Should you take out a car loan to buy a new car?
Your car breaks down on the side of the road … again. It’s rush hour and it won’t start. You have to have it towed and you’re not happy about it. At all.
So what do you do?
You head to the local dealership in a fury, ready to replace it with something far more reliable, but also affordable. But the dealership has a few tricks up their sleeve and, according to Paul (the salesman helping you), it must be your lucky day. Amazingly, your car died at the most opportune time in history.
“Amazing deals are on the table for today only, folks, and we are in the midst of a complete liquidation,” says Paul. “Prices are being slashed left and right, and you need to act fast.”
“This is the sale of the century!!!”
So you bite, and before you know it you’re standing in front of a shiny, new sedan covered with stickers exclaiming things like “0 PERCENT INTEREST” and “$2,500 CASH BACK.”
You slide into the plastic-covered seat and breathe in that indescribable new car smell. You play with the knobs and the radio, and you notice how little squares of plastic have been methodically placed to shelter the dashboard from the germs and fingerprints of anyone who dare touch this car. The flawless upholstery is still largely untouched, never having been exposed to the rain, the sludge of winter, or your toddler’s leaky sippy cup. You like it.
“Pick your payment and I’ll make it work,” says Paul.
And the rest is history.
The High Cost of a Low Monthly Payment
This kind of scenario happens every day of the year and all over the country. It happened to me when I was 22 years old. At the time, I had a job making something like $8 an hour but had just gotten my residential real estate license. I headed to the dealership, convinced that I needed a newer car to drive around all of the clients I would surely have. (Feel free to laugh.) Soon I was talking to a shark of a salesman — a nice guy — who used buzz words like “elegant,” “sophisticated,” and “successful” to describe how I could look in something new. And I bought it all hook, line, and sinker.
Even though I went to the dealership with something much more modest in mind, I pulled out of there with a brand new Mitsubishi Galant, a $24,000 loan, and a monthly payment somewhere close to $500. Even worse, I quickly found out that I was a terrible saleswoman and never sold a thing.
But I still had that payment.
Car Payments: ‘Til Death Do Us Part
And I’m not the only one. A recent study from Experian shows that Americans continue to spend lavishly on new cars, despite the fact that wages have mostly stagnated and the median household income continues to hover at around $51,000 per year. A few of the key findings from Experian’s report:
- The average car loan for a new vehicle climbed to $27,430 in Q4 of 2013, up from $26,691 the year before.
- The average monthly payment for a new car loan rose to $471/month.
According to Experian, new car leases are also on the rise accounting for 28.4 percent of all new vehicles financed in Q4 2013 and with an average payment of $420 per month.
“Leasing continues to grow in popularity among car shoppers, especially those hoping to stay within a strict monthly budget,” Melinda Zabritski, senior director of automotive credit for Experian Automotive, said in a press release. “Our analysis this quarter showed that the average monthly lease payment was $51 lower than the average loan payment, which can make a big difference to consumers trying to stretch their dollar.”
But What If…
The new car industry probably loves hearing that new car loans continue to rise. But the family budget? Not so much. At nearly $500 per month, that payment is as much as some families spend on groceries or even a small mortgage.
But what if you chose to do things differently and forgo a new vehicle every five years? What if you drove something older and cheaper and paid it off? Or paid cash to begin with?
What could you do with an extra $471 per month? What would that mean to your bottom line? A few ideas:
- You could pay down debt. No matter where you are in your financial journey, freeing up an additional $471 monthly could make a world of difference.
- You could save it. Pocketing the average car payment for five years would mean adding another $28,260 to your savings.
- You could invest it. Investing $471 each month into an account earning 4 percent would yield $31.837.57 after five years. Invest that amount for ten years, and you could be sitting on $70,572.85.
And that’s not all. Imagine having an extra $471 each month to help your kids pay for college, or using it to beef up your dream vacation fund. You could even set it aside and use it to pay for your next car with cash. After all, whatever you’re driving won’t last forever.
And obviously, the choice isn’t just between buying a new car and keeping your old one. Some people drive considerably more than most people and need something reliable. Others want the “new car warranty” that protects them from out-of-pocket repairs and the worst-case scenario of getting stuck with a lemon. Fortunately, the average car loan can easily be cut in half on even a new car, simply by choosing an inexpensive model. Cars.com even offers a list of the cheapest 2014 models that start at considerably less than the average car loan, including three that cost around half:
- 2014 Chevrolet Spark — $12,995
- 2014 Mitsubishi Mirage — $13,790
- 2014 Nissan Versa — $13,800
You can even shop around for a reliable used car. Remember, the experts say that a new car loses 20 percent of its value within a year and up to 60 percent of its value within five years. If you have to replace your car, consider buying a used model with low mileage and a warranty.
Break Up With Your Car Payment … For Good
The new car smell, the way your friends ooohhhh and ahhhhh as you pull into your driveway, the sense of pride you feel when you pick your kids up at school, all of that is an illusion — a fantasy –– perpetuated by an industry that desperately wants you to see your new car as a symbol of your status and a sign of success.
We’re paying dearly for the privilege and giving up far more than what we get in return. Next time you are in the market for reliable transportation, don’t forget to run the numbers. Calculate the real cost of a new car and ask yourself, “Is it worth what I’m giving up?”
Chances are, the answer will be no.
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There are 81 comments to "Should you take out a car loan to buy a new car?".
I’m currently car shopping to replace my teenaged car and find it’s very much a numbers game. A couple of things I’ve learned:
– Spending a bit more to buy a reliable model saved me a LOT of money in repairs and maintenance over the years. More than the difference in purchase price for a cheaper but less reliable model. (And certainly a LOT less hassle.)
– Consider amortization. For instance, if a new car costs $24,000 all in and you drive it for 12 years, that’s $2000 a year over the life of a car. If you buy a four year old car at $18,000 and drive it for eight years, that’s $2250 per year. That’s just the purchase price. If you always buy used, you’re paying more for maintenance and repairs because someone else got those early trouble-free years.
– There’s a certain amount of maintenance that needs to be done around the 5-year mark. Regardless of whether I buy new or used, I’ll factor that in.
– Does it always make sense to pay cash for a car? I can pay cash, but with near 0% interest rates would I do better to hang on to my money? (Even my paltry savings accounts make 1.25%) I can afford to pay the car off at any time and I would put down a large enough downpayment to make sure I’m never underwater. Still, I HATE the idea of debt.
– The money you would no longer need to put towards a car payment isn’t “free money” — it should go towards paying cash for your next car. If you’re saving for your next car, don’t make the mistake I did and count it as part your net worth — it makes it even harder to part with the money! (Hmmm. perhaps that’s a good thing?)
If anyone has any thoughts/suggestions/criticisms I’m all ears! (And would be grateful)
We do agree that one should pay cash. I disagree, however, that there is little difference between buying new and used. First, maintenance and repairs between the two will not be that big of a difference. It might save a little for a couple of years, but then that new car will become a used car and it will also require repairs and maintenance.
Second, your purchase numbers are off. Buying new is much more expensive! I just checked Kelley Blue Book and to buy a 2014 Honda Accord in my area would cost $22,000. A 2010 Accord with all of the same options would be $12,000. And both will last far longer than 12 years.
More details:
2014 model on factory clearance: $22K (Including a LOT more features than the 2010, such as more airbags.)
2010 version with fewer features: about $14K + 13% HST + $800 for new tires + licensing and fees = about $17K.
I should have double checked my estimate before posting this morning — you’re right, I was off by $35 a year if you take out the tires. (If I buy new, I’ll have to replace the tires anyway after 4-5 years.)
Prices here aren’t as low as they are in the U.S. and good used cars are hard to find where I live (a lot of demand from young professionals and students). I might have to go farther afield!
Same situation where I live (Atlantic Canada). Used cars are much more expensive than in the US. Even with rust-proofing, most cars have a 10-12 year lifespan before rust gets them (love that fresh sea air).
For us, the amortized purchase price for a new car was not significantly higher than a used, with a few assumptions:
(a) negotiate hard on price (2-3% over invoice)
(b) turn down all dealer extras (warranty, paintguard etc)
(c) get a decent discount for paying cash (>5%)
I think you make a lot of negative and unsubstantiated assumptions about used cars. I looked online and saw $22k and $12k in my area for a HONDA – Hondas hold their value more than most other car makes so other makes will likely go for less. Both of the cars can be negotiated down. And frankly, you could pay less for an even older car than just 4 years old.
$800 for new tires? That is high. And wherever you are, you pay a 13%(!) tax and it is only on used cars and not new cars? That is crazy – here in the US that is definitely not the case.
PS – and in what world does a 2010 Honda Accord not have air bags???? They have been required by law since 1997.
The dealer wants to make money off the financing so tends to hold to a higher price line for the 0% versus a rebate amount (which I believe comes from corporate so they don’t lose that money). Nothing saying you can’t negotiate a deal with a rebate, get the lower price through them that way, then pay it off in cash. Just don’t assume the 0% deal is automatically a better overall deal and look for a number of car buying strategies to get the lower price.
A comment on the $12K 2010 Honda Accord by Scooze. That may be what the blue book says (I got $13K for what I put in), but a quick look at craigslist in our area has 2010 honda accords going for $15-17K. The only $12K ones I saw had rebuilt titles, very high milage, or other potential issues. I’m sure part of this is these have other bells and whistles originally purchased, but you have to consider the market and your needs. You may have to wait for what you want versus getting it when you need it. Perceived reliable cars come at a premium.
I entered “excellent” condition, so I doubt that most of the cars are that bad at that price range.
A car’s listing price does not equal its going price. Wouldn’t it be nice if Craigslist listed sold items like ebay does?
Yes! Good point. Here’s a pair of cars I was looking at for comparison (these are sticker prices, not all-in)
2012 Toyota Corolla for $16,800.
2014 Toyota Corolla with similar options: $18,500
Difference of $1700.
Say I drive both until they are 12 years old. Looking at the amortization of the purchase price alone, the 2012 costs me $1680/year. The 2014 would cost me $1542.
Let’s throw in a 2011 at $15,500. Drive it until it’s 12 and it costs $1722/year.
A 2010 for $14,500. Drive it for eight years = $1812/year
or a 2010 for $13,500 = 1688/year.
Yeeeesh. Why is this so difficult?
You have flexibility with insurance when you own your car outright.
I’m curious — how so? The quotes on insurance I got from my broker were the same whether I lease, finance or pay cash. I’d love to know what I’m missing!
you don’t have to have full coverage. You can also go down to minimum state requirements – finance companies usually require higher limits.
We just bought a car, half cash and the rest financed. Those 0% deals really are not 0%, there are certainly fees and costs with them. Accordingly, we financed the other half privately and came out ahead of the so called 0% finance deal.
I’m curious — how did that work? I haven’t encountered any extra fees on the .5% financing quotes I’ve got from dealers.
Beth:
If you can afford a new car, go for it. We have often bought new cars and keep them a long time, typically selling them at 150,000 or so. New cars often come with additional features and benefits not available on older cars. Consumer Reports does an excellent job reviewing new and used cars. Either way that works for you, if you can’t afford new, there are lots of reliable used cars out there. Cars rusting out is pretty much a thing of the past unless you live in areas where the roads are seriously salted or near salt water. But the coating on metal these days serious reduces these types of problems.
Good luck Beth
Nice job on this Holly! The average car loan could be cut to nothing if people did some advanced planning. We have been saving for a new to us vehicle for two years as we have been anticipating our family outgrowing our minivan. In 6-8 months we will be able to purchase a used suburban-type vehicle with cash. We couldn’t have done that had we not looked ahead.
Interesting article, but personally I am for the debt-free lifestyle, Buy a car only if you NEED it, and if you do PAY CASH!
People should never get into credits!
Thats just my opinion anyway!
That’s how I feel, although I know it’s not always realistic for some people. We don’t have any car payments now and hope to never have them again.
If you want to pay cash, be sure to dump your too-much-used vehicle when it starts to bleed you dry– even if you just bought it. The fallacy of sunk costs applies ESPECIALLY to junkers.
By the time I got the rest of the family to admit we had to replace our bought-very-used van (when you have 3 adults and 2 kids in the family, you are really screwed when it comes to any distance travel– inexpensive five-passenger sedans just *aren’t* practical for any distance) we had dropped so much money into repairs that our emergency fund was dangerously low. We were averaging $500+ in repairs a month, more than a car payment.
Checking consumer reports used car reports, not just your mechanic’s know-how, can also *sometimes* save you from buying a cheap used car that suddenly starts soaking you for repairs.
Note: Instead of buying a junker with whatever cash you can spare, it may be worth it to investigate off-lease vehicles that have good Consumer Reports ratings.
I’ve owned 6 cars over the last 15 years, none of them even close to new. I don’t think I could stomach the depreciation, or the payment. Except for one car I bought right after getting married, I’ve always paid cash. For example, I bought a 2000 Camry in 2005 for $7500 cash, and 9 years later it’s still our family car, and we’ve never had to make any major repairs on it.
I’ll have mine paid off next year and when I do, I’m going to take most of that payment and put it in the next car fund. That way in 6-7 years when this one either dies or becomes too expensive to fix, I’ll have enough for a decent used car. I was looking on carmax and for about 14k you can get a nearly new car. Keep on like that and I’ll never have to finance a car again.
And that’s a great place to be! The last car I had to finance was about 25 years ago.
Debi, you’re right, it is a great place to be.
Apologies to GRS readers who’ve heard this before (last time, promise), but this is such an important issue. They say cars are the second most important purchases we’ll make in our lives, after houses. (I say the most important purchase is the wedding license, but that’s another story.)
I bought my first car (a 13-year-old Chevy) at age 17 for $75. Cash, of course, though $75 back then meant two weeks pay when minimum wage was a dollar an hour.
It’s now fifty years later, and I’ve never made a car payment in my life. That first car, paid off when I drove off the lot, set me on the right path.
And not just for cars, of course.
Don’t apologize. That’s awesome!
Good article.
There may be a day when I need a ‘real’ car. But for now, living in New York, and parking on the street, I was very happy to buy 12yo car with 80k miles for $1,500. Bonus: Insurance goes down considerably when you don’t care if your car gets dented or even stolen.
Coming from the sub-prime auto industry, I have to say, there are many stretches available for people planning to buy a car at a reasonable price. But when getting into an auto loan, lenders aren’t typically lenient for first time buyers at a young age, so I can see what could have happened there.
But I agree with what you said about, “We’re paying dearly for the privilege and giving up far more than what we get in return.” I had a lady one time call in, in hopes of getting an auto loan with her very poor credit…and she wanted only a Maserati with only her SSI income…You see, people just won’t settle for what they need. It’s always about privilege and face.
I agree 100% to keep cars longer than we currently do in this country and also that we tend to over-buy.
However, I disagree about not financing vehicles (whether new or used). The wife and I bought a car recently for about $20K and financed $15k of it (we could have put a much larger down-payment on it if we wanted to); we got 1.9% financing. Given today’s inflation and the fact I can get a better return investing the remaining funds, financing was a no-brainer. That said, this wont work for people who do not think long term/save, but I don’t think that applies here.
People get a job and want a large house. So they buy a McMansion an hour plus from work. Now they’re spending half their time in the car instead of the home they wanted so bad so they makes sure it has a touch screen, back up camera, bluetooth, etc. This costs much more than the basic car they really need so they have to get a better job further away…
I’m obviously taking this point to an extreme, but how about this for an idea?
Get a good job. Live close to it. Have enough car for what you need. Drive it until it no longer makes sense. Save time on the commute, house and car. Spend the time and money with your family or however you see fit.
So did you actually end up investing the remaining funds?
I guess it’s based on individual experiences, but mine has been slightly negative buying a certified pre-owned (CPO) with low miles and a warranty.
I bought a 2010 Ford Focus SES in 2012 with 28,800 miles on it. It was probably $1500 more than a 2009 that was not CPO and had maybe 40,000 miles. On top of that, I bought the OEM warranty only eligible to CPOs. That was a few grand more.
That warranty covers absolutely nothing that needs to be replaced, as in things that wear down – tires, brakes, etc. I’ve had to buy new tires, I just had to buy new brake pads and rotors. I highly doubt the non-CPO would be any worse. If I could go back in time, I’d take the non-CPO, bargain for either new tires and brakes on the spot or a lower price, and call it a day.
The one positive is that I basically intend on driving this car into the ground. I will not pay my car off early (2.9% interest – student loans with higher rates more important), but I am looking forward to not paying $329/month.
You first mistake is buying an American car. The next is getting suckered into a “warantee.”
Don’t feel bad. We got suckered, too, and never have again.
My ’97 Saturn got to 264,000 miles on it, and I would have bought another one if they had stayed in business.
Hasn’t Fords’ reliability improved over the years? Through CarMax we just bought a used 2012 Ford Fusion and chose it over the Accord or the Camry. We are loving it so far. It’s my first American made car.
But, yes, extended warranties are a racket and quite high on Fords compared to Toyotas or Hondas. You might say that is because of the reliability issue, but it also could be a hold over from past perceptions about unreliability that don’t match the reality now.
In regard to the Big 3 purchase, my Ford has been amazing. No issues besides regular wear (tires, brakes).
It was stupid of me to fall for a warranty, though. Cars aren’t in my comfort zone of purchases – tech items are. I’d never buy an extended warranty on a laptop, cell phone, or similar. Shouldn’t have been any different for the car, but oh well. Live and learn.
My wife and I just bought a new Subaru to replace our old Subaru. The old Subaru was used. Well, that car was a pain, we had that car for 2 years and it gave us expensive problems nearly every 3-4 months.
That experience taught us that poor maintenance kills even reliable brands. The first owner of our old Subaru kept meticulous records, never missed a service for 11 years. Whoever owned it between the first owner and us, didn’t take care of it for less than a year.
We knew buying a new car is not the most sound financial move. But my wife and I have a lot of peace knowing our car’s history and future is our history and future.
I agree with you on this and it’s why I’m seriously considering buying new for my next car despite the cost and depreciation factors. I really believe that even a short time of a car being badly taken care of can take a toll on longevity and greatly increase repair costs down the line.
When I purchased my 1988 Volvo 240 in 2002, the previous owner had every document and receipt going back to the very beginning. I had no problems with the car at all until its death in 2009 (everything, including the clutch was original and it had almost 350K miles). He was also an older guy, professional, responsible. I would never buy a car from someone whom I felt was not a responsible person.
We have a post on the economic theory showing that once you figure in the probability of getting a lemon, it’s equally rational to buy a new car as a used one. http://nicoleandmaggie.wordpress.com/2010/09/27/how-the-used-car-market-is-like-health-insurance/
In theory, can’t a new car be a lemon as well? Perhaps it is less likely, since much of the problems come from poor maintenance, but it’s still possible.
That’s the whole point– some fraction of new cars are lemons. People who get lemons want to sell and people who get peaches don’t. That means there’s more lemons on the market and people can’t get a fair price for their peach, so they hold on to it longer. The bad drives out the good.
I’ve owned used, new, and near new. They all have ther pluses and minuses. Not everyone gets the five year old car that doesn’t need major repairs for a decade. I’ve had used cars with window motors that died, needed new “air” struts replaced to the tune of thousands of dollars, dashboard lights that crapped out, or have needed all the hoses replaced due to becoming brittle due to age, etc. Right now we’ve been told we need to make a $2500 repair to a car worth about $3500. Potentially tough decision there, but something to consider when you have an older vehicle. I’ve had new cars with issues that were initially covered by warrenty but kept repeating after the warrenty period. I had the sliding door come off my minivan while I was holding it because it “jumped the track”, but they claimed it wasn’t a design defect and the bumper to bumper warrenty had just expired.
I also have an in-law who after over a decade of dealing with used vehicles said the heck with it and now leases. Who’s to say it’s not a frugal choice if they’re hitting their other financial goals and it makes them happy to never deal with any repairs again?
There is so much hoopla over cars and what is best. The most important point IMHO is to be informed, make a decision you can afford and live with, and own the decision. It’s part of your overall financial life, not the sum of it. We all have made dumb financial mistakes, to potentially include some with vehicles we’ve purchased, and hopefully we learn from them.
I am all over the place right now trying to figure out what to do with my car. It is 8 years old and has 150K miles. Beyond that I love the car, which is why I bought it in the first place. Figured I could satisfy the best of both worlds by getting the car I wanted and keeping it for at least 10 years/200K miles. Aside from normal maintenance, it has never cost me a dime in repairs. My issue is it’s starting to rust in the wheel wells and the hood. I think I’m going to pay a visit to some body shops and see if there is anything that can be done.
Other than that since I fully funded my emergency fund last year I have been working on a car fund.
To me, the vehicle market is a lot like the stock market. You get the deal by doing the opposite of what everyone else is doing. For a few years now it seems like a lot more people are buying used, which has made new car offers much more attractive.
My debt averse brain says to pay cash for a 3 year old car. My financial brain says there is no reason to pay cash when you can get 0%-1% interest. My risk averse brain doesn’t want a car someone else didn’t take care of.
Oy…maybe someone should write a post about multiple financial personality disorder haha.
I bought my current car new for this reason — it was nearly impossible to find a decent used car at the time and incentives on the new one were much better. No regrets — it was a smart decision in hindsight.
When I was looking for a used car 4 years ago, it was definitely a sellers market. It wasn’t unusual to find cars that had 6 digit mileage selling at a premium. When I was in California it was easier to find lower mileage cars but higher in the northwest, people tend to drive them much longer.
Used, at the time, wasn’t the best deal. I’m sure its a different market now.
Two words… Auto Insurance
Don’t forget that the shiny new car has a higher value than a used car, which means the insurance companies will want you to pay a higher premium to keep it insured. If you finance the car, the lender will likely want you to carry full comprehensive coverage for the duration of the loan. That can easily add several hundred dollars per year to keep the car on the road.
This is true that lenders will make you insure the vehicle with full coverage however even if you pay cash for the vehicle, you should still carry full coverage IF you don’t have the cash on hand that equals the value of the vehicle. Depending on your situation, you need to evaluate your situation because hitting a light pole isn’t covered under liability and you may be without a vehicle if you don’t have the cash.
We have 3 cars and have no car payments. One car we bartered with someone who needed plumbing equipment(yr 2003), one we inherited(2001), and one we paid off last October(2007). We have been trying to put some of the car payment away for a down payment on a new car when we need it, however trying to replace brakes and other misc repairs on 3 vehicles makes it difficult.
I am not looking forward to when we do need to purchase another vehicle but we are trying to make it easier when we do.
And in some states (like Arizona) the registration cost is based on the value of the car — the newer and more expensive the car, the higher the registration cost. As in several hundred dollars!
I drive a 21-year-old car; a ’93 Infiniti J30 — still running well, and I still love driving it! My husband drives a 12-year-old car (02 Toyota Sequoia). We haven’t had a car payment in 7 years – Lovely! I dread the day we will need to replace them because I really don’t like many of the new options.
I recently bought a car (with cash) but was almost convinced by a dealer to finance a newer car…it’s like they have brainwashing power, I say! Thankfully I didn’t, and found the same car I wanted to finance but a bit older with a bit more miles for much less than what the dealer was asking. The craziest part is that the dealer was trying to convince me to finance without putting the money I had on hand down – and he thought that this would be great so I could “keep the money in your pocket.” It makes me sad to think that many people fall for such bad advice! I wrote about my experience here: http://www.runfundone.com/2014/04/13/use-your-good-brain/
Ugh, I fell for something like that once.
My dad’s phone got stolen so I went to get him a new one. We could’ve paid $200 for an identical replacement phone (which is what dad asked for), and be done with payments forever. Or, for $100, we could get a new phone and a new plan. This would theoretically save us money, because the monthly payment for the new phone + plan was $20 less than his current monthly plan.
I went for it, and by the time we got through all the paperwork, new costs and fees kept appearing out of nowhere. The final down payment was $180 instead of $100, and we’d only save $10 per month on the plan…. Plus, we were locked in for 2 years to pay the cost of the phone down.
I thought the salesman seemed like a nice guy, but looking back I think he was just extremely dishonest.
Great Article…This is why our family has vowed never to have another car payment for as long as we live. In fact, we are already saving up to pay cash for our next vehicle.
Through my example…I am also hoping to discourage my kids, and their kids, from having car payments as well.
Everyone should read this right before they go out car shopping! 🙂
I found out that before we were married, my wife had financed her car at 16%! Yes, sixteen percent. By showing that she had about $32k left in payments over 5 more years, I convinced her to sell it, take a $4k loan from her 401k to pay the difference, and most importantly not to buy another car. What used to go toward car payments repaid her 401k within a year and we’ve been a 1 car family of three ever since.
Yes it’s inconvenient juggling schedules at times, but now I take the train to work (in Los Angeles) when I had never considered public transit. No second car = no payments, no insurance, no office parking costs, much lower gas costs, I can read during my commute, and my commute time is actually shorter.
Overall, the single car lifestyle hasn’t been a difficult shift, and parting with the payment before death is well worth it.
On a frivolous note, if you really love that new car smell, you can actually buy the same scent in an aerosol can and spray away at will.
Those never smell like a new car to me. I like the leather-scented Car Jar air fresheners from Yankee Candle. I don’t have leather seats, but I associate “leather” with “new” so it works.
Also, you’d be amazed at how much “newer” a car smells when it’s clean!
I think the new vs. used debate may continue forever. The reason is there is not a one size fits all answer. There are so many factors to consider, it’s not just one or two. The best way to buy a car is what makes financial sense for you! We buy brand new vehicles, maintain them pristinely for 12-15 years. This makes sense to us because we buy at .9% or lower (investing money at a higher rate), because I have to have a particular type of vehicle for my business, and because my husband’s employer pays a car allowance that we have to show proof of expense for each month. My children buy used cars for cash because they are for basic commuting and that makes financial sense for them!
There is not one right way to do things here! And I agree with Beth from personal experience, sometimes the cheap option will cost you more in the long run!
Literally just paid off my 18,000 Hyundai Elantra car this week!
I financed 16,500 and it took me 25 months.
That extra 500 bucks a month will be put to good investment use! (Payment was only 308 but I paid ahead).
I love articles like this that expose the rediculousness of buying a new car every few years (barring a major accident or mechanical issue).
While I do completely understand the points a lot of people have made about buying a used car for as low as you can find and running it into the ground, there is something to be said for people that actually enjoy the car itself.
Living in Los Angeles, and living pretty close to my job, we still spend an above average amount of time in the car. Not to mention living in southern california means we have the opportunity for taking road trips all over the place on weekends.
I personally dont see a huge problem is spending a few thousand more to get a car that does its job and you love. To me, if you do plan on hanging onto the car for a while, that extra $5k (maybe even $10k) might be worth it.
Maybe its because I was raised around car enthusiasts.
I’ve always bought 2-3 year old cars, with under 30k miles. Saved a lot and the cars have all been reliable.
I like the idea of paying in cash but the reality is not for me. My current car is financed at 1.9%. The reality is I earn money every month, I use the car every month, I pay for the car every month. If I lost or quit my job I’d sell the car as it’s worth more than what I owe (and I have an emergency fund to cover the payments for quite some time).
I never understood the whole “pride from buying something” attitude. Especially when it’s on debt money! When a friend wants to show off and brag about his new car I always think, “So what? I could get the same car if I borrowed money, went to the dealership, and signed on the dotted line. Big deal–it’s an object. It’s not like you *made* it or something–it came off an assembly line, dummy.”
Maybe it was my broke, punk rock teenage years that solidified something anti-materialistic inside me. I’d be mortified to show up anywhere in a brand new car I’d bought. In the same way at age 17 I’d have been mortified to show up at a Ramones concert in a tuxedo. It offends all my sensibilities.
It’s refreshing that you ended this article with some advice on options to responsibly finance a car. I pay $300 per year in interest for safe, reliable, warranty-backed transportation. I would rather have paid for the car in full, and I’m working to clear the debt, but in the interim I need good transportation.
One trend in the auto industry that no one is talking about but that came up in the comments here is how the cost of good used cars with low miles have increased significantly in the past 10 years.
Also, I had a Nissan Versa and took it back after a year. Better to spend your $13K on a safer/sturdier vehicle IMO. This was a case where I was trying to be frugal but it turned into a waste of money.
It has been my experience that I either have a car payment or car repair bills and the car repair bills are usually about the same amount as my car payments. I have to ask myself how much my time is worth and how reliable my car needs to be at any given time. Also, how easy is it to come up with $4000 in cash to make the repair vs. financing a new/new to me car at a reasonable interest rate and easy monthly payment.
My best friend finally bid goodbye to her Acura, just shy of 20 years of service. She cashed in a CD (started years ago as a new-car fund) and bought a 2008 Honda that had only 32,000 miles and was in very good shape inside and out (apparently it was one of those cars that mostly got driven to church and the grocery store).
I’m in a one-car household. My partner is driving a 1999 Subaru and he will continue to drive it until the wheels fall off. (And even then, he’ll probably stick ’em back on with duct tape to get a few more miles out of the vehicle.)
“No car payment” is a beautiful thing if you can manage it. So is a one-car situation if that’s something you can swing: having to gas up, repair and insure just *one* vehicle is a huge savings. But YMMV, as it were.
Make sure he uses the Gorilla duct tape!
Buying with cash is great, but it is also important not to overlook incentives to finance and other options even if you have cash.
For our recent car purchase we could have written check for the total (relatively small, not expensive car).
Instead we took the finance deal which involved 2,000 cash back. Made several payments and then paid off the loan.
Also paid a major portion of the purchase price with a credit card which was paid off the same month.
So in the end the car was about 2100 cheaper than if we paid cash..
This was more than 10% of the purchase price.
Cool tip I learned: if you want to know which cars are the most reliable, ask a tow truck driver.
A few months ago our 1989 Chevy wouldn’t start, so we needed to get it towed to the mechanic’s. The tow truck driver said that he never sees any cars like these (not surprising, since it’s 25 years old). We asked him what cars he does see a lot of. The list included luxury cars like Audi and Mercedes. He did not see a lot of Hondas or Toyotas. It was quite interesting.
Speaking of sharks, in my early 20’s I stopped at a Toyota dealership looking for a new car. Started talking to the salesman and dimbulb me actually asked how much a car costs. Do you think I ever got a price? The response was “How much payment can you afford?” “How much does the car cost?” “How much of a payment can you afford?” It was right out of an Abbott and Costello bit. I stopped wasting his time and mine, and went home scratching my head that I could not get a price like you would get a price on a pair of pants. (This was pre-Internet, btw.)
When buying a new car, people think they can afford the payment but forget to add on top of that maintenance (even on a new car)registration and insurance. Even though I paid cash for my new car, the little beauty still costs me on average $150 a month for registration, insurance and maintenace.
As for the $471 a month? You can fully fund a ROTH IRA each year and still have $12 for a movie.
Great timing – thanks! I’ve been driving my 2003 SUV (which I bought new) for 11 years and it might have just been through it’s last winter.
I’ve been looking for about six months for an off-lease car and have been test driving a bunch of different makes and models and ranking factors important to me for about 15 different models of sedans. When I finally make the leap and buy something (for cash, of course), this project will be the most researched project I’ve ever completed.
Along the lines of asking the tow driver, when I started looking, I called my mechanic and asked him what type of car he sees a lot of.
We just bought a new truck for Mr. Sam, he had been driving a late 90s (yes 1990s) truck since about 2005. We need a truck, due to our rental properties, and we were willing to fix the truck but after consulting with two mechanics we were advised that putting a new engine, which is what it needed, did not make sense.
So, we started shopping for a nused truck, we wanted a mid size truck, with a cab and four or three doors. We were very surprised that the cost of a 2008-2011 truck (that fit our needs) was so high. The prices for a 2008 truck with 60,000 miles was just a few thousand below a new truck. We were told various reasons as to why nused cars are so expensive right now.
So, long story short, we ended up buying new (2013 model). We paid $10,000 in cash and financed the rest (we plan to have it paid off shortly). It has been so long since we have had non mortgage debt, it hurts to see it on my balance sheet.
I just took out a car loan, and I have no regrests about the loan. Until last September, I had driven a 1996 Geo Prizm. I loved that little car with good gas mileage. My in-laws were worried about me driving such an old car, and generously gave us their 2005 Jeep Grand Cherokee. I hated it. I hated how big it was, and I really hated getting 15 miles per gallon. I hated that it handled worse in the snow than my old Prizm (Jeep was only rear wheel drive). I traded it in for a 2011 Toyota Prius. Just in the savings of gas, I will fully cover the cost of my loan. While it is less than ideal that I needed a loan at all (we didn’t want to dip into our emergency fund), I have no regrets about making the choice. I only slightly regret accepting the Jeep and selling the Prizm. As noted by other posters, my insurance was low and the maintenance costs weren’t very much. I kept my previous car until it was 17 years old so I will have the Prius long after it is paid off.
That Geo Prizm will run for-ev-er…Shoulda hung on to that one.
Isn’t it actually a Toyota Corolla?
Yep. Hence my regret on selling it and taking the Jeep. The Prizm was a great car, even at 17 years old.
I have owned 2 used cars in my life. I drive only one day a week (2 max) as I commute to work by bus, so I doubt I will ever own a new car – it just makes no sense. My first car was a 1990 Toyota – I was the third owner, paid $800 cash, and drove it for 12 years until it died. Best $800 I ever spent. Now I have a 2003 Honda Civic, paid $3000 cash and am looking forward to at least another 10 years. But I am very lucky that I have a friend who has a business buying used cars, fixing them, and selling them to people – so I never have to worry about buying a lemon.
One day I’ll get a car. Haven’t had one for 8 years now. I’ve FINALLY started a new job this past month, and moved into an apartment right next to work (literally!). So either walking or biking will do for now, until I save enough to get a beater of a car, just to go get groceries with. (Right now, I go buy groceries with a bike, but my bike basket only holds so much!)
I’m not sure how it works in the US, but our last car was an ex-rental car (09 Hyundai Accent) with 35000 km on it.
When I was young the ‘common sense’ knowledge was never to buy a rental because people ‘drive the crap’ out of rentals. My experience has been that most people just drive the car, and most rentals are fine after a few miles.
So we got an 09 car, in 2010, for $10K, which was about 60% of the price of a new car. We had 4 more years of warranty, and really have not had any issues with it since.
But what made it a very confident decision was our use of the Lemon-Aid book (is that a thing in the US or is it just for us Canucks)?
I highly recommend using the Lemon-Aid for any vehicle purchase. Take the most recent out from the library, check all the cars and types for what you need.
My husband and I have prided ourselves on living debt free and sans car loan. Our 2004 Honda has 185,000 miles. Hopefully it’ll prove to be a workhorse, but major things are starting to break. We thought we would use savings to replace it eventually. Then life happened- infertility. We are now looking at spending thousands of dollars for the chance to become parents. We can finance some of our treatment or we can plan to finance the car when we get to that point but we can’t pay cash for both. What do we do?! It’s a looming question every day. Money can’t buy happiness, but it can buy fertility treatments and cars, which are two things making us incredibly unhappy right now.
If you like classics, buy a reasonably priced car that you’ll have a blast in, and you’ll likely break-even when you sell it. I just bought a ’68 BMW 2002 for $4500 and immediately put $1200 into it. It’s now my daily driver, and worth $9-10k.
I’ve never owned a car, and it’s a huge difference in my finances. Despite making under $30K a year for all of my 20’s, I’ve been able to build up a decent nest egg and no debt because all the money that would go to a car has instead gone to savings, education, and travel. I’m lucky to be a single person without children who lives in a dense city where I have numerous other transportation options – I would never want to own a car, and continue to set up my life so that I don’t have to. I spend less than 2% of my annual income on personal transportation and I hope to keep it that way. Cars are a giant money suck, and biking, walking, and transit are great for my physical and mental health. Not everyone has the privilege to live without a car, but not everyone has the resources to afford one either. Cars often trap people in poverty – it’s nice to be able to escape poverty by not having one.
Good for you for never owning a car! I went car-free a year ago and I couldn’t be happier with my decision. Now I get plenty of fresh air, sunshine and exercise… plus my stress level plummeted. Cars keep us in a ‘rush around’ mode. When you go car-free, you will see your financial security increase and waistline decrease!
It is common for people to find themselves faced with debt burden because the world’s economy is in recession and the cost of living is rising day by day. The problem is that it may be easy for people to rack up a little debt, but paying it back can prove to be downright difficult.
Car payments are evil. I drive a ’99 Corolla proudly. I see most people with a much newer car than mine and wonder if they truly own it. No! So much of what we do is out of self-consciousness of what other people think of us. Break free from that crap! I’ve noticed that all cars are darn expensive these days as is a college degree. The reason is because almost no one pays for them outright. It’s painful to pay cash. Try it.
This is great information! I have 4 car payments let on a car that I have had for 5 years. It was my first car that I purchased by myself right after graduating college. My family has grown since then and I have been thinking about getting a van. My husband has an older model SUV that is still in reasonably good condition and has no car payment. I think that instead of trending in either of our vehicles, once mine is paid of, we will just use the money to pay off credit card debit and build our savings account for a while.