A car for the holidays?

Posted: Dec 19, 2006 9:46 AM

Every year at this time, I see the ads on T.V. and in magazines suggesting that you buy your loved one an automobile for their holiday gift. I have spent a lot of time thinking about those adds, and in all my life, I do not believe I have ever seen someone buy a car for somebody else for the holidays. Someone must be buying them as gifts, or they wouldn't be constantly running the adds each year. Now realize I am speaking as a "non car gene person" (See What's up with the Cars, Oct. 7) when I say "are you kidding me''? Have people completely lost their minds? A car as a gift for Christmas or Hanukkah? It was bad enough when a few years past people were giving the gift of having a a star named after you. One that no one could see or find in a planetarium. But that was a quick loss and you were over it. And best of all, it didn't get recycled!

Back to the cars. Generally speaking cars depreciate rather quickly. I have been told that when you leave the dealer's lot in your new, shinny, midnight blue or aqua green chariot that you just lost $5000. I know for a fact that 1.5 years ago I was hit and had the car totaled eight days after my wife bought it, and I still have not recovered the down payment. Fortunately, it was only $5000 which, come to think of, might be the same money that disappeared when I left the private property of the car dealer and entered the public highway. New cars aren't a great deal from my perspective, but they really do not cost more than used cars because of the maintenance factor. No, I do not maintain my own car, but I do the necessary things to keep it going: oil changes, rotating of the tires and all the warranty stuff.

We only buy new cars, one sensible one for me and the opposite for the lady with the car gene, my wife. We generally keep the car(s) until major work is needed or new tires are required, whichever comes first and then trade them in for another new car. Mine is now two years old with 48,000 miles and still neither major work nor new tires are required so I will continue with the same car. I know there are cars that have become classics or will become classics and make sense to hold on but I haven't a clue which they are and save my investments for real estate. I wouldn't mind finding a deal on a 55 Chevy 2 door sedan convertible but I have been told that the last deal was probably a decade ago. (I was told that several times at Hot August NIghts in Reno, Nevada) There is still the hope that they may go out of vogue--but I digress.

Paying cash for a car is not a smart financial decision as you will watch your dollars depreciate in front of your eyes. The longest payment one could get would make the most economic sense for a depreciating asset. You would be using inflated dollars to finance the shrinking asset and this would take some of the sting out of it. But it is that very long term payment that stops borrowers from using the most beneficial financing, home financing, in their most beneficial way: a shorter amortization. This creates two dilemmas which I will debate for you at this time.

The first dilemma is putting your car payment into your home mortgage and the second is paying off your mortgage quickly. I have had numerous emails from people who can't understand why I would ever suggest that strategy. If you have a 30 year fixed and a car payment and they total "y" per month and you can combine them into a 15 or 20 year fixed and the total cost is "y" minus $200 a month it is a major win. Let us see why. The first way you pay off your car in 5 years and your total monthly payments are reduced. You now have a 30 year fixed with 25 years to go. If you do it my way, at the end of 5 years ,you will have already amortized your 15 year loan more than the car payment and you have just 10 years to go. You have saved 15 years of mortgage payments. If you can't afford the payment because you need a new car, which you would also need in the first example, you could refinance again to a 15 year fixed including the price of the new car, and at the end you would still be 10 years better off. Realize that over the years, your income should rise enough to make the 15 year payment a less significant portion in relation to your overall income.

What about the fact that I stated paying cash for a car is not smart financially. You are getting a write-off from your mortgage interest, albeit not a large one, and the reduction of the car payment helped you make money by reducing your mortgage quicker, which I consider a major offset..

Then there is the question of why you would even want to pay off your home mortgage quickly. If money isn't an object then a 30, 40 or 50 year mortgage gives the best tax breaks and lowest long term financing available. I haven't a problem with that. For most of the borrowers I deal with paying off their mortgage quickly becomes the best retirement plan they have. (See "Retiring the Retirement Plans" August 15) and that is important.

There isn't a right answer because everyone has a different situation. All a person can do is read up on the subject and discuss your situation with someone you can respect.

Which gets us back full circle to the holiday gift selection. I heartily suggest buying your beloved an island, or peninsula or maybe even a ranch. Make it be in California because I am a believer in Hank Paulson, the Secretary of the Treasury, who is cajoling the Chinese to let their currency float and adjust in relation to the dollar. For every percent it adjusts to close the gap with the dollar, it also gives them the same discount on our real estate. The best place for the Chinese to go is California, the Europeans have the east coast, and when they do come, then watch the prices of California real estate go through the roof.

You could of course just make a donation to Habitat for Humanity, our favorite charity, and help get some else a house. Just a thought.