I never buy new vehicles. The first vehicle I bought was my Dad’s car which he had also bought used. It was a 1986 Buick Century and I will never forget it. That car cost less than $1,000 and lasted for several years and tens of thousands of miles. It was a perfect first car because I was never worried about putting a scratch on it or having it stolen.
Buying New Cars the Opposite of Building Wealth
Buying a new vehicle is one of the fastest ways to lose wealth. It is the opposite of getting rich quick. I won’t go into all of the reasons here but here are a few quick ones:
- steep loss of value in the first three years
- higher insurance costs
- more pressure to maintain appearance
- higher risk of loss in value if stolen or damaged
I often see people buy new cars because they feel pressured into owning a certain type of car. But this could be a disaster for your finances.
Using Debt to Make a Costly and Value Destructive Purchase
But i haven’t even talked about the impact of debt. Sure you could buy a new vehicle for $30,000 to $50,000 in cash. I don’t know many people who do that. Even people who could afford to do that would rather not fork over that much money all at one time.
And if you watch commercials for new vehicles you will find that about half of the emphasis relates not to the car but to the financing! This is a way for dealers to make the purchase easier and to entice more people to buy new cars that they can’t really afford. You will find this same thing when you visit a dealership. Instead of selling you a car for $30,000 they will sell you a car for $5,000 down and only $330 per month. This is an easy way to get people to stop focusing on the total cost of the vehicle. The whole conversation is around the monthly payment instead of the cost of added options, taxes, tag, title, and finance fees.
The length of car loans has also been increasing. Loans for cars should always be done as a last resort and for the shortest time period possible. But car loans have gone from 3 years to 5 years and now up to as long as 7 years. A loan on a car is a horrible, value destructive idea.
Not only has the length of loans been increasing but the cost of the average new car has also been increasing. The average cost of a new car is now $30,000. I don’t think this is a coincidence at all. The longer loan period has dropped the monthly payment which allows dealers to sell cars at a higher price.
So let’s look at the numbers. We’ll compare a brand new car for $30,000 or a used car for $7,000. I know I know, you may feel like you just can’t get a used car that is appropriate for $7,000 but I assure you it is possible. It may just take some time and you will certainly have to settle for an older vehicle with less bells and whistles. But I’m not even going to try to convince you. I want you to look at the numbers and make your own decision.
First, the positive side. Now I want to warn you: there isn’t really a positive side to this. Buying a car is always a losing proposition. They cost money to purchase, maintain, and insure. They also only go down in value. You could argue that a collectible car could go up in value but the cost to store, insure, restore, and market a vehicle like that is often not worth it.
But having said that let’s say you buy a car for $7,000 and keep it for 7 years. You may have to spend $5,000 to maintain the vehicle during that time. It may be more and it may be less but it probably won’t be wildly different. To be conservative though, let’s say the car has some significant problems since it is older and you end up spending $7,000 on maintenance. So your total cost of the car is $14,000 and you end up selling it at the end of 7 years for $500. The total cost less the salvage value is $13,500.
This is a pretty simplified calculation ignoring the lower cost of insurance on the older vehicle and other items. But it still captures the potentially high cost of maintenance which comes with an older vehicle.
Now let’s look at the $30,000 vehicle financed using a 7 year loan. This is where the numbers get bad. We will assume that you put the same $7,000 down and get a loan at 3% for the remaining $23,000. This leaves you with a $300 monthly payment.
Over the life of the loan you will pay $25,563. Add in the down payment and your total cost just to purchase the vehicle is $32,563. But buying a brand new car and owning it for 7 years will still result in some maintenance costs. These maintenance costs won’t be nearly as high as with the used vehicle but they could still be significant. Now clearly I am biased against buying a new car so I’m going to be conservative and say that the only maintenance you will pay is $1,000. I don’t really believe it would be that low but I don’t want to make the numbers too dramatically in favor of buying the used car. And I don’t need to! Look at the chart:
The total cost of the new car is more than twice that of the used car – and that is based on very conservative calculations of the cost of owning the new car and without the difference in insurance costs factored in.
The bottom line is that the $30,000 price tag of the car is about the amount of money that you lose over 7 years. Think about it – you are paying $30,000 for the use of a car for 7 years and at the end have nothing to show for it. If you took the difference between the two options, $16,163, and invested in the stock market at an 11% return for 30 years you would have $370,000. If you rode a bike you could invest the entire amount. For many of us a bike is not an option. But buying a used car is.
Check this great auto depreciation calculator here to see how the drop in value on the new car was calculated. I am really impressed with the calculator as it shows what the impact would be over 30 years if you continued to pour money into used cars and experience the depreciation on them.
What is the value of a new car to you? Do you have a good experience with buying a used car?