I have lots of friends who have bought new vehicles, and some who are considering it. New cars are great. You get to be the first owner, have that new car smell all to yourself, great warranty etc. Owning a new car might be the perfect fit for your life. I have found however that most do not understand the financial and life commitment that they are making when they commit to such a huge purchase. There are a few good reasons to buy a new car, and for most, a lot of reasons not to. I want to address the latter here today. I have put together 6 reasons not to buy a new car so you go into your decision making process with all of the information, not just what you get from a salesman.
1. You Probably Don’t Need A New Car
Let’s define the word “need”. To need something means that you can not do without it…how often is this actually true? I have heard time and time again, “I need a new car because I need something reliable” or “I need a new car because it will be good on fuel”. Consider your use of the word “need”. Have you ever safely gotten somewhere in a used vehicle? Do you know anybody who owns an older car that doesn’t constantly deal with breakdowns or obnoxiously high fuel costs? You probably know several. Consider that a 1995 Honda Civic gets around 35 MPG, and a 2012 Honda Civic gets the same 35 MPG. The fuel argument definitely doesn’t hold water. There are some people who need new cars. Perhaps you are a taxi driver who leases his vehicle for business use or have a business that requires you to have a new vehicle. Or…just maybe, you want a new car and have the money on hand to buy one.
2. Dealers Make Money Off Your Purchase In More Ways Than You Think
A dealer makes money by buying your new vehicle from the manufacturer, and then selling it to you at a higher price. That’s it right? Wrong. There are many different ways the dealer can take your cash from extended warranties to financing insurance, under coating, paint protection, oil change packages, accessories, tint, fabric protection, customer service fees, documentation fees etc. Could you get away with billing somebody $100 for giving them a few documents? Dealerships do it every single day. There is an excellent list of ways the dealership makes money off your purchase here.
3. New Vehicles Can Have Major Mechanical Problems
I bought a new pickup truck in 2008. It cost me way too much money and hassle and I no longer own it. Within 2 months of ownership it needed a new clutch, engine sensors and a couple other more minor repairs. 2 MONTHS!! This story isn’t typical but it’s not that rare either. Often a car that’s been on the road for a couple of years and been broken in is more reliable than one that has just been assembled. I would not expect a brand new car to fail but I certainly wouldn’t want anybody to think that it can’t happen.
4. High Pressure
Bad decisions are made in high pressure situations. Dealership salesmen are trained professionals at applying pressure and keeping you there until you buy. If you don’t know exactly what you are going to face and go to a dealership well-prepared…you may sign away a lot more money than you intended to. If you insist on buying a new car, my suggestion is this: never make a purchase the first or even second time you go to the dealership. The salesman will lead you to believe that there’s some awesome deal to be had that is only available today. It is never true. They will be equally as motivated to sell you a vehicle tomorrow, the next day, and the day after that. Never buy into that lie.
5. A Dealer Will Undervalue Your Trade
At least they’re usually fairly honest about this. The dealer will try to get you to trade in your old car and tell you that there’s all kinds of tax savings and it’s less hassle. The tax savings are minimal and it may be less hassle, but I don’t know anybody who wouldn’t be annoyed that the Toyota they traded in last week for $3000 is now for sale on the lot for $5999. Make sure you understand what you can sell your car for privately before signing it over to a dealership and giving them all of the equity you have in that vehicle.
6. You Haven’t Done The Math On How Much This Car Will Actually Cost You
This is, in my opinion, the biggest reason to reconsider buying a new car. I don’t believe financing a new car is a wise decision for most people, but if I can’t talk you out of it let me say this. You need to know down to the penny how much you will be paying for this car over the term of your financing. Let’s assume for a minute that you are not going to buy the financing insurance, accessory/maintenance packages etc. You are just buying a car, with no extras. Let’s assume a 6% finance rate.
I know what you’re thinking now, “Honda will finance at 0% over 6 years!”. That may be true, lots of manufacturers are offering their own financing at 0% nowadays. But having that finance company comes at a cost. They pay customer service people, loans officers, rent for an office, bills etc. to keep that operation running and that money comes from somewhere. It is built into a higher sticker price and recovered off the backs of those who don’t qualify for the 0% and have to pay a higher interest rate. When I bought my truck, the dealership was bouncing back and forth each month between a 0% financing promotion and a cash back promotion. They plan on making a certain amount on each car, and they are just offering 2 different ways of achieving the same price and making you feel like you’re getting an awesome deal.
So here’s our deal as I see it. The dealer will try to avoid you seeing it in whole numbers and instead will focus on the monthly payment amount which he surely will insist is “easy”.
A 2012 Whatever It Is coupe sells for $21,000
Taxes in our area are 12% so I will use that. 12% tax on $21,000 is $2,520
So let’s assume you don’t have any cash and want to finance the entire amount with tax. You are financing a total of $23,520
You will have payments of $389.79 per month, not so bad right? Let’s look at how much money that adds up to be over the term of your loan.
$389.79 per month for 72 months = $28,064.88
Now we know that cars depreciate as soon as we drive them off the lot, let’s assume an immediate 15% depreciation.
You now owe $28,064.88 on a car that is worth $17,850 and have only owned it for 30 minutes.
If you sold your car right now you would have to pay $10,214.88 just to get out of the loan. Not such a great deal anymore.
Consider this. If in this hypothetical situation we had continued to drive our old vehicle and waited 6 years to buy a car. We put away the same amount of each month into a savings account and let it accumulate, we would have $28,064.88 saved. We could now buy a nearly new 2 year old lease return car with a factory warranty for $16,000, and have more than $12,000 in the bank. Who is better off?
Owning a new car definitely can be a good fit for the right family, just make sure that you know exactly what you are getting into. The most money is made off people who overstate their needs, don’t do proper research and make impulse purchase decisions that can’t be reversed.