philosophyonwheels.com

Business: it’s what makes the world go round.  Corporations are extremely deft at constructing and controlling socioeconomic devices to influence/control people’s behavior for their financial benefit.  And one common strategy is to shroud the rules in obfuscation (i.g. fine print, read sub-prime mortgage).  Personally I’m an advocate for furthering the average citizen’s understanding of all things finance.  (And I think business should have this same interest because it will ultimately lead to fewer people defaulting or declaring bankruptcy.) Loans are one of such devices that I am talking about.  Though potentially a necessary evil loans get us into the cars of our dreams and you need to understand them.

Way back in the day it was the norm to pay for a car with cash up front.  Pure and simple.  Now the norm is to borrow against the future, your future, and your anticipated earnings.  Banks issue the loan as a service and charge a fee for fronting the full value of the car.  This fee is measured as an interest rate expressed as a percentage.  Percentages used to be simple to understand and is a basic curriculum topic in junior high.  But percentages become somewhat of an intangible in the world of lending due to words like “compounding” and “amortization.”  But the car dealership from where you want to buy your next new car is very well versed in this financial parlance.  And due to the adversarial nature of price negotiations, a car salesman will take advantage of any disparity between their and your familiarity of how lending works.  Don’t let this happen to you.

For your consideration: loan scenario A and B.

Loan amount: $ 20,000

Term: 48 months

Interest Rate: 5 %

Monthly Payment: $ 460.58

Total of Payments: $ 22,107.84

Loan amount: $ 20,000

Term: 48 months

Interest Rate: 10 %

Monthly Payment: $ 507.25

Total of Payments: $ 24,348.00

Deception

When you are done paying off loan A (assuming minimum payments, always) the car will be paid off and the bank will have received $2,107.84 for their services.  (For those sticklers our there, I’ll be ignoring inflation etc.)  This is more than 10% of the loan principle (amount of money fronted).  So on a loan with a 5% rate, the bank gets more than 10%…deception!  I believe loan scenario A to be almost unrealistically good and loan scenario B is a bit closer to reality.  After loan B is paid off the bank has received $4,348.00, nearly 22% of the loan principle.  This highlights the geometric trickery of finance.  The interest rate from scenario A to B doubled, but the bank more than doubled their money.  (Use this as extra motivation to negotiate a better interest rate when purchasing your next car.)

Extra Payment

You are not restricted to paying the minimum amount on a monthly loan payment.  In fact it is a fantastic idea to pay 150% or even twice the payment amount.  Because every cent above and beyond the monthly payment goes straight to paring down the principle.  (And spares you from paying interest on that portion of the principle.)  Unfortunately it’s typical for the value of a car to depreciate faster than the principle is paid off.  An extra payment here and there will help you keep pace (or get ahead) of depreciation.  This is very important if you plan to sell the car before the full term of the loan.  Otherwise you will need cash to cover the gap between the principle and your car’s value.  (Or you can roll that debt into your next loan, but that just perpetuates the problem.)

Down Payment

My advice: when buying a car always put at least 15% down (or more if possible).  You won’t pay any interest on that money because you’re not borrowing it.  The monthly payment will be lower and put less of a strain on your budget.  

Conclusion

If you want to make a lot of money go to college and study accounting.

With a four year loan at 8.17%, a Porsche 911 GT2 only costs $4,751.60 … per month.  Sign me up.

I took my driving exam on July 20.  My birthday is June 1st.  I was sixteen for nearly two months without my license.  While my friends had made Driver’s Education their numero uno priority during junior year of high school, I had to defer until summer vacation because I was busy trying to distinguish myself academically by taking the extra college prep courses.  Did it pay off?  TBD.  Though I did finish college…eventually.  

But during those six weeks before my driving exam I was dialed in on acing that test and it was nearly all I could think about.  I think a good visual would be major leaguer Gary Sheffield up to bat, with his bat oscillating viciously behind him ready to unwind an immense force guided by those characteristic beady eyes that led one to believe that he was always on some psycho-stimulant.  My instrument would be a red 1999 Dodge Stratus (stick shift).  I am still proud to say that I aced both the practice and actual exam.  I was the only one in my class to accomplish this.

But things really hit home the day after I picked up my license.  I’m sure my parents were dreading it but I got in the car and drove down the driveway…by myself.  After a few miles I glanced at the empty passenger seat and truly went berserk.  It was a chaotic episode of expletives, gasps, and forehead slaps.  The next step in the evolution was to blast some Lenny Kravitz (“Fly Away”), roll down all the windows, and don my Foakleys.  I had arrived.  I was in complete control of over 3,000 lbs of metal on four wheels and it would go in any direction that I commanded.  

Unfortunately somewhere along the road of life driving loses it’s thrill to the drudgery of routine and responsibility.  But it doesn’t have to stay that way!  Driving can still be fun.  It just takes some planning and a positive attitude for a more serene and mature experience.  We live in a society nearly crazed on competition and it would suggest that the only way to have fun driving again is to go racing.  But what I’m talking about is a genuine and refined experience that can be cherished as a cultural pastime.  Something that a couple or a father and a son can enjoy together.  I then officially beckon for the revival of the leisure drive or Sunday driving.  And to help America get this back, I am highlighting a road that is under-appreciated and prime for such enjoyment.

I was recently in Rhode Island.  It’s the tiniest state in the U.S. and 30 miles south of the capital Providence is an island with a town called Newport.  This was the summer destination for the upper crust during the Gilded Age.  The fabulously wealthy needed summer homes so mansions were built on incredibly grand scales along the shore.  The main roadway for the southern coast of Newport is Ocean Drive.  

Ocean Drive is a fantastic road.  A speed limit of 25 mph prevents the scenery from flying by too quickly.  Though the gentle curves and hills still allow for gentle sensations of speed.  On a clear day you can start with a view of the two mile long Newport Bridge straddling Narragansett Bay which is usually teeming with sailboats of all sizes and configuration.  The rocky coastline is a favorite for recreational fisherman and their curious and canine best friends.  The waves crashing against the crags sends the unmistakable aroma of sea salt wafting over Ocean Drive.  (Constantly reminding me of my favorite flavor of potato chips.)

There are numerous beaches and some are highly exclusive.  The style of architecture for the residential properties run the gambit from old and awesome looking to modern and awesome looking.  On one bend in the road there is a parking area for people to stop and picnic or enjoy the scene.  Thanks to the consistent winds this spot is a favorite to fly kites.  And it is a unique thing to drive under dozens of kites.  I would rent a convertible just to accentuate this experience alone.

Finally at the end of Ocean Drive you make a right turn onto Bellevue Avenue which comprises the Bellevue Avenue Historic District.  The avenue has many of the mansions built by various captains of industry during the Gilded age (a period of unparalleled wealth and prosperity).  I’m not even going to begin to describe the grand scale of these mansions, but the aristocracy in the air is so palpable you could swear you had somehow wound up across the Atlantic in Versailles.

So there’s a lot of neat things to see that are sure to send an ordinary teenager’s eyes rolling from apathy.  Well America, it’s time to wake up and face our antipathy towards reality.  There are a lot of sources of influence out there that would rather have us watching TV all Saturday becoming aware of corporate America’s brands and products.  I was in Newport on Saturday and I went for a drive just for the pleasure of it.  My car wasn’t brand new, I didn’t look like Robert Redford, and I wasn’t trying to impress anyone.  I have a very pleasing image left in my mind of the sun setting behind a boat and an island that I know nothing about.  My imagination is still concocting fantastic anecdotes about who may have lived in one of the castles I saw.  And the sky was dotted with kites as I drove with the slightest of smiles.  That was my Saturday and I felt like I had arrived…again.

I had a friend approach me with a dilemma.  Her current car is possibly on its last legs and she has decided she is in the market for a new one.  Immediately I was overly enthused and began spewing specifications for the BMW 535i xDrive.  After a few deep breaths I then came up with some realistic parameters for her search.  My friend is a beautiful and smart twenty-something, fresh out of a prestigious school and into her career field as a budding professional.  With a firm monthly allowance for a car payment, we would be sticking to cars under $20,000.  It will be her first new car!  That’s possibly more exciting than a first car which is typically clunker.  This kind of choice will reflect on a person’s image for years and there are just so many things to consider.  Let’s get started.

If my friend was of the most beige complexion of practical, she would have first concluded that a Toyota Corolla is the car for her.  Compact, cheap, and efficient: this car makes the most financial sense to a young woman starting her independent life.  But this car’s problem is that it screams compact, cheap, and efficient.  Sure there are Kia hatchbacks out there that cost less, but because there are so many Corolla’s on the road it makes them seem like a fleet of four-wheeled conformity enforcing sentinels.  A first job can be exciting, but who wants to commute to work for the 50th time and hop out of a Corolla…ready to finally fit into that round hole.  This might be the day!  (Conformity sentinel: “Why aren’t you wearing Gap and listening to NPR during your commute!?”)

Volkswagen Jetta.  This car is truly instant entry-level-chic.  Can anyone remember when the Jetta wasn’t in style?  That doesn’t happen by accident.  When you enter into the “das auto” culture with the purchase of a VW, the Germans offer their appreciation by the precision tuned upkeep of the brand.  All of those meticulously crafted TV commercials featuring hip young people continue to reinforce the cool factor for VW.  That’s why it is so easy to imagine you and three friends in a silver Jetta, windows rolled down, and driving on an open road to the beach or any other random destination.  The Jetta is fun and it’s very good at staying that way.

My friend may want to consider a Subaru Outback, but she will then quickly remember to which type these are nearly exclusively reserved.  Next car…

Mini Cooper: too small.  This is a Tic Tac with a white roof.  The Cooper would be right only if you were absolutely certain you would not move during the time you owned this car.  Using just some basic math I calculated that to move an average 1-bedroom apartment’s amount of stuff would require 12 million round trips in a Mini.  And with only two doors, at some point your friends will become annoyed trying to squeeze into the rear seats.  Don’t let a Mini Cooper ruin your friendships.

Honda Civic.  This car might be right for a young professional who is really into Techno and/or raves and has an overly exuberant sense of sarcasm.  I envision a future where children seizing from too much Pokemon will be whisked away in a Honda Civic badged as the Epilepsy Ambulance.  If my opinion for the Civic hasn’t been made clear yet, I will just say that it continues to dance on the line of acceptable techno-fad styling.  And Honda changes their cars’ styling so much, you can expect the Civic to be redesigned five minutes after you are done reading this paragraph and your Civic will have been rendered old and boring.  

Now for a surprise: the Ford Fusion.  I like the way this car was redesigned for this year.  It actually says to me that Ford management’s idea coalesced into a sensible product.  It looks sharp with a hint of aggression.  The engine is not puny but has a sensible balance of efficiency and power.  The interior craftsmanship is still slightly behind similarly priced foreign sedans, but it exudes a certain humility.  It’s as if Ford was saying “we know we’re not great at the interior quality, so we’re going to do simple and not get caught with something painfully contrived.”  Unfortunately the biggest thing going against this car is the negative stigma lingering over the Ford logo.  (That I think is symptomatic of a much bigger problem concerning America and patriotism: far too big a subject for the scope of this post.)  

So there’s some of my analysis.  Did she pick a car yet?…nope.  Stay tuned for an update.  I promise.