May 27, 2014

Beater Shopping - Borrowing Money to Buy a Car With Better MPG Can Make Sense

If you don't have a lot of money and you're shopping for a beater car you likely find that the cheapest cars usually have pretty poor fuel economy.   I believe people in the car market realize the value of better MPG and are willing to pay a bit of a premium for it and see the problem with a low MPG car and discount its value.   So the end result is that the  cheaper cars often have poor economy.     If you don't have a lot of money this puts you in a poor spot since it seems all you can afford is a car that will cost you more to operate.    I think in this situation it can make sense to borrow some money simply to buy a car with better fuel economy.

Lets look at some examples.   I looked on Craigslist and found a couple cars around $1000.   One was a 1994 Pontiac Grandprix that gets 20 MPG (17/26) and the other is a '94 Ford Explorer 4x4 which gets 17 MPG (15/20).    These are cheap cars and if you don't have much money maybe its all you can get.   But your gasoline bills are going to be pretty high.   If you drive 10,000 miles in a year at $3.50 per gallon then that Grand Prix will run you about $1,750 to fill the tank for just one year.   If you found a car that got 25MPG then it would be $1,400 and a 30MPG car would only cost $1,167. 

Paying a bit more can net you a car with decent mileage.  I found a 1996 Honda for $2000.   That car would get 25 MPG (22/29) and so the gas would run you about $1,400 a year.   So spending $1000 more on the car would save you about $350 a year in gas.  I also found a '99 Chevy Prizm for about $2000 which would get 29 MPG (27/34).   That car would run about $1,207 a year to fuel or about $543 less.

Note that I'm ignoring things like reliability here which of course you'd want to take into account as well.

Can you borrow $1000 somewhere?    Lets say the best you could do is a personal loan at your credit union at 12%.   Thats really high interest so hopefully you've got better options.    If you borrowed an extra $1000 to afford that Prizm with better MPG then your payments over 36 months would be $33 per month.   You'd save more in gas than your payments on the loan would be.     Or if you went with that Honda then your payments and gas savings would be about a wash.

Here lets compare the total cost of my 4 example cars if you look at what you'd pay over 5 years :

cost MPG annual gas 5 year total
Grand Prix $1,000 20 $1,750 $9,750
Explorer $1,000 17 $2,059 $11,294
Honda $2,000 25 $1,400 $9,188
Prizm $2,000 29 $1,207 $8,222

The last column with the 5 year total includes 5 years worth of gasoline and the cost to buy the car.  For the Honda and Prizm I'm counting $1000 out of pocket and then 36 months forth of $33 payments on that 12% loan.   In the end the more expensive cars with better MPG are going to cost you less even if you finance their purchase at 12%.

Now don't get me wrong, I'm not saying you should borrow $25,000 to get a car with 40MPG.   The point here is that if you're looking for a beater car in the low end and have very limited funds than rather settle for the cheapest car you can find and pay out the nose at gas station, it can make sense to borrow some money to finance a car at the 2nd to bottom rung of the beater pile.


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