We all know the siren call of a brand-new car: the smell, the beautiful shine, and the ability to customize the car you’ve always dreamed of. However, the beauty comes at a high cost that you’ll never recoup.
If you’re considering buying a brand-new car, be warned. As soon as you drive off the lot, you’ll lose money. Combined with the miscellaneous fees of car ownership, you might wish you’d spent a little less on a used car and used your hard-earned money elsewhere. Here are 10 reasons to avoid buying a brand-new car.
1. Waiting Lists
If you’re in the market for a specific new car, you might not be able to get it right away. Waiting might build excitement, but most of the time, it’s better to get a car sooner rather than later. Worse, if you get impatient, you might end up with a car you don’t really want.
It’s always better to find a car that’s ready to go home with you as soon as possible—that way, you can take ownership of your car-buying experience instead of being at the mercy of an assembly line.
2. Bad Dealership Service
If you buy a new car at a dealership, you’ll have to go back to that dealership every so often for maintenance or new parts. This can be logistically challenging, especially if you choose a dealership out of town.
Doing maintenance yourself is an option, but it’s not for everyone, and if you decide to go to a different dealership or mechanic, you might forfeit your car’s warranty.
3. Sustainability Issues
Car manufacturing is a huge contributor to global pollution, and if you decide to buy a new car, you become part of that chain. Whether it’s clothes, food, or cars, it’s always better for the earth to buy something that already exists rather than something that takes a lot of energy to manufacture.
4. Depreciation
A brand-new car depreciates at a rate of 20% per year on average. In fact, the second you drive it off the lot, it has already depreciated 11%. That’s like buying a laptop at BestBuy for $1,000, and when you decide to return it the next day, they say it is only worth $890.
Imagine if all things depreciated as fast as a car. Your $300,000 home would be worth $277,000 the day after you moved in. At the end of the first year of homeownership, your home would be worth $240,000. You would never buy a house if this was the case. But for car ownership, it’s something we accept without second thought.
5. Debt-To-Income Ratio
Your debt-to-income ratio refers to the money you pay monthly toward debt compared to your gross income. To figure out your debt-to-income ratio, add up all monthly debt payments (auto payments, student loans, credit cards, mortgages, and personal loans) and divide that number by your gross income. For example, If you gross $4,000 monthly and have $2,000 in payments, your debt-to-income ratio would be 50%.
Buying a car can significantly impact your debt-to-income ratio. If you’re trying to buy a house, you will have a tough time getting a qualified mortgage if your debt-to-income ratio is higher than 43%.
6. Save Your Cash
My household vehicle cost is $320 a month for fuel and insurance, which is only about 4% of my monthly budget. The average person with a car payment will spend almost $750 per month (or roughly $9,000 annually) on their car payment. $9,000 is a large amount of money that could be going to something that pays you instead of something that depreciates.
You can save more, pay off debt, or invest in retirement if you don’t have a huge monthly auto expense. Monthly car payments sabotage your cash flow. More cash in your monthly budget gives you options, and financial security is all about choices.
7. A New Car Is Not an Investment
Contrary to what many are told from a young age, a car is not an investment. Sure, a paid-off car does count as an asset, according to the IRS, but cars are not true assets. Read any book about finances; people with solid financial portfolios do not view their cars as assets—they view them as liabilities.
Why is a car a liability? For starters, there’s the depreciation factor. An asset produces and grows (i.e., investments); it does not depreciate. A liability, such as a car, decreases in value. In addition to depreciation expenses, vehicle owners should also expect to budget $150 monthly for yearly car maintenance and tires.
8. Car Companies Want You to Have Payments
Here’s a simple trick for all personal finance situations: Think the opposite of what you’re being told. You probably don’t need a laptop warranty, for example, but the salesperson at BestBuy will try to make you think you do.
Using the same logic, car companies use car payments to help buyers think they can afford new cars. But do the math. Five or six years is a long time to have a car payment. And remember, by year five, your car will be worth 60% less than the purchase price. The only one benefiting from your new car purchase is the dealership.
9. Used Cars Are Simply More Affordable
When you lease or buy a certified pre-owned car, you’re not only walking away with an almost brand-new car—you’re saving close to 50%. If you lease, most lease terms for cars last 24–36 months, which means a few things:
- Leased vehicles have low miles
- Routine maintenance is almost always performed
- They are generally low mileage but like new
When you go to buy a used car, you’re getting a steal, and you let the previous owner or lease eat the 40% depreciation if you buy two years used.
10. You’ll Overspend With Your New Car Purchase
The biggest issue with buying brand-new cars is that most people don’t understand what a reasonable price is for a brand-new vehicle. Car companies will use sales tactics like leases and long-term loans to get customers to buy new cars—even if they can’t really afford to.
Always follow the 25% gross income rule: Your car’s value should be no more than your gross income divided by four. For example, if you make $50,000 per year, your car’s value should be no more than $12,500. In most cases, this means you’re looking in the used car lot.
When Should You Buy a Used Car?
Most financial experts recommend buying used vehicles around the two-year mark. By buying pre-owned, you can save around 40%. If you catch a Labor Day deal, you get to save even more (see Edmunds, KBB, or CarGurus). Other items to consider when buying a car are the following costs:
- Maintenance
- Annual fuel expenses
- Insurance
- Personal property taxes
Sometimes, a car payment can be manageable. However, when coupled with all the other associated expenses, it can become unmanageable and impact your savings rate.
Just Don’t Buy a Car Brand-New
There can be external pressure to buy new. You might see a high school friend’s Facebook posts boasting about their brand-new car. That’s why it’s important to stay strong and know what you can afford.
A used car offers all the same perks as a new car: It’ll get you from point A to point B, and you should feel good when you drive it. And you’ll feel better knowing you got a good deal with low monthly payments. Happy car shopping!