Have you heard the “never buy a new car” myth? If you’ve read almost any book on personal finance, it probably contains a chapter on why it’s financially smart to only buy used cars. I get the sentiment, because I do see people buying cars, both new and used, in ways that damage their financial situation. But is it really true that you should never buy a new car?
Never Buy a New Car Myth
What the Gurus Say
The biggest support for the “never buy a new car” myth is depreciation. It’s one of those words, that as soon as you hear it, sounds like Charlie Brown’s teacher (blah, blah, blah, blah…) So, what is it, really? Depreciation simply means a decrease in value of your vehicle compared to your purchase price. If you pay $35,000 for a new car today, and sell it 3 years later, chances are you’ll get much less than that. (Classic and rare cars can be the 1% exception.)
In general, new cars lose 20% of their value in the first year, and up to 60% by their fifth year. The passing of time isn’t the only thing that affects the depreciation on your car. The number of miles driven and the general condition of your car can either help or hinder your rate of depreciation.
Other reasons the money gurus cite to support the “never buy a new car” myth?
- Higher sales taxes and licensing fees
- Higher insurance premiums
- If financed, you’ll pay more interest
This is only true if you spend more on your new car. Let’s say your car budget is $35,000 and you decide to buy a used Lexus or Mercedes instead of a brand-new Toyota. If you still spend $35k whether you buy new or used, the taxes, interest, and insurance won’t differ much.
Certainly, you should take these costs into consideration when purchasing any vehicle, along with the estimated costs of fuel, repairs, and maintenance. Edmunds offers this handy Cost of Car Ownership calculator so you can see your estimated annual cost.
The Real Cost of Buying My New Cars
In 2004, I purchased my first new car, Hyundai Sonata, with cash. I bought my second one, another Sonata in 2014. On September 16th, I wrote a check for my third new vehicle. Why did I decide to buy new when all the gurus, including my former mentor, Dave Ramsey, were screaming, “NO”?
First, let’s look at the actual numbers. I bought my first Hyundai Sonata for $15,000 (including tax + fees). I kept it for 10 years, and sold it to friends from church for $5,000. I only had one major repair bill, other than the standard maintenance and tires, for this car: a new air conditioner compressor in year 8. This repair cost me $1200. So essentially, my first new car “cost” me $1,120 per year ($93/ month)! WAY less than the average car payment for even a used car. (Plus, the Hyundai 10-year warranty is pretty spectacular.)
I bought my second Sonata in 2014 for $20,800 (including tax + fees). I kept it for 7 years, and just traded it in on my newest car for $10,900. I had no major repairs for this car, other than standard maintenance and tires. For those of you who are NOT math nerds, this car “cost” me $1,414 per year, only $118/ month.
Here’s how I buy new cars the right way:
- I pay cash. No, I don’t walk into the dealership with a briefcase of hundies. (But how fun would that be?) Car dealerships do accept personal checks (and apparently debit cards, too)! If you can’t afford to pay cash for a new car, I recommend borrowing as little as possible and paying back as quickly as possible. If the only way you can buy a new car is to finance all of it over 7 years, it’s likely not a good idea.
- I buy new cars when the next year’s models release. I did this with all three of my new car purchases. Dealers are itching to get rid of lingering stock to make room for the new models. That means I actually get a good deal on a brand-new car.
- I keep my cars for 7 – 10 years. When I buy a car, I keep it for a good long while. This means I shop around for something I’m going to be happy with for a long time. If I bought new cars every 2-3 years, my cost of ownership would be much higher, because the bulk of depreciation happens then.
- I baby my cars and take excellent care of them. Dealers always try to get my current cars as trade ins because they’re “cream puffs.” In car lingo, a cream puff is a pre-owned car in excellent condition: clean, low miles, and well-maintained. When you pay cash for your car, there’s a greater pride of ownership, and you tend to take better care of things you own outright.
New Cars Aren’t for Everyone
A new car purchase isn’t going to make sense for everyone. If you’re rough on your vehicles because you work in construction or put tons of miles on them, you probably shouldn’t buy a new car. Or maybe you have 3 messy kids and a dog who likes to roll in the mud before hopping in your car. If a car is purely transportation for you, just a way to get from point A to point B, you might not want to spend any more money than you absolutely need to.
Here’s the bottom line: it’s a personal choice each of us has to make, and we should never feel shamed by a money guru or financial professional for buying a new car. You’ll need to consider both the financial, situational, and emotional factors when decided whether your next car will be new or used. So, I can hope that we agree we’ve put the “never buy a new car myth” to rest.
Only time will tell if my latest new car will “make sense” financially, but that’s not why I bought an Alfa Romeo Giulia. I’ll dive into that story in a future post, I promise!
P.S. Dave Ramsey enthusiasts, before you freak out, remember that Dave himself said that it IS okay to buy a new car if you’re a millionaire. Since my net worth is almost twice that, I unofficially have his approval.
If you’re a six-figure earning professional who feels like you’re treading water financially, let’s chat and see if my Financial Dignity® Coaching is a good fit for your situation