Is Buying A New Car Really That Bad?

According to Experian’s State of the Automotive Finance Market’s latest report, people are still living with a love affair of driving expensive cars.

But is buying a new car really that bad? Does it really destroy your chances for financial freedom like so many experts claim it does? Let’s start by looking at the numbers.

Here’s How Much that New Car is Costing You

During the first quarter of 2017, car payments and loans reached another record high. Over 1.082 billion dollars in auto loans graced our great country during the first quarter of 2017, up from $1.005 billion in the first quarter of 2016.

85.5 percent of new car purchases came with some sort of financing, along with 53.3 percent of used car purchases. The average loan amount for new car purchases was $30,534, up $513 from a year ago.

The average term for a new car loan was 68.53 months (that’s nearly six years), with the average payment being $509.

Why Are New Cars and New Car Loans So Bad?

You might ask “what’s the big deal” when it comes to these new, higher numbers. Well, let’s say that all is well in the land of new car purchasers and they can all afford to make their monthly payments without struggle.

What’s the problem with new car loans in that scenario?

The problem lies largely in opportunity cost. What is opportunity cost, you might ask? Opportunity cost is the money you could have had if you’d chosen to invest that monthly car payment money instead of spending it on a depreciating asset such as a car.

For instance:

  • The average interest rate on a new car loan is 4.87% in Q1 of 2017, the average loan amount is $30.534 and the average term is $68.53 months.
  • Assuming you put $5k down and paid for tax, title and license with cash, you will have paid a total with interest of $40,002.25 for the car after the 68 month loan term is up.

But that’s just the beginning. Let’s say that instead of making those monthly car loan payments to Keep-You-Broke Bank, you kept the money and drove a quality used car that you paid cash for, investing the money instead.

How much money would you have at the end of six years?

Yep, you’d have $56,643. Add that onto the money you’ve spent on the car, $40,002, and your opportunity cost for that car is a whopping $96,645.

So, is it worth it? Is your once new and shiny car worth the $96k that you paid for it?

Only you can decide the answer to that question. For me, it’s absolutely not.

I’m not going to tell you that we don’t get sick and tired of driving our old cars at times. But we’re earning bigger and better returns by keeping those old cars and using our cash to do the following:

Paying Off Debt

Yep, the average credit card interest rate is hovering around 13 percent. If you use your cash to pay off your credit card debt instead of buying a new car, you are earning a guaranteed interest rate equal to what you are paying on the card.

Bonus: you’re earning a greater peace of mind as you reduce – and eventually eliminate – the number of lenders that keep you tied to your paycheck.

Paying off your debt means you’re putting yourself into a position where you can tell your employer “goodbye” because you no longer need their money.

Investing for the Future

Instead of paying for that new car which will eventually end up in the junk pile, how about using that money to invest in your future?

Investing in your future might mean:

  • Saving more toward retirement so you can live a cushy retirement life
  • Saving more in non-retirement funds so you can retire super early
  • Saving money toward your kids’ college funds
  • Saving money toward dreams of world travel or other fun stuff

What Matters More to You?

Now, I’m not going to deny that new cars are fun to drive and own. There’s little that compares to the sleek, shiny look of a new car or that fabulous “new car smell”.

However, when you compare the benefits to the weight of the monthly payment – especially if you are tight on cash to begin with – the new car smell isn’t so fun anymore.

When you compare the new car smell to a struggling retirement life, the new car smell isn’t so fun anymore.

When you compare the new car smell to a lifetime of trying to muster up the cash to pay those minimum payments, the new car smell isn’t so fun anymore.

I submit to you that financial freedom is more fun. Having the money to do what you want, when you want to (and that includes buying new cars) is much more fun when you are in a financial position that allows you to pay cash for those cars and other dreams because you “owe no man” and have a spectacular savings rate.

You in?

 

*Photo by Samuele Errico Piccarini

 

35 comments

  1. Our current car is a used one. It was 2.5 years old when we bought it. The car before that we purchased new and drove for nearly a decade. I can understand both sides. We ended up purchasing a used car because it was a much better value. On the flip side I do like the idea of being the sole owner of a car when you buy new.

    Either way, both of our car purchases have been modest, which I think is the most important. We drive a Honda Fit. It’s small and efficient. Less expensive on gas, insurance, maintenance, tires etc. It’s perfect for 99% of our travel. 1% of the time we use a “roof bag” for extra stuff (like when we go car camping). Or we rent/borrow a truck.

    • Laurie says:

      I think buying new can be okay IF you plan on driving the car into the ground. We bought Rick a new pickup in 2000 and he still owns it today. He takes immaculate care of it – it has 95k miles on it. We also got it on “clearance”, so we avoided much of the depreciation. New car purchases can be smart – if you do them right. Thanks for weighing in, Owen!

  2. Kathy says:

    We have generally purchased new cars and retired at ages 53 and 55. So purchasing a new car doesn’t have to mean you forfeit your financial independence. We’ve also leased cars, which most FI writers feel is the ultimate sin. The car I drive now is a 10 year old Lexus which we bought used from a family member under some very sad circumstances. We paid cash and it only had 15,000 miles on it at the time of purchase. My husband prefers cars to be in warranty, which is why us usually get new ones, however, with the Lexus, we knew its history and while it wasn’t in warranty, it was definitely is pristine condition. The point I’m making is that no single way is correct for everyone. The person making the purchase definitely needs to be working with their brain instead of their heart.

    • Laurie says:

      “The person making the purchase definitely needs to be working with their brain instead of their heart.”

      I think that’s the key, Kathy. As I mentioned in my reply to Owen we’ve bought new cars too, but when you’re purchasing them for emotional reasons without a well-thought-out financial plan to back the purchase up and help ensure you’re making a wise choice, that’s where most people get into trouble.

  3. We’re one of those weirdos who bought a new car, hahaha. We weren’t pursuing FIRE at the time, but after crunching the numbers, it still makes sense for us to have a car payment. We’ve had really bad luck with new-to-us cars in the past, and I love the relative reliability that I get from a new vehicle.

    • Laurie says:

      I think the fact that you thought it out and ran the numbers is what matters. It wasn’t a “Ooh, I want a new and shiny….” purchase. We’ve done the same. 🙂

  4. Olivia says:

    Though we’ve gotten some lemons over the years it still ends up being cheaper for us to buy used. A friend challenged me after we had to bring the car into the shop for repairs, “you wouldn’t have these problems with a new car. It would be cheaper”. I crunched the numbers and he was flat out wrong. Even with the repairs, is was less. Another consideration. We generally save up and pay cash. Thus avoiding interest. The one time we took out a car loan, (for a used car), we had to take out full replacement cost insurance because the bank required it. Even if we paid cash for a new car, the insurance premiums are considerably higher. Do the math for yourself and find out what works best in your area, as prices vary. For us, it’s used.

    • Laurie says:

      Great point about the higher insurance premiums. Generally the math has worked out for us to buy used as well.

      One time we bought new and the numbers looked good, but the dang car had nothing but problems, even new off the lot. SO frustrating.

  5. I think this is a GREAT topic and very applicable for 80% or so of the population. When we help people with their budgets we continue to see huge percentages of take-home pay allocated to car payments. Sometimes more than the rent or mortgage.

    That said, I agree with the other two that “it depends”. My wife and I have purchased a couple of used cars and a couple of new cars over the years. Most recently we purchased a new car this year (plus a [very] used motorhome). Whenever we buy a car though, new or used, we pay cash and make sure it is a small percentage of our net worth. That’s the key IMO.

    • Laurie says:

      I agree, Brad. You guys are in a financial position where you can afford to take the off-the-lot depreciation. You’re debt free and financially independent.

      My biggest concern is about the paycheck-to-paycheck people who are putting themselves into an even bigger risk category.

  6. Brian says:

    I believe you get the best value on cars buying used and paying in cash. A 2-3-year-old gentle used car has already depreciated, and you have the buying leverage when using cash.

    Now if you are out of debt, have a large net worth, there is nothing wrong with buying new, but it makes no sense going into debt or if you already have existing debt it would be silly to take on a car loan.

    • Laurie says:

      We’ve done that before and may do it again. We had friends who bought a new pickup last year and got a stellar deal. It made sense, and they had the money to pay in cash. Sometimes it works.

  7. Laurie, it always shocks me how huge the new car market is. I can’t imagine the number of folks strapped to make a car payment for a car they can’t afford.

    Here’s a challenge I try to achieve: “Drive your car for $1k/year (of depreciation)”. I’ve done it several times, most recently w a 3 yr old Miata I bought for $15k, drove for 7 years, and sold for $10k. It can be done, but not with a new car!

    • Laurie says:

      Agreed, Fritz!!! The “9% off the lot” depreciation is what frightens me most about the new car purchase. If you can get a clearance deal it could be worth it, but not in prime buying season.

  8. My goodness Laurie, we’re still writing in synch! I would be happy to drive used – and I mean 8-10 years “new-used” until the dumpster at 20 years + – for the rest of my life. I think it must be the single most effective way to avoid unnecessary spending – which means more opportunities for high value-based spending and investments. Fortunately, my husband is on the same page now. He used to dream of owning a Porsche. Not anymore!

  9. katscratch says:

    I love that, as usual, you have a balanced approach to this.

    I don’t see myself ever purchasing a new car, but I can see circumstances where the numbers work out for other people to do so.

    I did buy a new-from-factory bicycle (not a custom frame, but was built up by my mechanic for my specifications), though, so I’m not immune to shiny new things.

    • Laurie says:

      Yeah, us too, but we’re a LOT more averted to it than we used to be and now do it only on the basis of a smart purchase instead of getting caught up in the bells, whistles and appearances, which is nice. 🙂

    • Laurie says:

      Sometimes. Our most recent truck purchase was a phenomenal deal, even with repairs, much more than a new truck purchase would have been. I think a good balance is to buy a 2-3 year old car….

  10. Cars are so crazy expensive these days. We used to buy 10 year old minivans for $1000 in great shape. Now it seems you can’t touch one for under $5000. Now if someone gave me a brand new minivan (or preferably, a brand new Jaguar), I’d take it and drive it with a big stupid smile on my face. However, to actually go and put out that kind of cash for a depreciating piece of scrap metal? Nuh uh, no way. I’ll stay in my 2012 Chevy Sonic a bit longer,. It’s small, but it gets 30 mpg and it’s free and clear. Funny how our priorities can change so much over time. Great lessons in this post Laurie! 🙂

    • Laurie says:

      The “free and clear” thing is a HUGE bonus for us too. When I think about taking on a new-car sized payment again, I get a really sick feeling in my stomach. 🙂

  11. Josh says:

    If you plan on keeping it the entire time and can get 0% financing, I can see a case for buying new. As most large family vehicles (excluding minivans), like Suburbans, Expeditions, and trucks cost $50,000+, my wife and I refuse to buy a new one sheerly because of the sticker price.

    Currently, we have three vehicles that are maybe worth $10,000 combined. The oldest is a 1998 with 204,000 miles and our newest is a 2009 with 150,000 miles. We paid cash for them all and purchased two of them on Craigslist. They have the occassional repair but it’s cheaper than a car payment on a depreciating asset.

    The only vehicle I did finance was my “dream car,” a 2012 Ford Mustang. Even then, the first owner traded it in after owning it for only 6 months. I got it for $8,000 below the sticker price and was still the newest model year as the ’13 Mustangs weren’t in production yet.

    • Laurie says:

      See now, that’s a good deal and would be worth it. We bought a new truck in 2000 and still own it, and we got it at the end of the season. Another good deal. It can be a smart thing to buy new, but you’ve got to know what you’re doing, and you’ve got to be able to afford it.

  12. I think the only reason buying new might make sense if you will drive it to the ground and if they have 0% financing. Otherwise, I prefer to let the previous owner take the depreciation and I’ll buy a gently used car for the discounted price. I rack up a lot of miles on my car because of my commute which is horrible…that’s another reason I don’t want to pay the new car premium.

    • Laurie says:

      Agreed, Andrew. We feel the same way. Friends of ours who are farmers just got a new Ford pickup in January at a ridiculously low price. The guy is a crazy good negotiator, and they had the cash to pay for it. In a situation like that I’d say go for it.

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