Buying a new car rarely makes good financial sense, according to several (if not most) financial planners and industry experts.
“Friends, I do not want you to buy a new car,” said self-made millionaire and co-founder of AE Wealth Management, David Bach, in a 2018 interview with CNBC.
Why is buying new so bad?
Rapid Depreciation
“Here’s why. Buy a brand new car —it smells good— but drive it off the lot and it drops in value by 30 percent,” Bach said.
Not everyone in the industry would agree with Bach’s 30-percent estimate, but everyone agrees that a new car is a bad investment because it depreciates so rapidly.
Financial services journalist, Greg Lewerer, for example, estimated that a new car would depreciate about 25 percent in one year and about 46 percent in three years. If you owned that car for five years, it would lose 63 percent of its value.
Thus, according to Lewerer’s article, if you had paid $34,968 for a new car in 2017, it would be worth about $12,938 by 2022. Thus, your vehicular asset lost more than $22,000 of its value.
By comparison, if you had purchased the same car when it was three years old, you could have paid approximately $18,882, again according to Lewerer.
Financing Makes It Worse
“Most people borrow money to buy that [new] car,” Bach said in his CNBC interview. “Why would you borrow money to buy an asset that immediately goes down in value by 30 percent? Don’t do it.”
The truth is that most people borrow money to buy any car, new or used. And some have argued that new cars can have lower interest rates. While this is true, a lower interest rate rarely offsets the depreciation. Thus, financing a new car only makes your investment worse.
“You can buy a brand spanking new mid-size sedan for $25,000. I’ll use round numbers for this example, so it’s easier to follow. You don’t have enough money to purchase the car outright, so you decide to take out a loan. Let’s say your credit is decent, and you get an interest rate of 3.5 percent, with a $3000 down payment, and $1000 on the trade in of your ’98 Subaru Forester with 250,000 miles and a head gasket that won’t make it to 251,” wrote Freddy “Tavarish” Hernandez, in a 2014 article for Jalopnik.
“The average length of a car loan, as of [2013], is just over 60 months, but let’s round to 60 for simplicity’s sake. Let’s also take taxes out of the equation, since each state varies. Per month, you’d be paying $382.02 before tax. It’s a nice, affordable number, and exactly why people get stuck in these predatory loans. When you extrapolate that figure over 60 months, you’d pay $26,921.20 for that $25,000 car,” Hernandez continued.
It Costs More
Finally, new cars simply cost more. Compare a one year old Ford F150 with 18,000 miles to a new F150 with otherwise identical features and the year-old-truck could be as much as 25 percent less.