[gnicholas]

A combination of liquidity, lack of discipline, or something in the middle.

As others have pointed out below, some people don't have enough cash to buy a car when they need one.

Other people have enough money to buy a car, but wish to purchase a nicer car because of vanity or enjoyment reasons.

And other people are in the middle: they could afford to buy a low-end vehicle in cash, but they realize that the transaction costs involved with every purchase (sales tax, time spent searching/selling) are not worth buying a $5k car, then a $10k car, then a $20k car in the next 5 years. So instead they finance an $18k car and hope their job trajectory continues as planned.

[MisterMower]

We’re talking about about a guy who only has $5,000 on hand to buy the first car. Those transaction costs are dwarfed by interest payments.

I highly doubt his time spent at the tag office and at the dealer buying those cars is going to be worth more than ~$1,500, which is roughly what you’d pay in interest for a 5 year note at 3% interest.

[gnicholas]

Sales tax alone almost hits this number, at least in high-tax states like CA. The problem is that you're paying sales tax with each car purchase, so if you buy the three cars I mentioned, you pay $400, $800, and $1600 (sum: $2,800) in sales tax with those purchases. If you just buy one $18,000 vehicle, you pay $1,400 in sales tax.

Factor in the time spent selling the vehicles (or getting screwed by the dealer on trade-in value), and it's much easier to see why financing a single more-expensive purchase could make financial sense.

Of course, this doesn't apply in states with low/no sales tax.

[MisterMower]

The whole point of buying the beater is so you can eventually get the car you want. It doesn’t make sense to buy multiple intermediate vehicles to get there.

Remove the second transaction and the associated $800 sales tax and it’s basically a wash. Live in a state with sensible tax rates and it’s a no brainer.

[gnicholas]

A $5k car is probably not very safe compared to newer cars. It might not hold as many passengers as you need (especially if your family gets bigger over time). Or it might get lousy gas mileage.

As for moving to a state with sensible tax rates, I think the moving costs or proximity to family/jobs would probably swamp the tax benefit for most people. But in the long run, people will surely take these factors into account (and perhaps are already, given recent trends!).