One highly desired item on many people’s wish list is a new car. And not just a new-to-you car, but a brand spankin’, first time owner, customize to your heart’s desire new car. While the allure of a new car is often irresistible, we’re here to impart on you a very important piece of advice.
DON’T DO IT!
If you truly want to have Money Earned through Money Saved, absolutely, unequivocally, positively never buy a new car. In fact, buying a new car is one of the absolute WORST financial decisions anyone can make.
You may be thinking, what’s the big deal? If I can “afford” it, why not? On the surface, buying a new car may not seem like a huge financial burden, but we guarantee it is one that will significantly limit you.
Let’s take a look at why buying a new car is a bad investment, and how buying a nice used car can save you thousands.
New Car Prices Have Risen Faster Than Salaries
At this point thinking about all the likes and comments you’ll get after posting your new car pics on Facebook and Instagram may be overriding your desire to save money. We get it, buying a new car is a status symbol, an extremely visible status symbol that will be seen by thousands of people every day.
Cars have always been a status symbol in this country, dating back to mass production of the Ford Model-T and the emergence of the middle class in the middle of the 20th century. Once cars became widely affordable, it wouldn’t do to simply own one. The type of car you owned now became a major factor in determining your status, an idea we American’s continue to buy into today. In fact, aside from a home, our cars are often the most expensive item we own.
While new cars have always been part of the American dream, today’s new cars far outpace the American budget of our parents and grandparents. To give you an idea just how steeply the cost of a new car has risen, let me (Tawnya) share a personal example.
My grandparents bought their first new car in 1972. It was a Chevrolet C-20 three quarter ton pickup in yellow and white (you know the one). Know what the cost of a brand new pickup was in 1972?
THREE THOUSAND TWENTY-SEVEN DOLLARS.
$3,027! For a brand new pickup!
Even better, know what my grandpa took home every month in 1972?
That’s right, the cost of a brand new pickup in 1972 was equivalent to 4.3 months’ salary for my grandparents.
As I write this article, a 2018 Chevrolet Silverado 2500HD regular cab (the modern-day equivalent) would set you back $34,400 before any upgrades (MSRP). That’s equivalent to over 11 months of my take-home teaching salary. That’s 2 ½ times the number of months it would have taken my grandpa to pay off his truck in 1972, and that’s if I could dedicate my entire monthly salary to the payment (which of course I can’t, and neither can anyone else). This example shows just how much the cost of a brand new vehicle has outpaced the increase in salary over the last 45+ years, making the purchase of a brand new car just that much more unrealistic for us today.
Low Monthly Payment = Longer, More Expensive Loans
Not to worry, you say. Car dealerships are willing to work with me to finance my new ride in such a way that I can afford the payments.
I bet they are.
There’s a reason car salespeople have such a bad rap. They’ll sell you the absolute most car you let them, although what they won’t tell you is how they’re taking you with longer loans and higher interest rates (especially if your credit could use a little TLC).
According to a CNN Money article published in July of 2017, the average car loan spans 69.3 months, or almost six years. Furthermore, the average monthly payment on a car loan is $517 dollars, with the average loan equaling $31,000!
This means that American’s are financing more of the purchase, over a longer period of time, and spending a huge chunk of their monthly income, all for that new car smell.
Car Dealer Myths
It’s still okay, you say. Many people do it. Heck, car salespeople have it great with all those dealer discounts…
Can I let you in on a little secret? Car salespeople RARELY buy new cars.
In fact, car people tend to keep their eye out for those great low-miler trade-ins that have already taken the new car hit (more on that later). Plus, with mechanics and service people at their fingertips, car people know when they’ve found a steal of a used car and snatch them up.
Is that the dealer discount you were talking about?
Oh, and that idea that a car is about to fall apart once it hits 100,000 miles (my Camry must be barely holding it together at 266,000 miles)? That’s a myth made up by car dealers to get you to trade in your perfectly fine vehicle (that they’ll pay you an outrageously low amount for, then turn around and make a nice profit on) and get you into even more debt by buying yet another new car! (My dad worked for a car dealer for a period of time and is good friends with several car dealer owners, so this is on good authority).
The New Car Hit
Still not convinced?
If dedicating more of your salary for a longer period of time isn’t enough to convince you, how about the fact that you will actually owe more on your new car than it’s worth the moment you drive off the lot?
Cars are depreciating assets, meaning they lose value over time. New cars are the worst. That’s because the biggest depreciation comes in the first year, with a big chunk of that coming when you drive it away and it goes from new to used. This is unofficially referred to as the new car hit.
In fact, once you drive a new car off the lot it depreciates as much as 10%!
Remember that brand spankin’ new Chevy Silverado we were talking about earlier? That $34,400 truck may only be worth $30,960 by the time you get it home.
But the fun doesn’t stop there.
The average new car will lose around 20% of its value in the first year (10% when you drive off the lot plus an additional 10% in the first year), with an additional 15% in depreciation each year for 4 more years. As a result, most cars lose around 60% of their value in the first 5 years, and at 10 years the majority of cars are only worth around 10% of their original cost.
It’s not looking so good for the Chevy, but here it goes.
After the first year, 20% depreciation means my brand spankin’ new Chevy will be worth about $27,520. After 3 years, my not so new ride may only be worth about $17,200, half of what I paid for it (20+15+15 = 50% depreciation).
Remember that $517 a month payment?
Yeah, a large chunk of that payment is going to interest for the first several years (Have questions about interest? Check out our Start Taking an Interest in Interest series). Thus, while the value of your new ride is dropping like the rain in Portland, only a portion of your massive payment is actually going toward the amount you still owe on the loan. This means that for the first several years you own the car, you’re actually upside-down in the loan.
You actually owe more than the vehicle is worth.
This is bad for a number of reasons, the first being that if you needed to sell the car for any reason while you’re upside-down you would actually end up owing more money after you sold it.
New Car = Expensive Insurance
Need yet another reason not to buy a new car?
Not only are you being gouged with more money, more interest, and a longer loan, you’re also likely going to pay more in car insurance. New cars often have higher insurance payments because they’re worth more than used cars (duh!). Furthermore, you will likely need to consider gap coverage with a new car to ensure you won’t be left with a sizable chunk on your loan if your car is totaled (gap coverage will pay the difference between what the car is worth and what is still owed on the loan), which will add more to your premium. While many things determine what you’ll pay for insurance, it is important to factor this cost in to your monthly new car expense.
Avoid the New Car Hit by Buying Used
If all the above still doesn’t have you convinced that new cars are bad news, consider this. I’m not saying that you can’t have a nice car. I’m not saying you need to drive an old beater. What I am saying is be patient, be smart, and buy yourself a nice used vehicle.
Let me give you another personal example. I recently upgraded my dog hauler (a 1993 Ford Explorer with 240,000 miles that my grandparents bought new).
After much debate (and price comparisons), I settled on my perfect vehicle: a steel-blue Chevrolet Silverado 1500 LT 5.3L V8 4WD Crew Cab short box (the featured image for this article is my truck). It even has the chrome package and a cool air intake exhaust system, which makes the engine rumble and the heads turn (status symbol all the way, baby!). I got a great deal on it. Low miles, everything in top shape, all for $19,500 ($1,000 below KBB!).
Only one thing…it’s a 2007.
Want to know what one of these baby’s cost brand new? (one more time, bear with me)
At the time I bought my truck (April, 2017), the brand spankin’ new version (the same thing with a newer body style and never been owned) cost…
I saved $24,600 and got the exact same thing on a 10-year-old truck with less than 90,000 miles that everyone thinks is brand new anyway!
Moral of the Story
Buying new isn’t the way to go when it comes to cars. The skyrocketing prices of new cars coupled with the slower increase in wages mean that buying a new car simply isn’t practical anymore.
Why waste thousands of dollars on something that’ll lose its value and appeal so quickly? After all, after a few months the thrill of the new will wear off, and your vehicle will be just another used car.
The only thing that won’t wear off are the payments!
On the other hand, you can get the exact same thing a few years older, and save tons of money. Look at my example. What could you do with an extra $24,600 over the next five years?
Talk about Money Saved!