It’s one of the great things about America. Everyone wants to save you money!
Just look in your mailbox. If it is like mine, savings are unending. In the last week I’ve been offered money to switch to AT&T, to move bank accounts to Chase, and to get more Internet for less--- not to mention credit cards with fabulous travel benefits.
The most interesting offer came from a car dealer, the same dealership where I bought our 2013 Honda Fit, sport model, forty months ago. The offer, it turns out, is a great example of mis-direction. That’s the technique in magic where your attention is directed away from what’s important, so the trick can be performed.
Let me show you the trick.
The dealership offer was simple. “Due to an increase in regional demand for pre-owned vehicles, we’re willing to pay you a premium price for your 2013 Honda Fit Hatchback Sport,” the letter said.
It further offered that I could upgrade to “a newly redesigned and enhanced 2016 Honda Fit Hatchback EX with $0 down--- and pay $13 less than you’re paying now.” The letter also noted that higher fuel economy would save another $1,080 over the 60-month period of the new car loan. And the new car would have a 3-year/36,000 mile new vehicle warranty while the warranty on our 2013 Fit had expired.
Sounds pretty good, right? The Honda Fit is a very popular car. It has great visibility, fantastic steering, and amazing space flexibility. It’s so popular that Honda brought out a new model, the HRV, to have a vehicle between the Fit and the CRV in size. The 2016 Fit upgrades the horsepower, which many owners felt was needed.
My wife chose the Fit over a new Prius and a Mini Cooper. And she’s no minimalist: her past autos include a Porsche and a Corvette. Her favorite car, however, is something few people have. She calls it a “No-Payment,” a designation far more important than the nameplate. We had upgraded the Fit to a No-Payment by paying the loan off early.
So, why don’t we have a new 2016 Honda Fit EX?
Simple. While the offer promotes lower monthly payments and fuel cost savings, it says nothing anywhere about depreciation. The monthly payment focus is the mis-direction. It’s a phony economy. Depreciation is what’s important.
The original cost of the car was $19,554, plus taxes, etc. If we still had a loan on the car, it would have been paid down to $6,774, according to the Bankrate.com loan calculator. The car dealer was offering “up to” $1,164 in equity after paying off our estimated loan. That brings the effective trade-in value to a sorrowful $7,938.
So we’d be “saving” $13 a month on a car payment by accepting $11,616 of depreciation. That’s 60 percent of the car’s original value in 40 months. And we’d be starting the cycle over again--- all in spite of the purported “increase in regional demand for pre-owned cars.”
That depreciation figures out to a stiff $290 a month, or about 24 cents a mile. The figure dwarfs the 4 cents a mile for insurance or the 6.5 cents a mile for gasoline. As the American Automobile Association regularly points out, depreciation is the largest single cost of driving a car. The bargain trade-in offer works to maximize past and future depreciation, including offering a 2016 vehicle at the beginning of the 2017 model year.
What’s the real difference between keeping the original car and replacing it with a newer model? It’s a lot more than saving $13 a month on the monthly payment. It’s the difference between starting a new depreciation cycle at about $290 a month and continuing the original depreciation cycle, now about $120 a month. (This figures assumes continued monthly depreciation at a 1.5 percent monthly rate on the remaining value of the 2013 Fit. Actual further depreciation would likely be less.)
In other words, the trade means you save $13 on the monthly payment by accepting a $170 a month in additional depreciation.
That’s the magic of marketing mis-direction.
How can you get the most car per dollar that you spend? Keep your car for a long time.