Tag Archives: Chrysler

Don’t Even Think About Buying a New Vehicle Just Yet

In January we talked about GM and Chrysler, and the possibility of bankruptcy. Right now, it’s one down and one to go, as I believe a GM bankruptcy is probably just weeks away. GM is working on a June 1st deadline to eliminate $27 billion of bondholder debt and come up with a new labour agreement or they’ll be pushed into bankruptcy.

For six months now, there’s been a cry that we can’t let them go bankrupt, because it would lose a gazillion jobs and end car manufacturing. I said then, and it’s obviously true, that the fear tactics were and are nonsense. Major changes were going to happen – with our without a bankruptcy.

Even GM has started to terminate dealers, shutting down production for months at a time, and laying off people. That has nothing to do with the possibility of bankruptcy. It has everything to do with a business model that’s not working! When the foundation of your house is collapsing is not the time to put in new windows, or paint the deck.

GM wants to close one out of every six dealers in the U.S., and get from 6,000 down to 3,600 by the end of next year. In Canada, the plan is to go from 700 down to 300. They call it a dealer rationalization plan, and the termination letters are expected to go out the end of this month.
If you do have the cash to buy a new vehicle, it is critical that you hold off on your purchase for another month or so. If not, you may be losing out on a huge amount of money.

Right now, the U.S. House of Representatives has passed a junker rebate program, and it is now in the Senate for consideration. The program is designed to get old junkers off the road and supply a rebate of up to $4,500 towards a new vehicle purchase that is more fuel efficient.

If the trend of Canada matching U.S. programs holds true, buying right now would cost you a 20 to 30% first year depreciation, and you’d miss out on that huge rebate of up to $4,500.
The U.S. government claims this is to promote fuel efficiency. Don’t believe that – it’s purely to boost car sales. For anyone trading a pickup, they only need to buy something that gets two more miles to the gallon to qualify for the maximum $4,500 rebate. Even Hummers just need to be traded for something that gets five miles per gallon more. That’s not fuel efficiency – that’s a sales promotion.

If you’re in the market for a new vehicle:
• Hold off until this program is in place or there is a clear decision that Canada won’t match it.
• Pay cash for your new vehicle, or better yet, buy a one or two year old that has some warranty left to avoid the new car depreciation
• If you’re going to ignore the “pay cash” advice, never finance a vehicle for more than four years.
• Never ever make the buying and financing decision on the same day. You’ll need to know the rebate that’s available and compare it to the low-rate finance offer. More times than not, you’ll be better off, financially, taking the cash rebate off the price and financing it with the credit union.

Hold off, too, if you’re considering a one or two year old model right now. When the new program becomes available, it not only drops the price of new vehicles, it also drops the value of one and two year old models about the same amount!

Is Your Car Making You Money Or Killing Your Financial Freedom?

Last week I had to pay a $900 bill to repair my 99 Chrysler with almost 300,000 km on it. Ouch is right – but once the shock wore off and I wrote the cheque, I was actually quite happy about it. Let me explain:

I paid $10,000 cash for my car and have driven it for seven years now. Since then, normal maintenance aside, I’ve spent $2,500 on repairs and the car’s worth $3,000 right now. So with a $10,000 price, plus the $2,500 repairs, minus today’s $3,000 value, the car has cost me $9,500, or $113 a month.

One of my friends is in the car business. She gets dead cost, or less, for her vehicles and has leased around the same $450 a month payment, forever. When I bought mine, she had a three-year lease, then a second one, and is now on a third vehicle on a four-year lease. Seven years at $450 a month means she’s spent $38,000 as of today. Her lease balance on this one is way higher than the value, and when the lease is over she has nothing but the need for a cab ride home.

Compared to her $38,000 versus my $9,500 spent, I’m $28,000 ahead of her. Yes, she drives a cooler car, no doubt, but I’d rather have the $28,000 in savings.

Another friend takes some of what I’ve been teaching and won’t lease. He bought a new car about six years ago and just traded it for another new one. The first one was $25,000, taxes aside, and he sold it for $8,000. The new one was $27,000, and it’s depreciated at least 20 percent when his butt hit the seat. In about the same time-frame, he spent $17,000 on the first one, and the 20 percent depreciation on the new one of $5,400. So his two cars have cost him over $22,000, or $305 a month for the last six years.

Neither one of these friends is very rich, and neither one of them thinks they waste money needlessly. But I’m $13,000 ahead of one and $28,000 ahead of the other. Yes, they have cooler wheels but I’d rather have the money.

And you know what: Nobody in the world really cares what you drive. If cars are a status symbol, instead of reliable basic transportation, it’s gonna cost you a lot of money. After all, there isn’t a car around that’s worth more tomorrow than it is today, so why keep throwing tens of thousands of dollars of payments and interest onto something that you’ll never ever recover?

Oh, and two more things: The GM and Chrysler merger appears to be off the rails this week. I don’t see how two on-the-edge companies in big financial trouble will make one strong company anyway, but get ready for massive layoffs – merger or not. It doesn’t take a finance degree to see that GM can’t keep losing over $1 billion a month.

The holdup right now is U.S. government approval and support. (Make that, more bailout money in addition to the $25 billion the auto industry received from Congress.) There’s also the issue of the $7 billion loans Cerberus has for buying Chrysler from Daimler last year. You see, the banks, including JP Morgan, Goldman Sachs, Citigroup and Morgan Stanley have been selling off large pieces of their loans to raise cash. But it’s next to impossible to get all these pieces back together as now there’s dozens and dozens of lenders who have a piece of this. It’ll make it likely Cerberus will have to pay off this total and start with new loans that are easier to trace – but now much harder to obtain….stay tuned!

And with GM only having enough cash for this quarter, you can bet there’ll be another wave of bailout money. Will it solve much of anything? No, sorry. A bailout changes nothing structurally. It only helps the companies to tread water a while longer. It’s kind of like making your minimum payments for a while. When the money runs out, nothing has really changed.