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Why you should never buy a new car
Why you should never buy a new car
One of the worst financial decisions one can make is to buy a brand new car. Controversial statement? Maybe. But read on for the case against buying a new car.
According to Edmunds, the value of a new car depreciates by an average of 11% upon driving it off of the lot. Think about that for a minute. You are on the hook for the $40,000 (for example) you just borrowed to finance a car that is now worth no more than $35,600. You have not even made it home yet, and you are in the hole by $4400. You could have taken a pretty nice vacation, cruise, etc. and covered everything for less than what it cost you to drive that car off the lot. My guess is the drive off of the lot would not have been anywhere near as fun, relaxing or memorable as a cruise, or a Hawaiian vacation. In addition to the sticker price, you will also be paying interest on the loan and higher insurance premiums since the car is new.
To add insult to injury, a new car depreciates by 15-25% a year in the first 5 years, and at the end of year 5, the car is worth – on average – about 37% of what you paid for it. Chances are; you will be upside down on the payments by that time. In other words, you will owe more than what the car is actually worth.
The status symbol trap
A financial misconception to which most of us have fallen prey at one time or another is the notion that the car one drives is the key indicator by which one's financial status and stability can be measured. This isn't to say that those at the upper end of the financial spectrum aren't likely to drive more expensive cars than the average income earner, but expensive automobiles are not driven exclusively by those for whom money is no object. Conversely; 10-year old pickup trucks are not driven exclusively by those on a tight budget (i.e. Sam Walton – founder of WalMart).
One more than one occasion I have heard people say things like: " He/She drives a (name of expensive vehicle) so they must be rich/wealthy/well-off, etc." Really? When I was in high school, I knew kids who waited tables on the weekends and lived at home who drove nice cars. Of course; after making the monthly car payment they barely had enough to put gas in the tank, but to the outside observer they (or their parents) appeared to be quite well-off financially because they had the key, wealth-defining accoutrement – an expensive car. However, dumping 95% of your net monthly income into a car payment hardly equates to truly being able to 'afford' the car. At the end of the day, the image one is able to project by driving an expensive car that they can't truly afford seems to be one of the key driving forces behind such purchases.
In fairness; if one places value on the image one is able to project by driving an expensive car (whether they can truly afford it or not), that individual is free to make that choice and spend their money accordingly. But, perhaps there is a way to strike a balance between exploiting the prestige factor and making a financially sound decision when it comes to the purchase of a vehicle. I still recommend putting your ego aside, and getting a car you can actually afford, that will last a long time and get you where you need to go safely and reliably. Most importantly; remember that the car one drives is merely a mode of transportation. Trying to assess someone's financial status based on the car they drive or to think that you can bolster your own financial status by simply 'looking the part' in an expensive car is a foolish endeavor.
The question to ask yourself is: "What price am I willing to pay for the prestige of driving an expensive car?" Let's face it, if you are spending more than 15% of your gross monthly income on a car payment (without even taking into consideration all of the other costs involved with owning a car), you are probably driving a car that you can't really afford unless you have no other expenses such as housing, utilities, food, medical, etc. You are not making an investment. That car you just bought (financed from the bank) has almost no chance of appreciating in value. How much of your income are you willing to have tied up in a car payment, insurance, gas, and maintenance?
Best of both worlds
It is possible to drive the nice car, and to do so without exposing yourself to the rapid depreciation outlined earlier. The most effective way to do this is to simply buy a car that is used or "pre-owned" in modern-day parlance. Most of the high-end, luxury brands have pre-owned certification programs to help ensure that you are not simply buying someone else's problems. Even mid-range vehicles, which are more accessible and affordable to most consumers, can be purchased through similar programs.
By purchasing a certified, pre-owned vehicle that is at least 2-3 years old, you are insulating yourself from some of the rapid depreciation alluded to earlier. If you can manage to find a certified pre-owned vehicle with a few years under its belt, but not so many miles (less than 10,000 miles per year), you have hit the sweet spot.
You get the personal benefit of driving the nice car you desire, but at a cost that is considerably less than what you would have paid for the newest model. You can, of course, lease the newest model but after years of making a lease payment, insuring the vehicle, and maintaining it, you still own nothing. You may even have to fork over some cash at the end of the lease if you exceed the mileage or if the car has some signs of damage beyond the normal wear and tear. The ability to unload a vehicle without the hassle of trying to sell it is appealing to many people so this trade-off may be worth it to some consumers.
From a purely financial perspective, it makes little sense to purchase a brand new car unless you are somehow able to obtain it for far below the retail price to the point where the discount exceeds the depreciation. Needless to say; this type of opportunity will rarely, if ever, present itself so it is critical to go into a major financial decision such as the purchase of a car armed with as much information as possible. Do your homework and let your logic - not your emotion - be your guide.