How much will a new car cost?
New car sales are a big business. In 2014, over 16.52 million new cars were sold in the US alone. People are bombarded with advertisements about how the latest model of their favorite car now has an even more adjustable headrest and even fancier computer-controlled safety systems — assuming you get the $4,500+ safety package.
While there is no denying the attractiveness of test driving and maybe even taking home a brand-new car, the average consumer should resist the temptation. The median new car price costs upwards of $32,000, well above the affordable range of most family incomes. Even someone who can stomach the monthly payments, or at least convinces themselves they can, will have to tangle with the biggest pill to swallow in new car purchases: depreciation.
The $10,000 Mile
Would you pay $10,000 to drive a car a mile? How about paying $10,000 for a car that was a day newer or with a mile less on the odometer?
Since nearly everyone would answer “no” to these questions, the odds are that a new car is not for them. New cars lose around 30% of their value the exact moment they stop being “new.” That means that as soon as you drive off the lot, you have just thrown a third of the money you spent or are going to spend in monthly payments out the window.
It gets worse. Market estimates show that most new cars lose 70% of their value in the first four years. That means that the money you spend during those four years on car payments is money you will likely never get back in resale value.
That New Car Smell Wears Off Quickly
Some of the main reasons people buy new instead of used include:
- Getting the latest features
- Getting a manufacturer warranty
- Enjoying the shininess of a pristine vehicle
These are all very desirable traits, but they can become just like any other car before you know it. The latest gadgets and features work their way down the market quickly — lane assist technologies were first used by Lexus and now they are available on most Toyotas. Manufacturer warranties also tend to expire or stop covering issues people are actually likely to have before the loan is paid off.
Finally, “shiny” is relative, meaning that your car will not look as slick as newer ones within just a few months if you do not take care of it. If a car is taken care of, a ten year old car can look just as handsome as a brand new one.
Your Money Can Be Better Spent
With monthly payments nearing $500, new cars can be tough to budget for. You may end up lagging behind on maintenance or having issues paying for other things like rent/mortgage or even healthcare costs.
Use an online auto loan calculator to determine how much your monthly car payments will be.
Just think that if you own a vehicle currently worth $1,500, you can save up that $500 for five months instead and pay for a $4,000 vehicle cash. You could also use that $4,000 to buy a four-year-old car, which by now would cost between $10,000 and $20,000 with financing that will be a lot more budget friendly. You will be able to pay off the car quicker and get more of the value of the loan payments back in resale value in the end. You can even afford more luxurious cars now that someone else has sunk in the biggest depreciation costs for you.
For all of these reasons, consider buying used instead of new unless you have buckets of money to spare. Also remember this: the car of choice for most millionaires is a Toyota, just like everyone else.
To find financing on an affordable and practical used car, visit our car loans page.