How to Buy a Car in Medical School

It finally happened.  After almost 3 years of marriage, Mrs. DA and I purchased a second car.  I feel spoiled not having to plan out our days according to the distance I can travel on my bike and Mrs. DA’s clinical rotation schedule.  I marvel at the display of wealth contained in our little garage, and I have to remind myself the purchase was necessary for my upcoming clinical years, which will require me to travel to hospitals around town at odd hours of the morning and night.  Opening the garage is a reminder that we are extremely well off compared to most families in the world.  We now own two 15 year old Toyota Camry’s, both of which were previously totaled, repaired, then sold under a salvaged title.

Welcome to Mr. DebtAnatomy’s favorite soap box.  Cars.  People lose their MINDS over cars!!!  These useful tools often become one of the biggest barriers to living debt free.  Remember that rent and car payments are usually the biggest costs in a budget.  I now present to you Mr. DA’s list of car-madness pitfalls that students should avoid:

1. Don’t buy a new car.  The second you drive your shiny new debt-mobile off the lot it depreciates 11%.  Is the new car smell really worth thousands of dollars?  NO.  Over the next 5 years, a new car is estimated to depreciate 15-25% of it’s current value per year.  This means that you can buy a lightly used car for far less the cost!

2. Take pride in your junker car.  In a society that values a person by the fanciness of their car, you have the opportunity to show how hip you are and stick it to the man.  Instead of flaunting your wealth (or in most cases your pretend-wealth), flaunt your sensibility.

3. Avoid monthly car payments.  If you have to make payments, then you can’t afford it.  Buy a cheaper car, or save up more money.  Somehow the car industry has sold the idea that having a car payment is the American Dream.  People nowadays get excited about paying off their car because it means they can rush down to the nearest dealership and sign up for a new and bigger pile of debt!  (But it’s ok, because the newer debt-mobile has a built in coffee maker, touch screen controls, shinier paint, seats made of the finest leather from the soft underbelly of a water buffalo, and 200 more horsepower that you will definitely need while complying with legal speed limits).  This is madness!  Cars instantly and continuously depreciate in value.  Yet rational human beings willingly pay interest on something that is GUARANTEED to be worth less every single day.

Use this simple rule: if you can’t afford it, don’t buy it.  Instead of taking out a car mortgage, use foresight and save up before you buy the car.  One common argument against my rule employs opportunity cost.  The argument is that car payments allow you to invest the money you would’ve spent by paying for the car in cash, and that the investments will earn you a higher percentage than the mortgage rate.  This argument is also used against people who want to pay cash for a house.  While technically true, my response is this: The opportunity cost argument is only valid if you actually invest the money you would’ve spent on the car.  However, I am willing to bet that in most cases the extra money is not invested, but rather it mysteriously vanishes out of your wallet due to creeping lifestyle costs.  Opportunity cost only works if the alternate scenarios are things that you actually plan on doing.

4. Don’t Lease a Car.  The only logical reason to lease a car is if your profession requires you to drive a new car at all times.  This certainly does not apply to a medical student in debt.  DON’T DO IT.  A common argument for leasing a car is that it saves you from costly repairs.  Here’s my reply:

Imagine you lease a car, and the contract is $200/month for 24 months.  Over those 2 years you will spend $4,800.  Now let’s imagine that instead of leasing a car, you bought a used sensible car for $4,800.  That car only has to last 2 years and 1 day for it to be better than leasing a car.  Even if the engine falls out of the frame on the very last day, it still comes up equal.  More realistically, you’ll put in a couple hundred dollars of work over the years, and the car will last much longer than the opposing 2 year lease contract, saving you more money per extra year compared to the person who leased their car.

5. Find a mechanic you trust.  This is a lesson I have learned from my father in law.  He has the talent of building relationships with owners of business establishments.  Both of our cars were purchased from a dealer that he knew, and inspected by a mechanic he trusted.  The used car market can be scary, and making friends with professionals can help you avoid lemons.  When buying a used car, make sure to have it inspected by someone who knows what they’re looking for.

6. Learn about the used car market.  When students realize they will need to purchase a car, they shouldn’t rush out and purchase the first car they see.  Instead, they should start watching the market.  Comb through the classifieds and pay attention to the asking price in relation to the year, model, and mileage.  You need to be able to pick out a good deal, as well as avoid something that is too good to be true (often a lemon).  A nice guide for the worth of used cars is the kelly blue book.

7. Realize that a car is not an investment.  The only thing you should be worrying about is the amount of miles you expect to get out of your car, compared to the cost.  Repeat after me: Miles per dollar.  Miles per dollar.  Miles per dollar.

Maybe it’ll help if we make it into an equation: Value of car = (expected miles it will last/cost).  Notice that according to this equation, the more expensive your car is, the less real value it has.  Remember this when you’re tempted to upgrade to a fancier model that has gps services, professional sound system quality, gold-lined seat upholstery, extra horsepower, etc.  Remember, your car is a tool, and its purpose is to get you from point A to B, and since you are swimming in debt, you want this tool to be as cheap as possible.

10 comments on “How to Buy a Car in Medical School”

  1. Karl Reply

    Great post! We are nearly 10 years into marriage, four children and are still managing to operate as a one-car household. Granted, there is only one adult working out of the home, making it much simpler than your case.
    As far as new vs. Junker, at age 30 I was pretty sure I was going to live an entire without ever buying a new car, but when child #3 was on her way, it was clear we needed a reliable vehicle with greater capacity. Our experience with maintenance costs and a dearth of used mini vans with less than 100k miles brought us to the nearest Larry H Miller.

    • Mr. DebtAnatomy Reply

      Thanks for sharing! Sounds like you responsibly approached the decision to buy a new car. Having spoken with several people who have children, I agree that reliability and safety ratings become a bigger factor in buying new. Your story is the perfect example of how to approach buying cars, especially since you are still able to function as a 6 member household with just one car.

  2. Stupid MS2 Reply

    Great advice, I agree with you on pretty much everything, though I find myself in an interesting predicament that might cause me to deviate from the logical and financially sound thing to do.

    I’m a 27 year old MS-2 who is interested in pursuing an IM subspecialty so by the time I’m finished with my training, I’ll probably be about 35. I am driving a 99 Toyota that I took my driving test in when I was 16 that is pushing 220,000 miles. It is our family clunker and it will not last me until I’m 35.

    I am in love with 4Runners and want to pull the trigger on a brand new 2015 model with a 6 year warranty. Prior to coming to medical school, I drove a 97 4WD 4runner that I bought with 107,000 miles for below KBB at 9,500$ while I was in high school. I did all of the maintenance and repairs on it myself and it lasted me another 10 years before the transmission gave out at 215,000 miles. Every Toyota my family has ever owned (4), has lasted 15 years or more from new. Sure, cars depreciate but Toyotas, and particularly 4runners, hold their value exceptionally well, and are rated by KBB as top tier in this regard as well as in reliability. A 2-3 year old 4runner with 30-40k miles only depreciates about 4,000. They are also relatively difficult to find because people don’t want to get rid of them!

    To counter your point of buying a used car, while MOST cars depreciate significantly in their first few years, this does not hold true for specialty vehicles like the 4Runner. Some Subaru models also are like this and retain their value exceptionally well. An 8 or 9 year old 4WD 4runner with over 100k miles will still run you over 20,000$ in good to excellent condition, while this is about the time when many cars begin to have catastrophic problems (my roommates 2005 PT Cruiser has a ton of gasket problems).

    The second point – is that buying a clunker is not always worth it due to the cost of the maintenance, and the longevity expected of the vehicle. Even if I opted for a 20,000$ used 4runner instead of a new one for 37,000$, if it’s already 8 or 9 years old with 110K miles on it, can I expect it to reliably last me another 10 years? Probably, but I don’t have the time to do maintenance and repairs on it like I did when I was in high school and college. Plus I get no maintenance or warranty, and 20,000$ is still a significant amount of money to spend on a car. It becomes evident that some specialty cars have a price floor, and the floor can be so disproportionately high even compared to the mechanical value and reliability of that car that buying an older clunker is a bad idea depending on how long you need it to last. While this is a rare case and only applies to certain cars, buyers who are considering these types of vehicles should be aware.

    The next thing you would logically ask is… why do I even NEED a 4runner so badly? Admittedly, the answer has to do with lifestyle. First of all, I’m from CA and I go to school in AZ. I drive home quite a bit due to family matters, and often transport large things (surfboards, bicycles, etc.) that currently don’t fit in my sedan. I also spend a lot of time outdoors, with this being my default way to relax and unwind when I have a free day or weekend. This aspect of my life is really important to me, and in the past few months, my car hasn’t been able to make it to several campgrounds I have tried to get to so we had to turn back and find a different place to camp, or ditch my car and have another person with a 4×4 pick us up. My lifestyle does not call for exorbitant luxury (arguably), regular expensive meals, trendy clothing or other big purchases. As a result, the 4runner may be a bigger part of of my lifestyle than cars are for the average person because it enables me to do what I would chose to do in my spare time.

    I realize the argument that I’m using to convince myself to do something stupid is rooted in a deep, materialistic want. I keep telling myself to save up by living below my budget and maybe in my 4th year I can pull the trigger. I have this impression than once in residency and fellowship, its even more difficult to buy a car on a resident/fellow salary because loans come out of deferment and it is highly advised to begin paying on them to keep the interest out of control, as payments are scaled by income (Pay as You Earn and Income Based Repayment).

    If I pulled the trigger with “extra” student loan money that I have been saving up for over the past 4 years, the interest would be kept under control as it would be rolled into my payments adjusted by PAYE/IBR. Sure in the end I might pay a significantly higher amount for the car, but the 4runner is no Mercedes. It’s not THAT expensive of a car, though it is certainly not cheap. A few extra thousand to finance the car and have a reliable car that I can do everything I need it to during the most difficult times of my training might just be worth it.

    So help steer me off this financially insensible track and explain to me: how do residents and fellows afford to buy a good car when they need one?

    What is your plan with your clunkers when they begin to have serious problems like gasket problems and transmission problems, or cooling problems? Will you just continue to sink money into them?

    Thank you!

    • Mr. DebtAnatomy Reply

      Loved reading this comment! I’m going to give it some thought and hopefully reply tomorrow. Coincidentally I’m actually on my way out the door to go camping. I’m cramming my 2 mountain bikes into the back of my toyota camry by taking off the seats and wheels 🙂 Gotta relax in 3rd year when you have the time!

    • Mr. DebtAnatomy Reply

      I decided to turn my reply into a full blown post. It’s called Needs vs Wants. Check it out!

  3. Jonathan Reply

    I found your blog by searching for the HPSP through Google. Nice post, I always buy used (current one is from ’98), because I am aware of the depreciation and leasing is basically renting. In the end, leasing means you really don’t own a vehicle. Currently, I prefer to do my own maintenance, but I don’t know how I’ll go about taking care of the vehicle during medical school. Most likely I will have to have someone else do it.

    I can’t see myself buying a car newer than five years, unless I’m a millionaire or something. That is because I enjoy having “expensive cars” at a low price. Say, a BMW that was $100,000 for a fraction of that! 😀

    Also, last thing, I didn’t quite understand your “Value = miles/cost” section. Could you clarify on what you meant there? I inputted 250,000/$2000 = 125. So, my car value is 125? What?

    • Mr. DebtAnatomy Reply

      Welcome to the blog Jonathan! It sounds like you’ve got your head on straight when it comes to cars.

      The equation of value = miles/cost gives you a number with the units “miles per dollar”. In your case, if you drove your car 250,000 miles, then you got 125 miles per $1. More realistically, you probably bought your car with miles already on it, so you would have to subtract those out to get the true value. I should have clarified that in the post. Does that make sense?

      • Jonathan Reply

        Oh, I see what you’re saying now. That makes perfect sense. Basically dividing the miles by purchase price to determine the miles per dollar, after subtracting the miles that the car already had. Thanks for elaborating!

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