“Should I buy a new car?”
If you asked almost every personal finance pundit that question, they’ll give you a bunch of reasons why you should buy used instead.
Some common reasons they give:
- “Used cars cost less.”
- “Used cars have lower insurance.”
- “Cars depreciate fastest in the first two years of ownership.”
- “Cars are built better than ever so there’s less risk than before in buying used.”
So of course, we should all be buying used … right?
Used cars can be a good way to go. But to apply a broad rule that “used is the best” is short-sighted. In fact, I think there are more reasons why people should buy a new car than used.
“Should I buy a new car?”
I wound up asking myself that question years ago in college. With lots of business meetings I had to make, I figured I’d rather not have missed any of them because my stupid 12-year-old van broke down.
So that November, I started looking for a new car.
The date was intentional: You can get amazing deals at the end of the year when dealers want to beat their quotas. First, I test-drove a few cars and researched them, narrowing it down to a Honda Accord or a Mercedes C230. (Both were four-door models because Indian people hate coupes. Seriously.)
The Mercedes was sporty and cool and kinda affordable (if a little bit of a stretch for me). But I decided against it for a few reasons: Service is absurdly expensive and I would just be angry every time I had to get stuff done at a dealer, plus insurance is more, etc.
But the real reason I didn’t want to get the Mercedes is, where do you go from there? You can’t get a Geo Prizm after driving a Mercedes for a few years. So I decided it would be stupid to get a Mercedes as a 22-year-old. Plus, cars are important to me, but not that important.
I decided to get a Honda Accord. Now I had to choose between buying a new or used car.
9 reasons you should buy a new car instead of a used car
Here are a few things I debated before choosing a new over a used car — and you should too.
- Cost. Sure, a new car costs more. But over the long term, not that much more. And the value — not just monetarily — can be much higher.
- Reliability. Above all, I wanted to get a car that wouldn’t break down. I had enough stuff going on in my life and I want to avoid car-repair issues (time, $) as much as possible. I was willing to pay slightly more for this certainty.
Not a piece of crap. Buying a car takes an enormous amount of time. I planned to have this car for many years and I didn’t want another piece of crap. As a result, this baseline requirement reduced the disparity between new and used prices.
In other words, I wouldn’t save a ton of money getting a used car because I wanted a pretty good car, regardless. Quick note: This is admittedly a little bit of vanity. But I’ve written time and time again about spending on things you love (more on this later). I love driving and I do it a lot. It’s not strictly functional for me. I even sprang for the V6 model. Plus, there are other ways to minimize your total cost, which I’ll get to in a minute.
- Cash I’d have to put down. This is important. If you don’t have any cash (or very little), a used car is more attractive because the down payment (i.e., money you have to pay immediately) is typically lower. And if you put $0 down, the interest charges on a new car will be much more. In my case, I had cash available to put down.
Interest rate. The interest rate on your car loan will depend on your credit, which is why having a good credit score is so important. If you have a solid credit score, your interest rate will be lower.
This becomes more important over a longer-term loan. Each dealership will negotiate differently. Don’t be afraid to walk out if the dealer tries to change the finance terms on you last minute. This is a common trick.
Resale value. One of my friends bought a $20,000 Acura Integra, drove it for about seven years, and then sold it for 50% of the price. That means she got a fantastic deal on driving a new car for seven years.
To check out how your potential car might fare, visit Kelley Blue Book and calculate the resale prices in five, seven, and 10 years. You’ll be surprised how quickly most cars depreciate and how others (Toyotas and Hondas especially) retain their value.
- Insurance. The insurance rates are lower for a new car compared to a used car. Even if they’re only slightly different (say, $50 / month), that can add up to real savings over a few years.
Gas mileage. With gas prices on a roller-coaster ride, you may want to hedge your bets and consider a fuel-efficient or even hybrid or electric car. This could be an important factor determining the value of a car over the long term.
And let’s be honest: How cool would it be to be the only guy on your block with a Tesla?
- New-car smell. Good god, is there a better smell on earth? This wasn’t really a requirement but I just wanted to mention how much I love it. This, and the smell of Payless ShoeSource. Find me at the mall, walking in and out of Payless over and over.
The lowdown on buying a new car vs a used car
Here’s the deal: Buying a used car might save you upfront money, but it may cost you a lot more over the long term. If you decide to buy a good used car, in my opinion you might as well spend a little more to mitigate the risks of car repair, etc. That’s the risk/reward perspective.
Another perspective, cost vs value, influenced me more. Buying a new car seems scary because the numbers are so high ($20,000!). But that’s what financing is for — especially at extremely low rates like 2% – 4%. You can put down as much money as you’re comfortable with.
But the biggest factor in my purchase was the total-value concept: You can get a new car for a relatively low cost over the long term by doing a few sensible things.
Now, most of the pundits who talk about buying new vs used cars seem to assume that people are completely stupid and will do things like pick a bad car that looks sexy but is a poor choice financially (e.g., a Dodge Neon vs a Honda Accord), spend a lot on the initial purchase price, not shop around for competitive insurance, not take good care of the car, and sell it when they see something shinier.
If you do these things, then yes, you totally deserve to pay a HUGE price for your car.
Instead, you should follow a few common sense ideas when it comes to buying a car.
5 common sense ways to save money on a new or used car purchase
Whether you decide to buy used or new, there are five common sense practices you can employ to getting the best deal for your car.
Pick a good car — for the long haul. A lot of people want to prioritize how a car looks over anything else. What color is it going to be? Two-door or four? Does it come with those Lambo doors that open sideways?
But you should really prioritize getting a good, reliable car that you’ll be able to drive around for at least 10 years.
Like saving for retirement, you are investing in your car for the long term. This isn’t like clothes where you can just cycle out of it after a year or two. You want to hold onto your car for as long as you possibly can because it costs so much.
Especially since it’s only going to depreciate in value over time:
Negotiate mercilessly with dealers. I have never seen so many people make bad purchase decisions as they do when they get in a car dealer’s office. If you’re not a hardball negotiator, take someone with you who is. Better yet, don’t even go to the dealer!
I bought my car for $2,000 under invoice by spending a month researching and planning. When I decided to buy, I had 17 car dealers bidding against each other to get my business by fax / email, while I reclined and watched Laguna Beach (wow, that’s a dated sentence). And I only went in one dealer’s office: the winning one. Also, I started negotiations at the end of the calendar year, when dealers are salivating to beat their quotas.
- Get a great interest rate. Your interest rate matters to the total cost of ownership, especially if you don’t put money down to start. This is why having a good credit score matters — if you have multiple sources of good credit, your interest rate will be lower.
Get a straightforward loan. Don’t do stupid things like getting an upside-down loan, where you owe more on the car than it’s worth. I know a girl who bought a new Lexus, but decided she didn’t like it five months later and traded it in for something else. She now has an upside-down loan and a distinct lack of common sense.
Treat your car like a stock and plan to hold it for a long, long time. This is hard because we’re judged on how new our car is. But with each year you drive your car payment-free, you’re saving tons of money.
- Your car’s price is vastly dependent on its condition. Go to Kelley Blue Book and experiment with pricing. Try the same car in Excellent, Good, Fair, and Poor conditions.
So I decided to get a new car. Let’s assume my car cost $20,000 ($25k sticker price, negotiated). If I can pay it off in five years, and drive it for three years afterward, I can sell my car for about $10,000.
That’s about $1,250 / year. And it only gets better as you drive the car longer with no payments. In other words, you save more in non-payments than the car depreciates.
Bonus: Want more ways to save? Check out my new Ultimate Guide to Personal Finance.
When SHOULDN’T I buy new?
This isn’t a black-and-white situation though. There might be times when, yes, maybe you should buy use or even think about holding onto the car you DO have for a little longer.
There are only two reasons, though, that truly determine whether or not you should get a new car: Your ability to afford it, and your Rich Life.
First, you need to be able to afford the car. This might seem obvious but I promise you, you’d be shocked at how many people jump into one of the biggest purchases of their lives without first asking themselves, “How am I going to pay for this car?”
And so they end up signing a financing contract that they can’t really afford and end up not being able to make monthly payments.
If you do that, there are ways to get out of it. But prevention is better than the cure.
You can find out how much new car you can afford right now with the 20/4/10 rule.
This easy back-of-the-napkin trick can give you a rough idea of what’s realistic for you and your finances.
Here’s how it works:
- 20% down payment on the car.
- 4-year car loan or less.
- 10% or less of your gross monthly income goes towards car expenses including gas, insurance, DMV fees, repairs, parking/speeding tickets, and interest payments.
Imagine you want to purchase a new car for $30,000 and you earn roughly $50,000 a year. That means you need to put at most a down payment of $6,000 (20% of the cost) and spend no more than $417 a month (10% of your income) on expenses for it.
The second reason you might not want to buy a new car is your Rich Life. I’ve talked about this philosophy many times before but here’s a quick breakdown: Your Rich Life is being able to spend and invest money into whatever makes you happy while ignoring everything else.
It can be something like buying first-class flights for your parents to come visit you, or something as simple as ordering appetizers when you go out.
While you spend on the things you love though, you’re also conscious in mercilessly cutting out the costs of things you don’t actually care about.
For example, I have a friend who spends $5,000 / year on shoes. At first, that seems like an eye-popping amount. HOWEVER, my friend is able to afford it because she makes a healthy six-figure salary, she has a roommate, she doesn’t buy lunches every day because she eats for free at work, and doesn’t spend her money on things like the gym, electronics, or anything else she doesn’t care about.
The result: She can spend $300 – $500 on around 10 – 15 pairs of shoes each year.
The same can be applied to you and a new car. Ask yourself, “Does a new car fit into my vision of a Rich Life? Will it really make me happy or am I just doing it for societal pressures?”
If the answer is no, you shouldn’t get that new car. If it’s yes, then awesome! Check out a few of my articles on making expensive purchases below for more.
Here’s the bottom line: I don’t like when pundits say that buying a used car is the only way to go. It’s not.
Buying a new car can be a smart choice if you pick the right car, negotiate extremely well, and stay disciplined about shopping for insurance, maintaining your car, etc.
Because buying a car is such a big purchase, I’m fine spending a little more money and time upfront to mitigate risk and get a great car that will last for a long time. And by being sensible about how long you drive your car for (longer is better), you can get a new car for a great value.
It doesn’t have to be a purely numbers-oriented decision. I loved my car — it was fun to drive, and if I had 10x the money, I would still get it.
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- The “guns and cars” myth of credit cards
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- How to get things rolling — for real — with only $20
- What most people don’t understand about taxes
- How to avoid the Super Mario Brothers trap by making your savings work harder than you do
- The difference between cheap and frugal
- The hidden relationship between money and food
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