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The car purchase - How to think about costs and financing

Updated: Dec 18, 2022

For more information on making a great car buying decision, please see: Cutting through complexity: A confidence-building car buying approach

In our Cutting through complexity article, we suggest your objective should include buying a car to optimize the “cost per remaining mile” or "CPRM." The CPRM starts by assuming a standard useful life of 120k miles. That is, a standard useful life you expect regardless of the car you buy. You can adjust this based on your need. Then, consider car buying alternatives minimizing the expected remaining mile cost after considering your highest weighted preferences. Your alternatives should be presented in a manner to help you trade off your car type preferences while minimizing your CPRM-related costs. This approach does guide you toward older, lower-mileage cars. Certainly, you may have preferences for newer cars. The CPRM approach still helps if you prefer newer cars.

Think of CPRM as an approach to common-size the remaining useful miles of different car purchase alternatives. It is a simple metric that makes different cars comparable. To see the CPRM approach in action, my son used his savings and paid $5,000 in cash to buy a used 2006 Kia Optima. He bought it in 2016. As of this writing, the car is still serving him well! As shown in the "Car Buying Workflow" link / "Auto economics" tab, buying a car could save you $2,200 per year and provide the equivalent of $500,000 for retirement.

In our article: Our car-buying best practices, we offer car-buying best practices. These practices will provide confidence in your car-buying decision! This approach is meant as a discipline to quickly weed out the car seller “posers” and provide you with high-quality car purchase alternatives. Think of this as an approach to combine your “what’s important to me” criteria, along with a comparable CPRM cost measure. This is combined with your total cost budget constraint and presented to you in a way to makes the best decision. Weighing your car buying preferences (like model type, engine size, color, technology package, or others) is important to combine with your CPRM preference. As a pro tip, start with the lower CPRM alternatives that meet your car buying preferences. That way, if the car meets your preferences and total budget, you will finish the process faster and with less effort. This process is relevant for new and used car buying.

Definitive Choice provides a convenient app to identify and weigh your car preferences, plus add CPRM data. It tracks and orders your criteria and alternatives to help you get the most out of this process.

Not using a choice architecture app or similar solution may cause challenges for accurate preference assembly and preference weighing. Behavioral economists and decision scientists, like Eric Johnson mentioned in the first note [i], consider both "Assembled Preferences" and "Plausible Paths" as key stumbling blocks for making a decision. There are many naturally occurring cognitive traps known as cognitive biases that make evaluating your preferences a challenge. Without going into specifics, a significant challenge is we do not generally realize when these biases are impacting our decision-making. That is why it is important to use choice architecture tools geared toward helping you, the chooser, make the best decision.

Obtaining financing: As noted earlier, car financing should be avoided or minimized if possible. The long-term financial impact is significant. We certainly recognize auto lending may still be a practical reality for many people. As such here is our auto financing approach:

  1. In our article: Our car-buying best practices, we provide best practices for identifying a car. As you initially research, you will determine the kind of car and price range you are targeting.

  2. Car loan pre-approval - This is the stage to determine how much you want to pay for a car. Also, if a loan is needed, now is the time to arrange financing. In terms of deciding how much you want to pay, this starts with your car buying anchor from step 1. Using an auto data search aggregator as mentioned in our article: Cutting through complexity: A confidence-building car buying approach. Search for cars that meet this purpose and sort from lowest to highest. The ones at the top of the list will give you an idea of the current market price. The difference between this estimated market price and the cash you have available for a car purchase is the amount you need to finance.

  3. Prearranged financing is important BEFORE you have a discussion with a car seller. We will discuss negotiations further in the article. Getting pre-approval is the critical first step to building a strong negotiation position. By the way, some banks have different names for their auto loan “pre-approval” program. The Cutting through complexity article also has lenders and loan aggregators for you to consider.

As a word of caution: You may feel the desire to figure out "what payment can I afford?" and back into the car price. This mindset may lead to economic discrimination and not getting a car that optimizes your preferences. The point of this article is to help you get the "biggest bang for your buck!" Trust the process!

Some auto dealers provide indirect auto loans through their bank network. You may certainly consider dealer financing as an alternative, but it is best practice to have your funding confirmed prior to going to the car seller.

Please follow this link for our Car Buying Workflow.

For help making the best car decision, please see this smartphone app:


Johnson does a nice job describing the impact of choice architecture, particularly as rendered by default and sort options. See Chapter 5, "Decisions by Default." He makes the point that choice architecture “designers” - like the sellers - do not always have the best interest of the “choosers” integrated into the choice architecture. This is a clarion call for being your own choice architect!


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