“Just one percent lets you drive it away,” Guardian Angels head Curtis Sliwa, pitching cars on television.
We’ve discussed this issue a bit previously, but we must discuss it again. That’s because of the critical importance of the subject to one’s financial—and possibly mental—health.
The issue is credit—how one views it and uses it in the course of a lifetime. It’s important to use it wisely when you have money. And it is critical to use it wisely when you don’t. It’s important wherever you are in life. If you don’t learn how to use credit carefully, you’ll likely never have any significant assets. You’ll be too busy paying off card debt.
Later in this book I’ll provide some card tips that, if followed, will save thousands, or perhaps, tens of thousands of dollars of needless costs over a lifetime. I speak of strategies that, consistently applied, will make a big difference. They will also, very possibly, save one from a nervous breakdown and even save a marriage.
First, consider the car sales pitch by Curtis Sliwa outlined at the top of this chapter.
Just One Percent
Do you know what he means by “just one percent?”
It doesn’t mean the car dealer is giving you a special deal and cutting the price of the car by 99 percent. It means, as with more and more big-ticket purchases of things like cars, houses and big screen TVs, that sellers today are often so motivated to move the property that they sell items with less and less of a down payment.
But less and less of a down payment means more and more of a purchase must be financed with credit. It means a much higher price. I’ve known people paying for second cars when they had yet to pay off their first ones!
That takes away more money from you. It is money that could have gone toward investments and making you financially independent. This easy credit, string out the loan over a longer and longer period, is a different way of paying for things than was used in prior generations.
Indeed, when our grandparents—many of whom had the sensibilities of MoneySense investors because they went through hard times that few of us have—bought a car or a house, they put down a large chunk of the purchase price. Possibly it was half. Then they financed the rest, which in this example was 50 percent. And don’t fall off your chair when I tell you this: Sometimes they saved up and paid the entire price of a big item!
But, of course, Curtis Sliwa, who is paid by the car dealer because the dealer believes his celebrity pitch will increase sales, wants you to have a better deal than what your grandparents did.
Sure.
Financing Follies
Sliwa wants you to finance the car with 99 percent borrowed money. In the course of a three-or-four-year deal, the financing—the interest you pay on the borrowed money—might end up costing more than the car itself. The financing, the loan you use to buy the car, might go on longer than you have the car. (That is possible since Curtis is trying to move used cars).
Credit Lesson: Go easy on financing. Maybe even avoid it if possible. But if you must, buy cars with as little borrowed money as possible. Try to pay off the loan as soon as you can. When you look back on a car you had for five or six years, you shouldn’t conclude that the biggest expense of the car was the loan.
How different is this than the practices of our grandparents?
I can remember back in the 1950s and 1960s when people would buy used cars with one hundred percent cash. That’s why they bought used cars.
Used, not Pre-Owned, Cars
You will notice, Dear Reader, that I dislike the euphemism “pre-owned.” This term is an Orwellian Newspeak invention of car dealers with sales quotas.
Unlike new cars, they could pay for used cars on the spot and never have to worry about financing. That’s something I did in the fall of 1978 when I moved to Indiana from New York and worked in small market radio. I bought my first car, a used VW Beetle. It was a wonderful car. I just barely had enough, but I paid for it with cash. I had no credit payments.
It was a great economical car that kept going in the worst weather. I was grateful. This was at a time when I made very little. I couldn’t afford monthly credit card payments. I had enough trouble just paying for rent, taxes and food. I was lucky I had neither card nor student loan payments. Consider the young people who followed me in the 1980s. Many were also making small salaries but they also had student loans to pay.
The point is financing and all credit should be used only when needed and carefully. If overused, the credit or the financing becomes incredibly expensive, driving up the item’s price.
An exception can be made in the case of financing an asset that can possibly gain, not lose, in value, such as a house or a business. These are items in which the price can be reduced because of tax breaks and which often later, under the best of circumstances, can sometimes be sold for a profit. Nevertheless, whether buying a house in an up-and-coming neighborhood or a business that one expects will provide a living, one should be careful to avoid excessive debt. What’s excessive? Think about your yearly income and what is your potential income over the next few years.
But in the case of a car, pre-owned (sic) or otherwise, unless one has a very rare car, the value of an auto almost always will immediately start to decline when one takes possession. And the use of credit to buy fun things, things that would be difficult to sell such as TVs and other consumer items, should be approached the way one would walk through a dangerous neighborhood at night—very carefully, with the understanding that so many bad things can happen to you and one should get through it as fast as possible. The bad neighborhood of personal finance for some people is the credit card.
The Worst Way to Borrow
Credit cards are probably the most expensive way to access credit outside of loan sharks and Mafia Dons.
Why?
The credit card is an “unsecured” debt. People who don’t understand the economics of the product don’t understand that this is why card interest rates are so high. Unlike a house or a car, where when the loan fails the bank can take back the house or the car, there is nothing backing the card other than a promise to pay. Millions have broken promises to card companies both in bad and good times.
Patience
This kind of loan, the credit card loan, is often quite risky. Card companies often write off billions of dollars in bad loans each year although I’m not running any benefit dinners for card companies. So the quality of these dicey loans is priced into the card. Therefore, cards have very high interest rates.
It is a kind of loan that some people actually use to pay that one percent for a car or for so many “must have now” purchases. Yet many of these purchases could be delayed until they could be paid for without debt.
These credit card junkies carry credit balances from month to month. They begin to run the race of trying to pay for all manner of things at the same time with a 20 percent interest rate slapped on top of their purchases.
You Don’t Mind Carrying This, Do You?
The difference between the people who engage in this self-destructive practice and the MoneySense investor who won’t is this: Imagine two people running a race. One has nothing strapped on his back. The other has to run the run the race with a 30-pound slab on his back.
Who wins?
All things being equal, my money is on the guy who doesn’t have to carry a big load.
Repeat this promise and mean it: “I will carry as little or no credit card debt from month-to-month, even if it means putting off some luxury purchases for a few months or even a year or so.”
Pledge to become a transactor, not a revolver. Revolvers are people who think Curtis Sliwa is doing them a favor when he raves about only one percent and you can drive it away.
He’s not. What’s the opposite of a revolver? It is someone who is very smart. It is someone called a transactor. The latter is a curse word with credit card companies.
More in our next chapter.
