new car

Why Buying a New Car is a Bad Investment

One highly desired item on many people’s wish list is a new car. And not just a new-to-you car, but a brand spankin’, first time owner, customize to your heart’s desire new car. While the allure of a new car is often irresistible, we’re here to impart on you a very important piece of advice.

DON’T DO IT!

If you truly want to have Money Earned through Money Saved, absolutely, unequivocally, positively never buy a new car. In fact, buying a new car is one of the absolute WORST financial decisions anyone can make.

You may be thinking, what’s the big deal? If I can “afford” it, why not? On the surface, buying a new car may not seem like a huge financial burden, but we guarantee it is one that will significantly limit you.

Let’s take a look at why buying a new car is a bad investment, and how buying a nice used car can save you thousands.

New Car Prices Have Risen Faster Than Salaries

At this point thinking about all the likes and comments you’ll get after posting your new car pics on Facebook and Instagram may be overriding your desire to save money. We get it, buying a new car is a status symbol, an extremely visible status symbol that will be seen by thousands of people every day.

Cars have always been a status symbol in this country, dating back to mass production of the Ford Model-T and the emergence of the middle class in the middle of the 20th century. Once cars became widely affordable, it wouldn’t do to simply own one. The type of car you owned now became a major factor in determining your status, an idea we American’s continue to buy into today. In fact, aside from a home, our cars are often the most expensive item we own.

While new cars have always been part of the American dream, today’s new cars far outpace the American budget of our parents and grandparents. To give you an idea just how steeply the cost of a new car has risen, let me (Tawnya) share a personal example.

My grandparents bought their first new car in 1972. It was a Chevrolet C-20 three quarter ton pickup in yellow and white (you know the one). Know what the cost of a brand new pickup was in 1972?

THREE THOUSAND TWENTY-SEVEN DOLLARS.

Three-zero-two-seven.

$3,027! For a brand new pickup!

Even better, know what my grandpa took home every month in 1972?

$700.

That’s right, the cost of a brand new pickup in 1972 was equivalent to 4.3 months’ salary for my grandparents.

As I write this article, a 2018 Chevrolet Silverado 2500HD regular cab (the modern-day equivalent) would set you back $34,400 before any upgrades (MSRP). That’s equivalent to over 11 months of my take-home teaching salary. That’s 2 ½ times the number of months it would have taken my grandpa to pay off his truck in 1972, and that’s if I could dedicate my entire monthly salary to the payment (which of course I can’t, and neither can anyone else). This example shows just how much the cost of a brand new vehicle has outpaced the increase in salary over the last 45+ years, making the purchase of a brand new car just that much more unrealistic for us today.

Low Monthly Payment = Longer, More Expensive Loans

Not to worry, you say. Car dealerships are willing to work with me to finance my new ride in such a way that I can afford the payments.

I bet they are.

There’s a reason car salespeople have such a bad rap. They’ll sell you the absolute most car you let them, although what they won’t tell you is how they’re taking you with longer loans and higher interest rates (especially if your credit could use a little TLC).

According to a CNN Money article published in July of 2017, the average car loan spans 69.3 months, or almost six years. Furthermore, the average monthly payment on a car loan is $517 dollars, with the average loan equaling $31,000!

This means that American’s are financing more of the purchase, over a longer period of time, and spending a huge chunk of their monthly income, all for that new car smell.

Car Dealer Myths

It’s still okay, you say. Many people do it. Heck, car salespeople have it great with all those dealer discounts…

Can I let you in on a little secret? Car salespeople RARELY buy new cars.

It’s true.

In fact, car people tend to keep their eye out for those great low-miler trade-ins that have already taken the new car hit (more on that later). Plus, with mechanics and service people at their fingertips, car people know when they’ve found a steal of a used car and snatch them up.

Is that the dealer discount you were talking about?

Oh, and that idea that a car is about to fall apart once it hits 100,000 miles (my Camry must be barely holding it together at 266,000 miles)? That’s a myth made up by car dealers to get you to trade in your perfectly fine vehicle (that they’ll pay you an outrageously low amount for, then turn around and make a nice profit on) and get you into even more debt by buying yet another new car! (My dad worked for a car dealer for a period of time and is good friends with several car dealer owners, so this is on good authority).

The New Car Hit

Still not convinced?

If dedicating more of your salary for a longer period of time isn’t enough to convince you, how about the fact that you will actually owe more on your new car than it’s worth the moment you drive off the lot?

Seriously.

Cars are depreciating assets, meaning they lose value over time. New cars are the worst. That’s because the biggest depreciation comes in the first year, with a big chunk of that coming when you drive it away and it goes from new to used. This is unofficially referred to as the new car hit.

In fact, once you drive a new car off the lot it depreciates as much as 10%!

Remember that brand spankin’ new Chevy Silverado we were talking about earlier? That $34,400 truck may only be worth $30,960 by the time you get it home.

But the fun doesn’t stop there.

The average new car will lose around 20% of its value in the first year (10% when you drive off the lot plus an additional 10% in the first year), with an additional 15% in depreciation each year for 4 more years. As a result, most cars lose around 60% of their value in the first 5 years, and at 10 years the majority of cars are only worth around 10% of their original cost.

It’s not looking so good for the Chevy, but here it goes.

After the first year, 20% depreciation means my brand spankin’ new Chevy will be worth about $27,520. After 3 years, my not so new ride may only be worth about $17,200, half of what I paid for it (20+15+15 = 50% depreciation).

Remember that $517 a month payment?

Yeah, a large chunk of that payment is going to interest for the first several years (Have questions about interest? Check out our Start Taking an Interest in Interest series). Thus, while the value of your new ride is dropping like the rain in Portland, only a portion of your massive payment is actually going toward the amount you still owe on the loan. This means that for the first several years you own the car, you’re actually upside-down in the loan.

You actually owe more than the vehicle is worth.

This is bad for a number of reasons, the first being that if you needed to sell the car for any reason while you’re upside-down you would actually end up owing more money after you sold it.

New Car = Expensive Insurance

Need yet another reason not to buy a new car?

Not only are you being gouged with more money, more interest, and a longer loan, you’re also likely going to pay more in car insurance. New cars often have higher insurance payments because they’re worth more than used cars (duh!). Furthermore, you will likely need to consider gap coverage with a new car to ensure you won’t be left with a sizable chunk on your loan if your car is totaled (gap coverage will pay the difference between what the car is worth and what is still owed on the loan), which will add more to your premium. While many things determine what you’ll pay for insurance, it is important to factor this cost in to your monthly new car expense.

Avoid the New Car Hit by Buying Used

If all the above still doesn’t have you convinced that new cars are bad news, consider this. I’m not saying that you can’t have a nice car. I’m not saying you need to drive an old beater. What I am saying is be patient, be smart, and buy yourself a nice used vehicle.

Let me give you another personal example. I recently upgraded my dog hauler (a 1993 Ford Explorer with 240,000 miles that my grandparents bought new).

After much debate (and price comparisons), I settled on my perfect vehicle: a steel-blue Chevrolet Silverado 1500 LT 5.3L V8 4WD Crew Cab short box (the featured image for this article is my truck). It even has the chrome package and a cool air intake exhaust system, which makes the engine rumble and the heads turn (status symbol all the way, baby!). I got a great deal on it. Low miles, everything in top shape, all for $19,500 ($1,000 below KBB!).

Only one thing…it’s a 2007.

Want to know what one of these baby’s cost brand new? (one more time, bear with me)

At the time I bought my truck (April, 2017), the brand spankin’ new version (the same thing with a newer body style and never been owned) cost…

$44,100.

I saved $24,600 and got the exact same thing on a 10-year-old truck with less than 90,000 miles that everyone thinks is brand new anyway!

Moral of the Story

Buying new isn’t the way to go when it comes to cars. The skyrocketing prices of new cars coupled with the slower increase in wages mean that buying a new car simply isn’t practical anymore.

Why waste thousands of dollars on something that’ll lose its value and appeal so quickly? After all, after a few months the thrill of the new will wear off, and your vehicle will be just another used car.

The only thing that won’t wear off are the payments!

On the other hand, you can get the exact same thing a few years older, and save tons of money. Look at my example. What could you do with an extra $24,600 over the next five years?

Talk about Money Saved!

22 thoughts on “Why Buying a New Car is a Bad Investment”

  1. I definitely agree with the principle, and if I were to buy another car today, I’d go the gently used route and I’d pay cash. That being said, I did purchase a brand new Honda Civic five years ago. It was important to me and my wife (we share the one car) to have the newer safety features (the back-up camera has been a lifesaver when parked between two larger vehicles). And although we purchased it on a loan, it was at 0.9% interest with payments less than half of “the average”. Now we have a paid off car with low miles that we plan to keep for as long as it lasts…which should be a very long time.

  2. Wise words, three years ago when I first early retired I was making enough in a single month to buy most new cars made in America but I was still buying and driving used cars. My latest, bought this month, a 2008 Infiniti with 158,000 miles on it. Price? $7,000. It will out accelerate and out corner 98% of the cars on the road, has leather and tons of fancy luxury features, even a big factory subwoofer that is mounted inside the spare tire, yeah that is weird! A friend of mine who gets a new truck every year just paid $68,000 for his latest pickup! OK, it does give a nice fingertip massage to both front seat occupants. And he parked next to me at the tennis courts and asked me if my “new” car was a 2018 model. That was priceless! $7,000 for a ten year old car that looked brand new to my car guy friend!

  3. I definitely agree. Used cars all the way it’s just a better investment. It’s so hard in the thick of car shopping to know exactly what to do and next time I am I will definitely look back on this post for advice!

  4. I can’t agree more. New cars come with so much to look out for financially especially when it comes to insurance and maintainance. And frankly, that pulls many into huge debts they usually have trouble dealing with.

  5. Yes, you are right. Buying new means a 10% depreciation right when you drive it off the lot. But many people still do it. I think if you are committed to paying it off quickly and you keep it for 200,000 miles, it might make sense.

  6. I would rather purchase a new vehicle with warranties than to buy a used car without any knowledge of the history behind it. I would also choose to buy new because the payments end instead of leasing where there is a continuous monthly payment as long as you’re leasing.

  7. Hmm I think you make a good point about not rushing into buying a new car but one shouldn’t rush into buying a used one either. As long as the mileage is ok and you can check the car doesn’t have any major faults you can safely go for a used one. However, in some cases buying a new one will eliminate all the risks with you not being able to spot potential faults in a used one (this mostly applies to less experienced drivers)

  8. I totally agree, cars are not really investment, as their price depreciate every year. And the insurance for new cars are really expensive. Unless you have money to splurge on cars 🙂 But on second thought, I think, you need to check used cars before buying it.

  9. I did noted that the as the cars are getting better when it comes to sell it they go down in value so much when compared to old cars! I always look for used cars too!

  10. I haven’t had a car payment in a while and I’m not looking forwarding to purchasing a car. The new car hit is horrible, nobody would “invest” in stocks and lose 10% immediately but the psychology of owning something new is too powerful for most.

    1. We would argue that most people have no idea they are losing so much value immediately, which is why we wrote the article. You’re right in that there is a status associated with buying a new car, but it wears off quickly and that is what we want people to understand.

  11. Renee groskreutz

    This is such great advice. Your point about how car prices have outpaced raises worries me. I decided to buy out my lease. I have no clue if I made a good choice but I can say that I will keep it as long as possible after this.

    1. Whether it was a good choice or not, it’s already done. However, we’re glad you have decided to keep it as long as possible, as that’s really the only way to get your money’s worth.

  12. I really enjoyed this post.

    We’ve bought new vehicles before, but now try to buy only used vehicles slightly before we think we’ll need them. That gives us time to shop around for the best deal we can find.

    Someone has to buy new cars to keep the market going, since cars don’t last forever. But I’ll let someone else take the depreciation and pay the higher taxes and insurance.

  13. I dont disagree with any opinions from this author, however one glaring point I would suggest is you cant put a price on piece of mind with a new vehicle when it comes to breaking down. Used cars are going to break down, thats a fact. Sometimes you get a warning and the repair wont come close to those ugly new car payments. The breakdown times when its the dead of winter and you are far from civilization, you will regret not having those big fat car payments. For where I live and drive, its gotta be new or close to it.

    1. Piece of mind can be worth the extra money for some people. However, I would also point out that new cars break down too. Of course it’s perhaps less likely, but not a 100% guarantee. I remember looking at cars with a friend at Carmax and an almost brand new Jeep (1,500 miles) they had in the showroom wouldn’t start and they couldn’t figure out why. If it really matters to you then go for it, just know what buying a new car means in terms of depreciation and don’t overstretch yourself.

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Scroll to Top