I am concerned for the people who read this article and over 2,160 have. I am concerned because some will take its advice. Enough people already have the misguided notion that they “need” a new car without an article like this that does not serve up any verifiable facts. Everyday more and more people find themselves in car trouble. And, I don’t mean mechanical car problems either. They are underwater on their new car. I see articles indicating this more and more.
Ravi opens straight forward enough stating that buying a new car by any other method than cash can be considered a “financial loss.” I agree. Unless you can purchase a new car with cash you shouldn’t buy. I will add one more condition. You should also be able to afford the major depreciation hit. I would further state that unless you buy a new car using these two criteria, you can’t truly afford a new car.
I want to make sure the depreciation story is understood. It seems to be a nastily little secret in the new car business, although it shouldn’t be. There is plenty of information out there about how big a hit it is to new car buyers.
According to Edmunds.com, the average new car in the U.S. costs about $31,000. They also state that in 4 years that new car will have lost 49% of it’s value. This results in about a $15,200 loss for the average new car. That is $3,800 per year. This is one month’s salary for someone making $45,600 a year. Can you afford this every year? I don’t feel I can.
Oh, and lest we forget, depreciation is on top of the 4 years of car payments at an average, according to Edmunds.com, of $464 per month. The 4 year total of these payments would be $22,272. Which works out to another $5,568 per year.
Ravi doesn’t lay out the numbers as I have here, but he acknowledges that people will pay interest on a depreciating asset. He further acknowledges that buyers will pay more than the cost of their car due to interest.
He closes the opening paragraph with the following, “However, most people prefer to buy new cars as it can be quite difficult to maintain old cars which require frequent maintenance and repairs.” I find this kind of funny, I too prefer a new car. I don’t buy one because I know the costs. Most people buy new cars because they either don’t know or care about the impact it is having to their financial future.
I will add for the cost of an average new car payment, I can maintain a used cash car for much less. I can do repairs for significantly less than the $5,500 per year of new car payments. By driving a quality used cash car, I will also not take the $3,800 per year depreciation hit.
Ravi’s Five Reasons to Buy a New Car
Old cars require major repairs:
Yes, some older cars can require major repairs, but buying used is cheaper than new. This information comes from a NY Times article “Auto Leases Entice, but They’re Still Costly.” I recommend you read this article. In it buying a used car is shown to be a cheaper alternative over a 6 year ownership period than either buying new on credit or leasing a new car.
Leasing was shown to cost $5,756 more than buying and financing a new car and $10,277 more than buying and financing a used car over the 6 year period.
Low interest rates:
Interest rates are at an all time lows. For those buying on credit this can be a powerful incentive. One gotcha is that not everyone will qualify for these low interest rates. In fact, most people can’t. The other more relevant point is that used cars also get lower interest rates. Certainly not as low as new, but the savings of buying a used car will more than make up for this in most instances.
According to bank rate.com the average 60-month new-car loan rate is 4.03 percent. For a used car, the 36-month loan rate is 4.5 percent.
I don’t see interest rates as a reason to buy a new car.
Of course if you are paying cash, this is no incentive at all!
Number of tax credits:
I could find only two U.S. tax credits listed. One for electric vehicles and one for plug-in hybrids. Each of these top out at $7,500. While this is a lot of money, these tax credits apply to only a few cars. For the complete list go to the U.S. government website to review tax credits offered.
Let’ s look at a few of the cars to which these credits apply.
I don’t think these cars are the mainstream cars average Americans with a U.S. Census $51,000 median income are purchasing. I therefore don’t believe tax credits are a compelling reason for most people to buy a new car.
It is true that car fuel economy has improved according to an all time high according to the University of Michigan’s Transport Research Institute (UMTRI) at 24.8 MPG. This is up from 20.1 MPG in October 2007 when they started tracking this information.
This means the average new car driver putting in 15,000 miles per year will spend $1960 on gas. For the used car averaging 20.1 MPG the cost would be $2,418 per year for the same 15,000 miles driven. Both examples assume current U.S. average gasoline pricing at $3.24 per gallon for fourth quarter 2013, per the U.S. Energy Information Administration.
Driving the new car does save you $458 per year in gasoline costs.
I don’t think this makes up for the fact that the average new car costs about $31,000 and the average used car costs about $15,600. Both of these average car prices are according to Edmunds.com. I know I can buy a lot of gas for the difference of $15,400.
If gas milage is a priority for you, there are plenty of used fuel efficient used cars available as well. The Toyota Prius has been around since 2004 for example.
Gas milage should not force someone to a new car.
Reliable: “Old cars tend to break down in the middle of the road; however, new cars are reliable and efficient.”
This list of vehicles was chosen with the intention of finding safe and reliable used cars. The article used the J.D. Power’s Vehicle Dependability Study to determine the cars in Autotrader’s article. The J.D. Power’s study explores long-term dependability of three-year-old vehicles.
There are many other dependable used cars for sale to be discovered. Read some of my previous posts to help you know how to find one.
Ravi is right a new car does come with a warranty and this could save repair costs.
As with gas milage, I don’t think this makes up for the fact that the average new car costs about $31,000 and the average used car costs about $15,600. I can make lot of repairs for $15,400.
There is also the fact that there are certified used cars which may also come with warranties. Third party warranties are available for many other used cars if this is important factor to a buyer.
In closing, let me just say I was appalled by this groundreport.com article and the broad generalized statements that were made with absolutely no back up. I know the article isn’t posted on an automotive site, but the fact that more than 2160 people have viewed this article is disturbing.
This is the kind of article that reinforces a way of thinking that keeps people in debt driving new cars. When the facts are known driving a quality used car is a less expensive choice.
I am all about people driving cash cars, but at a minimum they should be driving used.
New should be reserved for those who can pay cash and afford the depreciation associated with a new car.
I hope this post will help dispel some of the myths perpetuated in Ravi’s article.
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