The weather gets warm, the trees start to turn green and simultaneously something inside of us gently nudges us to hop online and browse new cars. As if the pollen flooding our noses isn’t enough, we activate this thinking that we NEED a new car.
But then the real question pops up, “Should I buy a new car or a used car?”
Truth be told, the first question we should all ask ourselves before even thinking about buying a new car is whether or not a new car is a NEED or a WANT?
In order to get to work, drive the kids around town and get to where we need to be most Americans still drive. In fact, according to Forbes, 77% of people were still commuting to work in 2017 via their car.
So while personal finance writers like myself will tell you reasons to never buy new cars, obviously my head isn’t in the sand, for the most part almost everyone has to have a car for transportation.
BUT transportation can hit the wallet hard. In fact, after housing costs, transportation ranks #2 for consuming most American’s monthly budget.
The question more people should be asking themselves is not whether or not to buy a new car or used car… but the long term implications of buying a TOO expensive car.
Should you buy a new car or wait?
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Let’s face it – at one point or another, we have all contemplated how we could legally total our car just so we can get a new car (Crap, I was just writing what I was thinking again). Just kidding – don’t commit insurance fraud.
In all seriousness, there are times when we need to assess whether or not buying a new car is in the fold for us. Here is a shortlist to determine if a new car is needed:
- Determine if buying a car is true need or just a want.
- Mileage of current car is over 150,000
- Current car is unreliable
- Maintenance costs are more then the car’s current value
- Upgrade needed for family reasons (Mostly kids)
- Downsizing to a commuter-friendly car
If you do decide that buying a new car is necessary, start with addressing whether to buy new or used.
Should I buy a new or used car?
Talk to most people with a financial background (Who isn’t trying to sell you lending) and they will tell you to always buy used vehicles.
The new car smell wears off in 6 months and buying 2-3 years used will knock the sticker price down 20-30%, not to mention saving on insurance and personal property taxes.
In fact, according to Money Savvy Mindset, a car is only worth 37% of what you paid for it 5 years later!!!
Or as self made millionare David Bach put it,
“Nothing you will do in your lifetime, realistically, will waste more money than buying a new car
-DAVID BACH, CNBC
All that being said, strong indications go towards used cars. Ideally, buying something with cash is the goal but most used vehicles still have factory warranties. Within 5-6 years a brand new car is worth 60% less on average.
However, there are cases where buying a brand new car might be something to consider:
- Better financing rates (if you have to finance)
- Some makes are pretty cheap brand new (Ex: Kia)
- Factory Warranty
- Less maintenance costs
Even when buying a new car, it is important to consider the costs of the car. Additionally, avoid super long financing terms (anything over 4 years). Longer terms to “afford the payment” indicates that the car is too expensive.
How much should your new car cost?
Recently there was much publicity surrounding the recent stat indicating that 7 million people were 90 days behind on their car payments.
How is it possible that 7 million people are that close to defaulting on their car loan?
Poor budgeting and unfettered spending can be a factor, however, the biggest factor is driving around a car that clearly they cannot afford.
Use this general rule of thumb when buying a car that I once heard from a well versed financial planner:
Your car’s value should never exceed 25% of your gross income.”
While this might be disappointing if you’re in the market for a new car, making sure you stay within your means is vital. Procuring lending is not the problem when buying new cars, it is clearly making the payments.
Having a rule of thumb that meets your financial needs will keep you on the right path. For example, a hypothetical family “A” makes $100,000 combined gross income. Therefore their new car purchase, be it used or brand new, should not exceed $25,000.
Should I lease a car?
What is something called that you pay for then give back? A rental, or in the auto industry a lease.
Sure you can continue making payments and buy the rest of your lease out, however, leasing vehicles is almost never a good idea for typical car buyers. Leasing is only advantageous in specific situations or for business owners.
While the temptation of a lower monthly minimum might seem nice, over time a lease will cost more and you don’t own.
Long term implications of a new car purchase
At the end of the day there are a few reasons to treat a new car purchase pretty seriously – not impulsively like I personally did in 2014. In no particular order, the biggest factors to consider before purchasing a vehicle include:
- Debt to income ratio.
- A future home purchase.
- Retirement savings.
- Positive cash flow per month.
- Weddings & Travel
How a new car purchase impacts your financial security is really up to you. However, new cars are not assets or investments. When looking at future value instead of present value, cars are depreciating liabilities.
Aside from car payment hurting your positive cash flow and debt to income ratio, most people are literally driving around in their retirement plan.
Here is what I mean.
Rough estimates indicate that the average car payment is equivalent to approx $500. Hypothetically, let’s say instead of having a $500 car payment a 30-year-old instead invests $300, while the other $200 goes towards a car payment.