreciates very quickly and therefore it will turn out to be more expensive than imagined. Not all secured loans behave this way as properties tend to increase in value (though falling right now) but when it comes to car purchases, you may wonder if it makes sense to keep paying installments as if the car was new when the price will be reduced after six months to less than 80% of the purchase price.

Depreciation Reduction Of The Assets Value

Depreciation implies the reduction or downgrading of the assets value. In this case, it implies that the cars price will drop within a period of time. Right after it is purchased, the automobile suffers a value reduction equal to the 20% of the purchase price. Everybody knows that used cars are significantly cheaper than new ones. Few notice though that the process of depreciation adds up to the cost of financing because by spreading the payments and adding interests you are paying more over time for something that is worth less and less each month.

Only fixed payments and inflation can reduce this depreciation effect. How? Simple, if your payments are fixed, they dont increase over time, and inflation increases the price of products and services because the value of money is reduced. Therefore, the effect of depreciation is partially compensated by inflation and the unmodified monthly payments of a car loan.

Saving For A Car Purchase

However, saving for a car purchase and avoiding using financing or at least reducing the amount of finance that you need will help you reduce the amount of money lost to interests and depreciation. An interesting consequence of this is that it prevents you from purchasing car models that are beyond your income capacity thus protecting your finances. Purchasing by means of a car loan an expensive vehicle can jeopardize your finances and budget due to high monthly payments that can become too onerous if you go through a rough situation like a disease, being fired from your job or any other adverse circumstances.

So the steps you need to take are simple: if you are currently repaying a car loan, speed up the repayment process so you can cancel all your debt fast and own your car completely. Then, design a savings plan suit for your budget and put the money aside so you can build up the proper amount. Remember that you can sell your car and count with that money for the purchase too. Thus, it is important to know when to sell your car in order to obtain the most out of it. If you can automate the process of setting money aside, that will help you save up the money sooner and avoid distractions.

Finally, remember that purchasing a brand new car may not be the smartest idea if you are worried about your finances. By purchasing a used car you will be avoiding some of the consequences of depreciation too. Though a used car keeps depreciating with time, the highest drop on the value of a vehicle happens right after the purchase and during the first year of usage.

by: Devora Witts

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