One highly desired item on many people’s wish lists 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 to you a very important piece of advice.
DON’T DO IT!
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.
Related: 10 Real Ways To Get a Free Car (Seriously, It’s a Thing!)
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 the 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 Americans 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 of 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 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 Americans 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.
Related: What Does It Mean To Be Independently Wealthy? + 10 Tips To Get There
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, but 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 into 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 a 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 babies 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 is the payment!
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?
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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.Why new cars are a waste of money? ›
Cars See Major Depreciation
If you're planning to buy new, be aware that vehicle loses value the instant you drive it off the lot. On average, a car loses up to 20% of its value in the first year of ownership. During the first five years, the value decreases by about 40%.
New cars come with the latest safety features and are very likely to be reliable, though they can come with a higher price tag and higher insurance costs. Used cars are generally cheaper because the high depreciation of their early years is already behind them and you may not need as much insurance coverage.What does Suze Orman say about buying a new car? ›
Suze Orman recommends buying the least expensive car, meaning a used one. She also suggests not buying until your credit score is 700 or higher. Orman also recommends a short-term car loan, to ensure you can truly afford the vehicle.How much should I spend on a car if I make $100000? ›
|Annual salary (pre-tax)||Estimated monthly car payment should not exceed|
|$50,000||$416 per month|
|$75,000||$625 per month|
|$100,000||$833 per month|
|$125,000||$1,042 per month|
- Buying Can Be More Expensive – in the Short Term.
- Pay Interest on the Total Cost of Your Car.
- You May Pay More Sales Tax.
- Larger Down Payments.
- Future Value of Your Car is Unknown.
- Manufacturer Warranties Will End.
Millionaires spending and budgeting isn't just limited to clothing and groceries but also to automobiles. While it's easy to think that millionaires all drive sports cars and live in huge mansions it's just not true. 81% of millionaires purchase their vehicle and only 23.5 percent actually buy new cars.Why do millionaires drive cheap cars? ›
Why are there so many wealthy people who drive average cars? Perhaps because driving expensive cars would attract unwanted attention. Many wealthy individuals become wary of showing their worth with a high-end car after becoming the focus of fraud, theft, or frivolous lawsuits.Do millionaires buy new or used cars? ›
You're right if you think the rich like to drive these luxury cars. But surprisingly, a high number of millionaires favor used and cheaper cars over new and high-end automobiles. According to a study done by researchers at Experian Automotive, 61 percent of wealthy people drive Hondas, Toyotas, and Fords.Should I buy a car now or wait until 2023? ›
Americans planning to shop for a new car in 2023 might find slightly better prices than during the past two years, though auto industry analysts say it is likely better to wait until the fall. Since mid-2021, car buyers have been frustrated by rising prices, skimpy selection and long waits for deliveries.
Conclusion: Is 2023 a Good Time To Buy a Car? Considering vehicle prices are still inflated and loan rates may be on the rise, it's not the best time to buy a car. However, auto prices may continue to level off during the rest of the year, which would be a good sign for car buyers.What if I regret buying a new car? ›
You can try contacting the dealership and explaining the situation anyway. Remember that they're under no obligation to allow you to return the car. If the dealership does have a return policy, check the terms. Find out how much time you have and which conditions you need to meet first.Is it smart to pay off a brand new car? ›
The bottom line. Paying off a car loan early can save you money — provided the lender doesn't assess too large a prepayment penalty and you don't have other high-interest debt. Even a few extra payments can go a long way to reducing your costs.Is it financially better to buy a new or used car Why? ›
Multiple costs are often cheaper when you buy a used vehicle rather than a new one. Everything from the price of car insurance to dealer fees will be less expensive when you buy a used vehicle. Depending on the vehicle you choose, the purchase price will also typically be less for a used car.How many years should you own a new car? ›
How long should you keep a car? A typical car is expected to last 200,000 miles or more, with electric or hybrid vehicles going up to 300,000 miles. If you drive the average number of miles for an American, a typical car should last you about 14 years and an electric car will last about 21 years.Can you afford a $30,000 car making $60,000 salary? ›
Follow the 35% rule. Whether you're paying cash, leasing, or financing a car, your upper spending limit really shouldn't be a penny more than 35% of your gross annual income. That means if you make $36,000 a year, the car price shouldn't exceed $12,600. Make $60,000, and the car price should fall below $21,000.What is the 20 4 10 rule? ›
20% down — be able to pay 20% or more of the total purchase price up front. 4-year loan — be able to pay off the balance in 48 months or fewer. 10% of your income — your total monthly auto costs (including insurance, gas, maintenance, and car payments) should be 10% or less of your monthly income.How much should I pay for a car if I make 50000 a year? ›
The 10% rule
One rule you may wish to follow if you're more on the frugal side is spend no more than 10% of your annual income on a car. Let's say you make $50,000 annually. 10% of annual income: $5,000, the amount to spend on a vehicle.
Advantages of Buying a New Car
A brand new car offers peace of mind and a sense of security. There's no need to worry about hidden flaws, plus the car will typically come with a three-year, 36,000 mile warranty. It's Easier: Buying a new car is easier than buying a used car.
One of the most significant drawbacks of purchasing a new car is the instant depreciation that occurs as soon as the car is driven off the dealership lot. On average, a new vehicle loses 20% to 30% of its value within the first year of ownership. This rapid decrease in value is known as depreciation.
Buying a car typically makes more financial sense than leasing one, since you get to keep the vehicle as an economic asset and avoid higher finance charges and upfront costs. There are certain benefits that leasing has over outright buying a car, such as making high-end vehicles more affordable.What kind of car does Jeff Bezos drive? ›
Jeff Bezos – Honda Accord.What cars do smart people drive? ›
The most intelligent drivers include those that own MINIs, Mazdas and Toyotas. White and grey cars are driven by smarter people. MINI and Mazda drivers scored highest on the IQ test, followed by Toyota, Mercedes Benz and Nissan drivers.What kind of car does Warren Buffett drive? ›
Warren Buffett's choice of vehicle has become a topic of interest among many people. Renowned for his frugal and simple lifestyle, the billionaire investor drives a 2014 Cadillac XTS.What car does Elon Musk drive? ›
What kind of car is Elon Musk driving? Tesla Model S is the car Musk drives the most. It is one of Tesla's most comfortable and spacious cars. It also has an impressive range of up to 405 miles and accelerates from 0-60mph in 2.4 seconds.What does Mark Zuckerberg drive? ›
Volkswagen Golf MK6 GTI
And according to a source from a few years ago, Mark happens to have his Golf with a manual transmission.
Bill Gates just loves Porsche sports cars be they classic or modern, gas-powered or electric. Apart from that, he has other cars in which he is chauffeured most of the time. That said, the most expensive set of wheels he has ever purchased is his two Gulfstream G650ERs and two Bombardier Challenger 350s.Do people regret buying expensive cars? ›
Nearly 40% of consumers who've purchased a vehicle have car-buying regrets. The most common regrets are choosing a different make or model, buying an unaffordably expensive car and not shopping for a better deal.What is the average age of the car a millionaire owns? ›
The reality that most millionaires buy their cars new, and that their cars are three or fewer years old, isn't surprising. So why do people so want the opposite to be true?What price does the typical millionaire pay for a car? ›
Also, I mention the median price paid for the most recent motor vehicle purchased by a millionaire was $31,367 [for decamillionaires-$41, 997].
Americans hoping to save some money on a new car should wait until the latter half of 2023 to buy, especially since automakers are already preparing for those price wars. “So right now, if you can be a little bit patient, my suggestion would be just to wait,” financial expert JB Brown said.Are car prices expected to drop in 2023? ›
Used car prices have likely peaked, but new car prices are expected to remain high. In 2023, prices are expected to decline by roughly 10% for used cars and by 2.5% to 5% for new cars.Will new cars go down in 2023? ›
Prices could drop up 5% for new vehicles and 10% to 20% for used vehicles in 2023, according to a report in November from J.P. Morgan. The basis for the prediction is that demand has stabilized and vehicle inventory is improving.What are the projections for new car sales in 2023? ›
According to a joint forecast from LMC Automotive and J.D. Power, new-vehicle sales in May 2023 should be around 1.3 million.What are the projections for new vehicle sales in 2023? ›
New-vehicle retail sales for May 2023 are expected to increase when compared with May 2022. Retail sales of new vehicles this month are expected to reach 1,079,200 units, a 9.6% increase from May 2022.What is the outlook for a new car in 2023? ›
Overall, 2023 projections indicate that registrations are expected to increase roughly 6.9 percent more than last year (just shy of 2021 sales numbers), despite increasing economic uncertainty in the state and nationwide.What is buyer's remorse law? ›
Buyer's remorse law: How the FTC's Cooling-Off Rule works
The rule gives consumers three days from the time they sign a contract to cancel or back out of a sale. The Cooling-Off Rule may only apply in the following instances: The rule applies to purchases mainly intended for personal, family or household use.
- “I'm ready to buy now.” ...
- “I can afford this much per month.” ...
- “Yes, I have a trade-in.” ...
- “I'm only buying the car with cash.” ...
- “I'm not sure…which model do you think I need?” ...
- “Oh, I've wanted one of these all my life.” ...
- “I'll take whatever the popular options are.”
When you return a car you can't afford to the lender, it's called voluntary repossession. It still hurts your credit.Is it dumb to pay cash for a new car? ›
Buying a car with cash has its benefits. It can help you stick to your budget since you're limited to the money you have on hand, and you won't have to pay interest on an auto loan. But buying upfront could disqualify you from special offers provided by the dealer and leave you strapped for cash in an emergency.
Paying extra payments toward the principal in your car loan will shorten the overall length of your loan. While you'll be paying more every month, you'll be paying the loan back for fewer months total. You'll also build equity much faster.What is a good interest rate for a car for 72 months? ›
What is a good interest rate for a 72-month car loan? An interest rate under 5% is a great rate for a 72-month auto loan. However, the best loan offers are only available to borrowers who have the best credit scores and payment histories.What are three cons of buying a new car? ›
- Buying Can Be More Expensive – in the Short Term.
- Pay Interest on the Total Cost of Your Car.
- You May Pay More Sales Tax.
- Larger Down Payments.
- Future Value of Your Car is Unknown.
- Manufacturer Warranties Will End.
In terms of the best time of the year, October, November and December are safe bets. Car dealerships have sales quotas, which typically break down into yearly, quarterly and monthly sales goals. All three goals begin to come together late in the year.Why you should keep your old car? ›
Keep driving it and you save money not only because you don't have to make payments on a new car, but also because car insurance premiums are lower, and in some states, so are registration fees and personal-property taxes.How often does the average person buy a new car? ›
It's an interesting fact to note that pre-recession in the States people bought an average of 13 cars in their lifetime. According to IHS Markit the average age of cars on the road at the moment is 11.5 years. According to CNBC, people buy on average 9.4 new cars in their lives.How old of a car is worth buying? ›
What's the “Sweet Spot” for Used Car Age? In retaining “like new” quality and inheriting a slower depreciation rate, the best used car age for buying is 2-3 years. In fact, Americans are saving up to $14,000 on a 3-year-old vehicle.Is it good to buy a car as an investment? ›
And the fact is that a car represents a significant financial outlay on an asset that will depreciate between 10% and 20% in the first year after leaving the dealership. In other words, looking at it strictly as an investment, you are allocating your money to something that will be worth less money year after year.What are 5 cons of owning a vehicle? ›
- Auto insurance.
- Registration fees.
- Routine maintenance.
- Parking costs.
- They're Expensive to Maintain. ...
- Cars Are Bad For The Environment. ...
- Reasons Not to Lease a Car: It Wastes Time. ...
- They're Unsustainable Compared to Public Transport. ...
- Owning a Car is Bad For Your Health. ...
- Reasons Not to Own a Car: The Alternatives Are Better. ...
- Cars Take Up Space. ...
- Reasons Not to Own a Car: They're Becoming Obsolete.
One of the most significant drawbacks of purchasing a new car is the instant depreciation that occurs as soon as the car is driven off the dealership lot. On average, a new vehicle loses 20% to 30% of its value within the first year of ownership. This rapid decrease in value is known as depreciation.How much should I spend on a car if I make 60000? ›
Follow the 35% rule. Whether you're paying cash, leasing, or financing a car, your upper spending limit really shouldn't be a penny more than 35% of your gross annual income. That means if you make $36,000 a year, the car price shouldn't exceed $12,600. Make $60,000, and the car price should fall below $21,000.Can you live without a car? ›
Honestly, whether you could get around without a car or not all depends on you and where you live. You will need to consider your situation and the services available in your area, your ability to carpool or work from home, and how far you're willing to walk or bike. Living without a car is not for everyone.What are the benefits of living without a car? ›
- 1) Save on gas, insurance, maintenance, taxes, fees, and more. ...
- 2) Kiss the garage goodbye. ...
- 3) It's eco-friendly. ...
- 4) Carsharing is good for parking. ...
- 5) Choose a car for the occasion. ...
- 6) Live a minimalist lifestyle. ...
- 7) Get into sharing culture. ...
- 8) Live flexibly.
Cars are useful but costly: along with the purchase price and monthly payments, you have gas, insurance, maintenance and parking costs. Life without a car isn't costless. It is cheaper than life with a car, but it involves costs you may not have thought about.What is a bad fact about cars? ›
Car engines release poisonous gases that pollute the air, especially the extremely harmful greenhouse gas called carbon monoxide. Carbon monoxide can cause people to get really sick or even die.What is the average cost of owning a car? ›
Owning a car also requires paying for insurance, gas, maintenance and more. The annual cost of car ownership in 2022 was $10,728, up from 2021's yearly cost of $9,666, according to AAA's Your Driving Costs study.What are three advantages to owning a car? ›
- It is a safer means of transport. ...
- Facilitates many tasks. ...
- It is much better than using public transport. ...
- You will feel much more-free. ...
- Save money and take trips.
New cars are less likely to break down than used ones and most new cars come with a factory warranty. Most new car warranties are bumper-to-bumper warranties, meaning most common repair costs are covered. You may also get free roadside assistance with your purchase.