The following is a guest post about the true price of a new car by Derek from Life And My Finances. He has his degree in Finance and loves to help people win in life with their personal finances through stories from his own life! He’ll teach you how to get out of debt, save money, and be rich!
Have you ever gone to a dealership and sat in a brand new car? You step inside, close the driver door, and suddenly all of your anxieties and hardships from that day melt away. The dash is illuminated with light, the radio looks more like a big screen TV, the sounds from outside are hushed, and every feature that you can think of (and beyond) can quickly be performed with a single push of a button. A smile comes across your face and you get the feeling that if you owned this car, you’d be happy for the rest of your life.
You want to know the truth? Yes, this car is probably nicer than anything you’ve ever sat in, but after a few months, it’s just a stinkin car, just like all the others. The only difference is, if you decide to purchase this new vehicle, it could set you back for years financially. Is it really worth it? Well, let’s take a look and find out.
The New Car Stats
Let’s say that this new car of your dreams has a sticker price of $25,000. Like many others, you don’t have $25,000 in cash, so you put $1,000 down, and you trade in your $6,000 Jeep for $4,000 (the trade-in value is often a couple thousand dollars less than the actual value of the car). Now, you have earned the right to the keys, but there’s still $20,000 that needs to be paid over the course of 4 years at 2.9% interest (remember, car financing is negotiable).
- $25,000 new car
- $1,000 paid up front
- $4,000 for your trade-in
- $20,000 owed over the course of 4 years
The New Car – 4 Years Later…
Alright, it’s been 4 years, and you own your car completely! I would say congrats… but let’s take a look at the numbers first.
How Much Was Paid For the $25,000 New Car?
- $1,000 down-payment
- $6,000 vehicle value(unfortunately, you only received $4,000 in credit for you new car…)
- $20,000 in principle payments
- $1,206.55 in interest payments (assuming a rate of 2.9%)
- $28,206.55 – AMOUNT PAID FOR YOUR NEW CAR
But What’s Your Car Worth Now?
You might not think that $28,206.55 is that bad. I mean, your car is super sweet. However, it’s been 4 years since you bought this car, and the average vehicle value goes down 60% in the first 4 years. That means that your super-sweet car is really only worth $10,000 today. You just threw away $18,206.55….and you’ll never see that money again. How do you feel now?
Here’s What I Would Do Instead of Buying a Brand New Car
Since it seems that you enjoy a newer car rather than an antique, I’ll advise that you buy one that’s only 4 years old. At this point, it probably doesn’t have more than 50,000 miles on it, and it’s still driving like a dream!
For that new car of yours, the payments were $441.80 a month. I would advise that you simply save that $441.80 (which you have because you didn’t buy that new car) for 24 months. After 2 years, with no interest whatsoever, you’ll have saved $10,603.20!
It’s time to head out and buy that 4 year old car for cash – buy from a private party, and you might strike yourself a pretty sweet deal too!
Let’s say you spent all of your $10,603.20 on that car, but remember, you still have your Jeep (now probably valued at about $5,000 instead of $6,000). Let’s sell that car and put the money in savings.
Amount of Extra Money, Plus You Own a Fairly New Car
After two more years, you continue to save that $441.80 a month, which amounts to another $10,603.20, plus you have $5,000 from the sale of your Jeep, which means you now have $15,603.20 in savings, AND your car is probably still worth $8,000. That means you have a net worth of $23,603.20.
Do you remember what you had after paying off your new car? Only $10,000 (the value of the car).
So, because you bought a car that was slightly used rather than new, you are now $13,603.20 richer.
Did you have any idea that a new car could be so costly? Wouldn’t you rather have an extra $13,603.20 after the course of 4 years?
Crystal’s Comments: Yes and no. I hate errands and most used cars are going to have a few more issues than new cars. But, my husband bought a used car – a 1 year old Prius – in 2008 that hasn’t given us any problems at all, so I know all used cars aren’t problematic. So, from here on out, we’ll probably buy used and pay off any loan as fast as possible, but I will be having my mechanic check out the car from tip to tail to make sure it won’t give me a headache, lol. I’m also not replacing my car until my stupid Chevy Aveo gives up on me completely. Great post Derek!
Obviously you should never buy more car than you can afford. And it isn’t good to owe money on a depreciating asset. But in general if you can afford it, there isn’t much difference between buying new and used precisely because used cars have higher maintenance costs (because of adverse selection). http://nicoleandmaggie.wordpress.com/2010/09/27/how-the-used-car-market-is-like-health-insurance/
The last car my husband bought was new but he keeps his cars for 10+ years. The last car I bought was used and it was 5 years old.
The other costs that go way down after 4 years are excise and sales taxes. That also can be thousands.
I’m starting to believe that new car dealers have engrained it in our minds that new cars are thousands of dollars cheaper every year because of low maintenance. I think this is a farce.
Used cars most likely do cost a little bit more, but even if my engine went out in my car, I could get a whole new one for $3,000, and I still saved more than $10,000 off the price of a new car.
Plus, that new car is depreciating much faster than a used car – it may not take maintenance, but it’s still taking dollars out of your pocket.
You are making a very faulty assumption that the old Jeep is still running like a dream and hasn’t cost a penny to repair anything. When you buy a new car, you get a bumper to bumper warranty. I bought at 4 year old car in 2008 and over two years, I had to put well over $3,000 into repairs on that car.
Even with $3,000 in repairs, you still make out much better than buying a new car, but to ignore such a large potential amount of money is a pretty big oversight.
I hear this advice all the time, and I can see what you are saying, but when I was 16, I bought my first car that had less than 30,000 miles on it. Turns out the previous owner never put oil in it, so the car gave me problems left and right. Ever since that miserable experience, we buy new. I had my first new car for 10 years, and we are going on 7 years now for our present car. I feel better knowing I have been taking care of it, and we plan to drive it for at least 4 more years. (But we do like you say and put some aside each month to pay for a replacement when the time comes.)
I have to respectfully disagree. While cars do depreciate fast, not all cars depreciate as fast as others. For instance, my Volvo has held its value very well. Also, for someone like me who plans to keep cars for a long time, buying a newer car enables you to have a reliable car for that much longer. I’ve had many cars in my life. I have found the used ones – despite make or model – start to have maintenance issues around the 5-6 year mark. The new ones run great until the 5-6 year mark, and then need repairs. Not having costly repairs for 5-6 years really makes up for the loss of value, in my opinion. That is why if I do buy used in the future it will not be more than a year or two old. And even then, the price had better be low enough to counter act the headaches that I know will be coming my way in the next few years.
However, I do like your theory for saving money that you would be spending, even if you don’t have a car payment. That is smart. It also ensures that when you are ready to buy your next car you will have a bigger down payment. Let’s say you had a 5 year car payment and kept your car 10 years. If you kept “paying yourself” you will now have 5 years worth of car payments to use as a down payment (or full payment!).
I’m right there with you on buying used vs. new. The only new car I ever bought had a massive amount of issues during the 4 years I owned it, and not a single one of those issues was covered by its warranty. On the other hand, the car I bought when it was one year old is still going strong now 20 years later.
I realize that I probably ended up with extremes on both ends of the scale, but repairs vs. amount spent for a new car has me sold on used.
Thank you Jackie! I was wondering if anyone would agree with me on the debate of used vs. new!
@Kevin
@Mom’s Plans
@Denise
I have had a few used cars that had plenty of items that needed repairing, but the total cost was nothing near the depreciation of a new car! I just can’t imagine buying a car for $25,000 and selling it 4 years later for $10,000. That’s a guarantee for losing money.
@Denise, I also love that idea of paying yourself after the loan is paid off. My husband and I paid off my new 2005 Aveo in 2007 and then started paying ourselves that $200 a month into a savings acount called “Car and Home Maintenance” and have conitinued that to this day.
We ended up using that account to make the downpayment on his 2007 Prius when we bought it used in 2008. We paid off his loan in mid-2010 and have now been paying ourselves that extra $300 a month since then too. That means we have $500 being funneled away every month for whichever car needs to be replaced or repaired next.
Love it!
Personally, I think older used cars have more personality. The key is doing a ton of research before you buy a used car. Plus, I’d rather save my money and go on a nice vacation and drive a used car then have a nice brand new car and no vacation.
@Jenna – I do agree with you. A new car looks nice at first, but they are just so much money! I mean, in my area, I can buy a pretty decent house for $60,000. I can’t imagine spending half of that on my car!
Plus, vacations provide pricless memories. Cars really aren’t that special – in my opinion.
Cars are depreciating assets! The best way to buy a car is exactly the way you describe it! Buy it used and pay cash! Many people cannot do that, but they can buy it used (3-4 yrs. old) and drive it into the ground. So you may have debt for a shorter period. Most cars, if well maintained will last 300,000 miles or longer. Mine are 16 and 14 years old.
My argment for buying used is always this: If new cars were cheaper than used cars then poor people would drive new cars.
I’m for buying slightly used cars. 2 years old or so. And then driving them til the wheels fall off.
The (lind of a) problem with Used cars today is that they’re over priced. At least in our neck of the woods.
Soooo, we compromised and bought a “Used” “New Car.”
A 2011 model that, brand new, would’ve cost us $21,500+TTL. And basically Zero (0) miles on it.
Instead, we bought a Used New Car. Still a 2010 model (at that time in 2010), but with the full 7 year Toyota warranty, and for $14,000. Oh, and it had some mileage on it. Right @ 20K miles. Seems like a few miles IMO, but it runs brand new and the warranty sold us. Plus, we saved $7500 on sticker price. but the thing is … we were planning on buying that used car, and had a ton of money saved for such. Instead, we paid cash for this one. Our car cost us …. exactly what we told them we’d pay. (And we went back and forth for a week.
Was it a good deal? We’re happy. And Toyota’s keep value – in most cases – better than the average cars. Even despite the bad publicity they’d been getting lately.
I quite agree tho’ … but a Used Car. If you can … get your best price and pay cash. The kelly Blue Book still says we can sell it for more than we paid for it, and we’ve had it for …. over 7-8 months now? Normally, we’d not have bought a car as new as this one was (Matrix). maybe it was a frugal splurge? (Ha!)
Good Stuff Derek. Spot on.
New for me from now on. I posted on my blog about it just this week in fact.
If I had the mechanical knowledge/time/skill/location to maintain my own car, I might feel differently about used. As it is, the 2 new cars I’ve bought have lasted me hundreds of thousands of miles and I’ve driven them until I absolutely got my money out of them.
Also if you buy your car at the right time of year, you can get a new car for a very very hefty “discount” below invoice.
@ krantcents
@ Ashley
You’ve got it right! Since cars are depreciating assets, it’s best to buy them after they’ve done the majority of the depreciating. I agree with driving them for a long time as well! Thanks for the comments!
@kh
I do understand where you’re coming from with the new car, but even if you get a good deal, it’s still going to drop like a rock in value.
I’d rather do my research, buy something that is mostly depreciated already, and drive it for a long time.
Thank you for the comments. I’m glad that you didn’t buy a new car right when it hit the lot!
You should write about the total cost of owning a car.
We purchased a new car last year and it worked out pretty well. We share only one car and drive it for 10+ years. I think the length that you keep the car is as important as the acquisition price.
@Ashley– That logic only works if you assume they can borrow money cheaply. Credit constraints mean that people cannot optimize.
I would always buy 3 or 4 years old car.
The problem is finding a good mechanic who is honest too. A good mechanic and an honest mechanic are mutually exclusive.
Hello Crystal, Julie here! I’ve been busy so I haven’t been by the site in a while, but I thought I’d chime in here. I agree that buying new vs. used can be a personal preference. I have bought both new and used so I thought I’d offer my perspective:
new: my van was bought new when Honda was having a great deal on them. I got it for 8K under MSRP. (6-7K if you add tax, but then you’d have to add tax to the MSRP, too).
used: A couple of months ago I purchased a 4 year old BMW. These cars are notoriously expensive to maintain but drive like a dream. I got it for less than half of its price when new after having had more than one dealership look at it and running carfax on it. I have to admit to having some help as my friends’ brother owns a dealership so I got it at the wholesale price.
I have always gone with used cars. Yes there is a chance that you will have problems with it but with a little forsight and research you can get a decent used car. My advice is always have your mechanic check it over before buying.
Just wanted to wade in with a general suggestion: check out the local Auto Trader or similar newspapers, plus the websites.
You’ll get a good idea what used cards are costing (dealer prioces versus non-dealership sellers).
My last car (2001 Volvo V40) was purchased from a lease-return reseller (not a dealership). The all-in drive-away price for a 3-year-old car was $16000, compared to the same car at the dealership for $19000, plus-plus-plus-plus.
Having found a local non-dealership specialist in the car helps on repairs — I get honest advise on prioritizing repairs as well as what after-market parts are worth getting versus going to the dealership, plus labour is less than the delership charges. Big kicker is the “Volvo-certified mechanic” diplomas hanging in the office, plus the owner and mechnics know us and our cars (my wife’s car, also used, came from a dealership before we found the lease-return guys. Yep! Overpaid by about $5000)
The only new car I ever purchased was my very first car I ever owned. My father was too scared to put me in a used car because I was new to the road and was afraid that it would break down. However now, I stick to the used cars. The value of a car depreciates the minute you take it off the lot. So a “new” car isn’t worth it. Yes, the smell is nice, and the miles are low, but you ARE paying a ton in interest. I would rather have the 13K in my pocket towards my house or a vacation!
That’s why we’ve buy used cars. The insurance is cheaper and if it’s a good car and you take care of it correctly and it can lead to fewer headaches over the long haul.
This makes a lot of sense, I have read before that buying a new car can be a very poor investment. If you can find a good used car with low mileage, get it!
-Jen
Wow, That really adds up really quickly. I never took the time to add all the little expenses up… No wonder our parents always told us that buying a slightly used car was a better deal.
Love the section about saving. It is amazing that if you just buy a used car and put away into saving what you would have been paying off your new car, you can retire early! That sounds great to me!
Great info, I will be back soon.
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