For most Americans, a car is a necessary purchase. A reliable form of transportation to get you to work, the grocery store and back home is an essential part of everyday life.
It can be very tempting to buy a new car with the enticing deals in advertisements, and all the freebies that car dealerships love to throw in to make your purchase seem like a financially sound choice. The truth is that most new car purchases are driven by emotion, though—not reason.
Most people want a new car because it’s a status symbol. There’s nothing like that new car smell, fresh leather seats, an undented bumper and shiny wheels. Buying a brand-new car may be a good emotional investment, but is it a good financial investment? The answer is no.
Buying a new car is never a good idea for your financial well-being. Below you’ll find four reasons why buying a new car is the worst investment you can make, and how you can avoid this financial trap.
A new car is a depreciating asset
As soon as you drive a new car off the lot, it begins to lose its worth. It should come as no surprise that cars are an awful investment, as they lose more than 20% of their value in the first year.
If you’re looking for a way to make money, buying a new car is not the answer. Some new cars can lose as much as 40% of their value during the first year alone—that’s assuming you keep the car in pristine condition, and avoid running over any curbs or making dents.
The numbers don’t get much better as the years go by—after the second year, new cars can lose an additional 15% in value, the third year 13%, the fourth year 12%, and so on and so forth. By the time you get to five years, your brand-new car will have lost nearly 55% of its value.
Keep in mind these numbers are only averages, and the depreciation value for new vehicles can vary. While it can be exhilarating walking off the lot the owner of a brand-new car, you have to ask yourself if the loss in money is worth that momentary happiness.
In today’s consumerism driven world, it’s easy to justify making a bad investment in a new car that brings you a fleeting sense joy. Just remember that as soon as the salesman hands you your new keys, 11% and thousands of dollars of what you just paid goes down the drain.
You’re paying more
Buying a new car can be one of the costliest purchases you will make in a lifetime. Besides buying a house, a new car is the most expensive item you can buy—although salesmen and clever marketing will have you think otherwise.
Most Americans will buy as many as 10 to 15 brand-new cars over the course of their lives. Considering the fact that the majority of new car owners finance around 90% to 100% of their car’s cost, investing in a new car is a low blow to your financial health.
While it may not seem like you’re paying more for a new car upfront—most people put down as little money as they can and finance the rest—accumulating interest rates on top of your loan add up fast. What may appear as a great deal at first could haunt you later down the road.
Even if you do manage to score a decent deal with low-rate auto financing, a new car will always be more expensive than a used version of the same model. You’ll also be paying more in insurance. New cars require that you to get a full coverage policy.
If you live in a state that requires you to pay personal property taxes, owning a new car will raise the amount of taxes you pay every year. Not only that, but depending on what state you live in you could be paying a large sales tax totaling a percentage of your new car’s value.
The car isn’t really yours
While nothing beats the feeling of becoming the owner of a new car, the reality is that unless you pay for the car in cash, it’s not really yours. You still owe somebody for that car, and will probably owe somebody for several years.
While the car may sit in your driveway, and you may have already personalized it with an air freshener and new bumper stickers, you shouldn’t get too attached. When you finance a new car the car dealership or bank still technically owns the car, you just have a license to use it.
It may seem like a good idea to invest a lot of money in something as long as you get to call it your own and do with it as you please. In reality, the bank or dealership you bought the car from can easily take it away from you without your consent if you miss your loan payments.
Used cars are just as reliable and a better investment
Considering the rapid depreciation of new cars within the first few years of owning them, it makes more sense overall to invest your money in a slightly older version of the same car. Even a car that is one year older than the current model can be thousands of dollars cheaper.
Most people are afraid of buying a used car because they think it won’t last as long, or they’ll just have to put more money into maintenance and repairs. The truth is that cars built in the last ten years are more efficient and reliable than ever thanks to modern technology.
Cars are lasting longer, and the price of repair will still probably be cheaper than the interest rates, taxes and fees you’ll be paying on a new car. Even if you do buy a new car, within a year or two you will be paying for the same regular maintenance and repair as a used one.
If you’re still considering buying a new car as a good investment, take a look at how much your used car is actually worth before you jump off the deep end. This in-depth guide to car valuation created by SellMax is a useful tool if you’re considering selling or trading in your current car.
Knowing the value of your current used car is an important factor when considering investing in a vehicle, whether it’s new or new-to-you. Used cars will provide you with a better financial option and value for your money, even if they don’t have that new car smell.
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation in writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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