The True Cost of Buy Here, Pay Here Cars
We now know what our Debt-Free Car cost us to own and operate for just over a year. But how would a car buyer have fared if he had gone to a "Buy Here, Pay Here" dealership, rather than buying a car outright? A critic of our project gave us a good basis for comparison.
A few months after our project launched, Peter Salinas, managing editor of Dealer Business Journal, a publication for "Buy Here, Pay Here" dealers, took issue with several points in our premise and said our project was "Fundamentally Flawed."
The biggest issue, he said, was that people with poor credit do not have $3,500 to buy a car outright, nor would it be feasible for them to save up that amount without it negatively impacting their lives.
He proposed that a 10-year-old Ford Taurus or Buick Century from a "Buy Here, Pay Here" dealer would be a more reasonable selection for such a buyer. Salinas said that those vehicles run from $4,500-$5,500 at auction, which is where car dealers often get their cars. He chose a midpoint value, $5,000, and proceeded to illustrate how the numbers would shake out at a "Buy Here, Pay Here" dealership:
- $5,000 for the vehicle the dealer bought at auction
- $600 to recondition it
- $2,000 for dealer overhead costs (i.e., building and lot expenses, insurance, personnel and employee benefits)
We are at $7,600 so far. Next is the dealer mark-up. This is how car dealers stay in business. However, Salinas didn't provide that information. We turned to Edmunds.com's senior pricing analyst, Richard Arca, to help fill in the figures. He said that for a 10-year-old vehicle, the average mark-up is about 40 percent from auction to retail purchase price. That would be $2,000 for the car in this example. The $5,000 Taurus will now be listed for about $9,600.
Next come the tax and title fees. We used a 2003 Ford Taurus (a 10-year-old car) as the basis for calculating the fees on our finance calculator. The sales tax and registration would be about $1,056 for this car in Santa Monica, where the Edmunds offices are located. The total so far is $10,656 but that still doesn't include financing costs.
We used the following stats to populate our finance calculator: A $792 down payment (the average down payment at a "Buy Here, Pay Here" dealership in 2012), a 17.7 percent interest rate (the average interest rate for a deep subprime consumer, according to Experian Automotive) and a 36-month loan (the length of the average "Buy Here, Pay Here" loan). This adds up to $2,920 worth of finance charges on the Taurus.
The grand total of the "Buy Here, Pay Here" loan would be $12,784, with a monthly payment of $355 per month. So it would have taken only an $800 down payment to get the immediate gratification of getting a car at a "Buy Here, Pay Here" lot. But in the long run, the buyer would have paid $8,984 more than we paid for our Lexus ES 300.
Further, a "Buy Here, Pay Here" purchaser can't sell the car without going deeper in debt. If he falls behind in payments, he faces the possibility of repossession. And there's still the cost of maintenance and repairs to pay for, in addition to the $355 monthly payment. Is a 10-year-old Taurus more reliable than a 17-year-old Lexus? Maybe. But it still will cost some money to keep up.
Our Debt-Free car buyer and his family, on the other hand, have the freedom to sell the car whenever they want. They are not in debt, and they don't have to worry about making car payments every month. They only make "payments" to themselves for maintenance. And if they lapse on one of those payments, their car doesn't get repossessed. At worst, they just have to put off repairs for awhile.
Success or Failure?
Would our imaginary owners have been happy after a year with the Debt-Free Car? We have mixed feelings about this.
On the plus side, we ended with a surplus in our maintenance budget. The car got good gas mileage. It was comfortable and had a reasonable number of amenities. And when you look at the total costs compared to a "Buy Here, Pay Here" car, the Lexus shines even brighter: Even counting our costs of maintenance and repairs, the Debt-Free Car buyer would have been $5,698 ahead.
But the Lexus did leave us stranded twice. It required a number of trips to the repair shop. We used resources that everyone has access to (word-of-mouth references, online forums, Yelp, YouTube, Google Search), but it took some time to sift through all that and find a good shop and decide what parts to buy. We took care of some fixes ourselves and others we left to the experts.
Would our Debt-Free Car buyer and family have been discouraged by that kind of ownership experience? Would they have had the time, patience or willingness to do some DIY repairs? Some of our readers argued that people buying in this price range most often perform most of the repairs themselves, but we know that a lot of people just want reliable, hassle-free cars. Would our Debt-Free Car have been too much trouble for them?
If someone were to ask us if they should follow in the footsteps of the Debt-Free Car, we would tell them yes, but with a disclaimer: In this price range, you will drive a car that will have repair issues. If you have a trusted mechanic, or if you are capable of doing the repairs on your own, then by all means, give it a shot.
But if you get overwhelmed dealing with mechanics and repair shops, or will worry excessively about potential breakdowns, you may want to find a newer (and more expensive) car. But bear in mind that there's no guarantee that a newer car won't break down either.
Breaking the Cycle
Financial guru Dave Ramsey has a great quote: "If you will live like no one else, then later you get to LIVE like no one else!"
It means that if you make financial sacrifices now, you will reap the rewards later. It isn't easy to save money, but at some point, people with troubled credit must break free of the cycle of debt to have any hope of improving their financial futures.
If you're ready to join them, we would encourage you to try cutting back on unnecessary expenses to save up for a car. And once you have enough money, keep up that pattern of savings to give yourself a maintenance budget. Self-discipline, planning and knowledge: the real secrets to owning a debt-free car.
The Debt-Free Car Project Chapter 1: Finding and Buying an Affordable Used Car
The Debt-Free Car Project Chapter 2: Preventive Car Maintenance
The Debt-Free Car Project Chapter 3: Curbstoners and Internet Scams
The Debt-Free Car Project Chapter 4: Dealing With Repairs
The Debt-Free Car Project Chapter 5: Driving Cross-Country in a 1996 Lexus ES 300
The Debt-Free Car Project Chapter 6: Midyear Check-In
The Debt-Free Car Project Chapter 7: Sailing Past 150,000 Miles
The Debt-Free Car Project Chapter 8: Wrap-Up
1996 Lexus ES 300 Long-Term Road Test