Buying a brand-new car is never a good financial decision whether you can afford the car or not. Even if you have cash ready to make the purchase, do not buy a new car unless, of course, your desires are so intense that you cannot hold them back. Learn why it is a bad idea to buy a new car and what you can do to avoid this financial misstep.
New cars come with a lot of drawbacks compared to the benefits you get from them. Not only that new cars cost you more money especially when you finance them with loans, but they also depreciate much faster. In addition, car values have risen so high that unless you are a higher-income earner, you cannot safely afford a new car. It also costs more money to insure a brand-new car than a used one.
If you are planning to buy a car, I will show you why you should not consider a brand-new car. Even if you have enough money to buy a car with cash, take one step back and read this article. You don’t want to throw away your hard-earned money for a good ride.
Key takeaways
Before you buy a new car, always consider the following.
- Cars are some of the worst depreciating assets. New cars can easily lose more than 40% of their original values within the first 5 years. Your new car will probably be worth half its original value by the time you finish paying it off.
- New cars are expensive for you, your lender, and your insurance company. That is why to minimize risks, insurance providers charge higher premiums to cover new cars, and lenders require full coverage when you finance the purchase with a car loan. In addition, you will need to purchase full coverage even if you purchased the car with cash. The higher the value of the car, the greater the risks. That is why it costs you more to maintain a new car.
- Your monthly payments make the car affordable. However, low monthly payments translate to paying more for the car due to interest. The longer you hold the loan, the more interest charges you pay.
- Your new car costs you more money in fees and charges that could be avoided or minimized if you finance the purchase with cash or buy a used car.
- Recent economic conditions such as inflation and the pandemic have skyrocketed car prices. In some cases, it is no longer financially viable to purchase a brand-new car.
- Never finance a car or other depreciating assets with debt. Doing so means you are always on the losing side. Why pay more if the value of your asset will only decrease over time?
- You probably don’t need a new car as much as you think you do.
- It is wise to buy an already depreciated car with cash if you can. In case you need to buy a new car, make sure that you have a large down payment to reduce the cost of the car.
For more details as to why it is a bad idea to buy a new car, keep reading.
You might also like: How to save money for a car: A complete guide
Why is it a bad idea to buy a new car?
I started by telling you that it is a bad idea to buy a new car. I was firm in that statement. In this article, I will walk you through every possible reason you should avoid buying a new car. Yes, new cars come with very fancy features and updated safety systems. They also drive better and come with low gas mileage. But, the downsides of new cars are also astonishing.
A new car costs you more money especially when you take out a car loan. Compared to how much cars used to cost a few years back, you will pay even more to own a new car. Even if it is the same car, you will pay more money to get it. Why? Because inflation has drastically lowered the value of your currency. On top of that, Covid-19 caused a lot of supply chain issues which disrupted the car manufacturing industry. For this reason, you pay more money for the same car. But, you get less value.
Did you know that new cars lose up to 20% of their value in their first year and 15% every year for the following 4 to 5 years? That is right. When you finance a new car purchase with a loan, you technically keep paying a higher rate on a car that is worth half of what you bought it for a few years later.
If you want to know why it is a bad idea to buy a new car, keep reading.
1. New cars lose value at a fast rate
Cars are known to be depreciating assets. This means that from the day you buy them, their values will only go lower at a fast rate.
An asset is said to be depreciating when it loses value over time. For example, if you buy a piece of furniture such as a sofa for $4,000 and sell it for $100 ten years later, you will conclude that your sofa lost $3,900 in value. That is your sofa depreciated by 97.5% in 10 years. Cars also follow the same pattern.
Although the example, might be a bit exaggerated; cars lose value at a rate that does not justify buying them brand-new. According to LendingTree, your new car can lose up to 20% of its value in the first year and 15% every year for the first five years. In order words, if you buy a brand-new car right now, you should expect the same car to lose more than 40% of its original value five years from now.
Why does this matter?
Even in the value of the car will slide from the day you bought it, the lender will not change the interest rate and monthly payments to reflect these changes. You will still pay an interest rate on the original price. For example, if the terms of your loan are 84 months or 7 years, your car will be half its original value but your interest charges will remain the same. In order words, it is like a rip-off.
Did you know that if you buy a car from a dealership and try to sell it back on the same day, your dealership cannot even give you what you paid for the car? The car’s value starts sliding the moment you buy it. If you were to sell that car to your dealership the same day, you would get around 10% less than what you bought it for.
2. You are buying a new car for the wrong reasons
People buy new cars for different reasons. For example, most people who don’t know how to fix cars prefer new vehicles because they are reliable and efficient.
Other people, however, buy new cars for the wrong reasons. This is true among young people and those who desire to look rich. If you are buying a new car to impress your friends, cute girls, or random strangers, you are getting into debt for the wrong reason. You should never spend more money and live out of your means to impress others. Your friends and girls you are trying to impress might not be watching. In other words, your whole plan could end in disappointment and financial misery.
3. Car prices have risen higher
Cars cost more than they used to many years back. According to the U.S. Bureau of Labor Statistics reported by the Consumer Price Index(CPI) calculator, the average cost of a car has risen by 635.39% from, 1952 to 2022. In other words, if a car was costing $20 in 1952, you would need over $147 to buy the same car in 2022. That is cars are more expensive due to the inflation rate and improved cost of living.
The average income also increased at a higher rate during the same period. According to the United States Census Bureau, the average salary of an American was $2,300 per year or $197 a month in 1952. Fast forward to 2022, the median weekly earnings stands at $1,070 or $4,280/month, according to the U.S. Bureau of Labor and Statistics(BLS). This represents an income increase of 2072.59%.
Although the income increased dramatically, the cost of living also went higher. In addition, current economic conditions and lifestyles come with many things you spend more money on that did not exist back then.
For example, the average person has streaming services, phone and internet packages, games, memberships, etc. These services did not exist back then. Living expenses also skyrocketed. The point here is that the cost of a new car cannot be supported by current income.
4. Paying lower monthly payments increases the cost of the car due to interest
If you were to buy your car with cash, it would be safe to say that the true cost of the car is what you bought it for plus some fees. When you finance a car purchase with a car loan, however, the story changes a bit. The average American cannot buy a car with cash. So, everyone relies on car loans.
To repay the car loan, you will need to make monthly payments for a given number of years. The terms of car loans usually range between 24 to 84 months. For every payment you make, a portion will cover interest and the other covers the principal until the loan is fully paid off. The longer the terms of the car, the lower your monthly payments will be, and therefore, the more money the car will cost you.
Example of how the car costs you more the longer you hold the loan
To explain why it is a bad idea to buy a new car, especially when using a car loan, I will use an example. Let’s consider that you just bought a new car for $40,000 with no down payment. Let’s also assume that the terms of the loan are 36 months at 8.5% APR. We will also assume that there was no trade-in value. Your monthly payment will be $1,263. By the end of 36 months, your loan will be fully paid off. The total cost of the car(principal and interest) excluding other fees will be $45,457. That is you paid over $5,457 in interest.
What if you signed up for 72 months instead of 36 months? In this case, your monthly payment will be $721/mo which is cheaper and affordable to many people. Unfortunately, the car will cost you more money in interest since you will be holding the loan for a long time. By the time you finish paying off the car 72 months later, the total cost of the car without considering other fees will be $51,914. In other words, you paid $11,914 in interest in exchange for a lower monthly payment.
5. New cars come with expensive insurance
Buying a new car is a bad idea due to the high cost of insurance. When you buy a new car, you end up having a lot of coverage because you have more to lose. Lenders also require that you get full coverage until you have paid off the loan. So, you can’t just get liability insurance when the car belongs to the bank.
On top of full coverage, insurance companies charge you more money to cover the car. That is in case you end up in an accident, the insurance company will have more to lose. That is why your insurance provider will leverage the risk by charging you more money.
Even if you bought your car with cash, you will still pay more money in insurance. This is because you will still need full coverage to lower the risks of losing the car. You don’t want to get hit by a non-insured driver and lose your $40,000 car because you wanted to save money. It is all about risk management. The point here is that new cars come with higher risks and it costs you more money to minimize those risks. In other words, it is a bad idea to buy a new car because the cost of loss mitigation on new cars does not justify the rewards.
Related: 7 tips on how to find the best car insurance
6. You pay more fees
Are you still thinking that it is a good idea to buy a new car? Let’s face it. It is possible that you don’t have $40,000 sitting in the bank. That is why you will probably get a car loan. Getting a loan automatically comes with inevitable fees and charges.
Some fees associated with financing a car purchase with a loan include but are not limited to the following.
- Title and registration fee
- Fabric protection fee
- Advertising fee
- Paint protection fee
- Rustproofing fee
- Destination charge
- Document fee
These fees could be minimized or avoided if you buy a used car with cash.
Should I buy a new car this year?
Although it might be tempting to buy a new car in 2022, the numbers do not show a green light. Prices of new cars have risen dramatically especially due to Covid-19. As reported by THE ZEBRA, new car prices have spiked from a 5% increase between 2019 to 2020 to a record high of 17.2% between 2020 to 2021. During the same time span, the average monthly payment rose by 11.8% on new cars. The same trend also appears in used cars where the monthly payment rose by 18.2%. Trade in value has also gone up. After 2021, car prices started to go down by some margin. However, the rates are still higher compared to past car prices before the pandemic.
The moral of the story is that buying a new car or a used one will cost you more than it used to. Unless you have a higher income, it would not make sense to buy a car right now, especially a new one. If there is any room for bargaining prices, you will only have a winning angle when buying a used car. Since used cars are relatively cheaper than new cars, it is a good idea to buy a used car instead of a brand-new car.
Is it dumb to buy a new car?
I cannot say that it is dumb to buy a new car. But, I can safely say that it is a bad idea to buy a new car. It is much worse to finance a car (new or used) with a car loan. For all the reasons I discussed with you in the article, you can easily conclude that you will be on the losing side when you buy a new car or finance one with a car loan.
Rule of thumb: Never finance depreciating assets such as cars with debt.
Reasons to buy a new car
If there were no crazy cons associated with brand-new cars, every person would get one. Yes, new cars are expensive and depreciate at a fast rate. But, they come with a lot of benefits that should not be ignored. The following are some of the reasons to buy a new car.
- New cars come with a warranty
- Maintenance costs are lower on new cars
- They are easily customizable
- New cars usually come with good gas mileage
- They are efficient
- Brand-new cars come with better safety features
- They come with newer and updated gadgets, etc.
The bottom line
It is always a bad idea to buy a new car especially when you are financing the purchase with a car loan. High depreciation rates, expensive insurance, a ton of fees and charges, etc, make new cars unattractive for people who value their money. In case, you have to buy a new car, at least have a large down payment. Having a 20% down payment is a good idea but it would be better if you have a much higher down payment. Putting money down prevents you from borrowing too much money. Hence, lowering the cost of the car.
The best course of action is to buy a used car with cash. Paying cash will protect you from most of the fees, charges, high interest, and expensive taxes. Another benefit of buying a used car with cash is that they have already depreciated. This means that you get a better quality car for half of the price. On top of this, used cars come with cheaper insurance compared to new cars even if you are getting full coverage.
