Should I buy a new car? No, why new cars suck

July 25, 2011 — 18 Comments

One question I often get is, “Should I buy a new car?”  We love our cars.  There’s no better way to let the world know you’ve “arrived” than by pulling up in a brand new car.  This time the new car scent isn’t coming from an air freshener. Oh no, it’s authentic.  The car was made for you, and you were made for it.

Only there’s one small problem.  You owe more on the car than you make in an entire year!  This is why I think you should seriously question if you should buy a new car.

We can easily justify our need for a new car.  Benjamin Franklin said it best,

“So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for every thing one has a mind to do.”

Why do you need a new car?  Well, you tell yourself it’s dependable and your old car isn’t.  You might say, “I don’t like buying used items from other people.”  “I don’t know what I’m getting with a used car; they may not have taken good care of it.”  “I need a bigger car for the family.”  “I need a new car!”  The list of excuses goes on and on.

You may think I sound bitter toward new cars. Well, I am, and I think new cars suck!  And, I bet you’re wondering why.

I fell into the trap one year after I graduated college.  My old Chevy Lumina was running fine, but I deserved so much better than the red interior and the bobble head alligator staring at me from the dash board.  After all, I had worked hard for a full year!

The used car lot wasn’t appealing – I didn’t even question why I shouldn’t buy a new car!  I spent $28,000 on a 4×4 Xterra, but I didn’t have the money for a down payment.  You can read more about my struggle after I bought the new car here.

So, what does a $28,000 loan look like in real life?  My loan payment was $508/month for 60 months at 4% interest.  I thought I pulled one over on ’em when I walked out with a great APR.  But little did I know at the time, if I would have kept the car for the loan term, I would have paid over $31,000 after interest payments!

Do you think at I would have paid $28,000 in cash for a new car if I had it saved up?  No way!  I would have agreed with my current self in the opinion that new cars suck :).

First, I didn’t have that much saved up at the time, and second, paying a huge chunk of cash would have hurt a lot more! It’s always easier to write a small check than a big one – that’s why loan payments change our perception of reality and make us think we can afford more than we really can.

It’s a lot easier to pay a $500/month loan than to pay $28,000 in cash.

So, how do you keep yourself from getting tricked into buying more than you can afford or taking on a large car loan?  Buy a car you CAN AFFORD with cash!

Your probably won’t be able to afford nearly as much, but that’s a good thing!  It will keep you within your limits and keep you out of debt.  Before you decide if you should buy a new car, consider my recommendation to spend no more than 20% of your annual salary on a car.

If you make $40,000/yr, then you could spend $8,000 on a car.  This doesn’t sound like much, but we’ve all lost our sense of reality when it comes to cars.  See if you can stick to 20% and convince yourself that new cars suck.

If you can’t afford it with cash, don’t buy it at all.  When you buy a new car, it’s estimated that you lose 25% of the value as soon as you drive it off the lot.  It’s a horrible way to spend money.

Dave Ramsey calls a car payment the “mantra of the middle class”.  People think they will always have a car payment and it becomes status quo in life.  They always call Dave Ramsey and ask him if they should buy a new car… his answer is typically no (unless they are worth millions).  After I sold my car, I learned that I can live without a car payment.

What would happen if you invested the same ‘normal’ monthly car payment amount in the stock market instead?

If you are 25 years old, you have 40 years until the normal retirement age of 65.  If you invest $500 per month for 40 years with a 10% return, you will have around $2.9 million dollars!!  In the end, that’s what your car payment costs you!

I bought my used car in 2007; a 2002 Volvo S60 with 83,000 miles on it.  I plan on driving it as long as I can. I now fully believe new cars suck – well, at least until I’m worth millions!

I make a lot more money now than I did in 2007, and I’ve had a few promotions.  BMW says I’m finally ready to join their new car club.  No thanks BMW, I’ll stick with my used car.

My car now has over 126,000 miles on the odometer, and I’ve had to pay a few big repair bills.  However, they’ve been a lot cheaper than a monthly car payment.

Don’t believe the myth that a new car is better.  The only thing that will make you is broke.  I’d rather have money than drive around in a new car.  Besides, that ‘new car smell’ is from the plastics and glue that are probably toxic anyway!

What do you think, should you buy a new car?  Is a new car worth it?  I would like to see your thoughts in the comments section.

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18 responses to Should I buy a new car? No, why new cars suck

  1. Been reading your blog. I like it, although I guess we have different financial goals. What the hell am I gonna do with 2 million dollars at the age of 65? Blow it at the bingo hall? No sir, Id rather buy a nice car now and drive a beater when I’m old and married and don’t have anyone to impress and I’m knocking on death’s door anyway. They say youth is wasted on the young. I say wealth is wasted on the old.

  2. I agree in principle: buying a used car generally costs more than new one. But I think the chasm isn’t as large as you think it is. It seems like you’re embracing frugality with a little too much pride, and not enough pragmatism.

    Keep in mind, manufacturers don’t make cars like they used to. The industry term is, “over-engineered.” Back in the 90’s manufacturers built cars as solid as can be. Now, these same manufacturers target a car’s life span to be 150,000 miles. In other words, if you picked up a 2010 Camry it will most likely die at around 150,000, while your comparable older sister from 1997 may make it to 250,000 miles. As you can see, this has significant bearing on the used car market, much more so than their new car counterparts.

    With that in mind, there’s a serious flaw to your 20% “Rule.” Any new car nowadays would essentially cost more than $20,000 out the door. By your rule, anyone who buys a new car should make at least $100,000 (top 10% of US population). This means that 90% of the US population should all be buying used cars. Fine. But if manufacturers are only selling to 10% of the population, they will surely decrease production. So then, where are all these used cars coming from? This is not a sustainable model.

    Secondly, the avg American roughly makes about $50,000 and drives roughly 15k miles/yr. So purchasing a $10,000 six-year-old vehicle with 90k miles will probably last you 4 years before it dies. That breaks down to about $200 a month. Not including any repairs, inconveniences, and if the car can even last that long. So you’re essentially giving up additional amenities, improved safety, and 5-6 years of usage for $150/month, of which 3 years will be under warranty and essentially hassle free. Gap seems much smaller, doesn’t it? It should, because it’s the concept of fair market value.

    Thirdly, money saved is not real money saved unless it’s deliberately set aside. And how many people who save $20 on cable bill, $10 on auto insurance, and $100 car payments actually set it aside to do anything? To be quite honest, most people who save that type of money just end up squandering it elsewhere.

    The 20% “suggestion” is a warm an fuzzy concept, but please don’t peddle it as an actual solution. While I appreciate your revelation that a car costing more than your post tax annual income is complete idiocy, it honestly doesn’t warrant such judgmental self-righteousness towards those who buy new cars. Don’t get me wrong, I’m a big supporter of exercising fiscal responsibility, but that doesn’t mean you should take the other polar extreme. And if you truly believe in your blog, I dare you to not delete comment and let others consider a different perspective.

    • Dare accepted. By the way, my wife would probably agree with you on me “embracing frugality with a little too much pride”!! Few things:

      1. Our Toyota 4runner (2003) is up to 166,000 miles with no signs of dying anytime soon
      2. If I ever have the power to tank the economy with my suggestion of people buying cars they can afford with cash then we have bigger problems.
      3. I bought a 2002 Volvo for $10k, put 50k miles on it, sold it for $3,600 for a total loss of $6,400. That’s about $105 per month and just for the fun of it we can add $2,000 for maintenance which makes it $140/month. When I had my new car payments in 2005, I paid $520 per month… by my math, that’s $380 per month more expensive.

      I’m sorry if you feel I’m being self-righteous to new car buyers.

      • 1. The manufacturers are targeting their vehicle life to 150k to lower costs (some may be 140, some may be 160, but by and large they’re all around 150,000 miles). This has been an initiative that started the mid-2000. Which means it’s probably tricking down to cars being made very recently. So the fact that your eleven year old car has lasted 166k miles doesn’t prove or disprove anything.
        2. Your power to influence isn’t a particularly great concern. The gripe I have is that you’re not actually telling people they need to buy “cars they can afford.” In fact, you haven’t even defined “affordability.” Instead, you’ve preached a self-made rule, peddling it as the holy grail by surrounded it with anecdotal evidence. You haven’t done your due diligence, the reader is not any more insightful, and nobody has really learned anything about financial responsibility when purchasing a car (other than this 20% rule that fails the laugh test about half the time).
        3. So you sold your Volvo for $3,600, fine. But you can’t credit residual value in one scenario and not the other. So if you want to do that, then we can calculate based on the numbers you gave: $10,000 Volvo, sold for $3,600, driven for 50kmi = $0.128 per mile. Let’s say a new car for $20,000, driven for 150kmi, will yield $0.13 per mile. Which is a whopping ~4.1% more. What do you get for 4.1%? You get improved gas mileage (which should more than cover the 4% price difference), improved amenities, improved safety, 3-4 years of being hassle-free, vehicle warranties, and the protection of lemon laws…just to name a few.

    • Wow! That’s a depressing thought to think newer cars only last until 150k miles. Maizy my 2007 Mazda CX-9 hit 220k this year! Only major repair on her was an AC motor going out this summer! That’s it! Old cars last as long as you treat with love and respect. everyone in my family has 5-15 year cars with 100-150 miles on it.
      My money saved from not having payment feels pretty real to me. 🙂 its great to watch your savings or retirement grow.
      People that squander extra saved money are the same dumb dumbs buying a new car 🙂 That’s a nice warm fuzzy motto to have when you’re watching your savings or retirement grow.

  3. The lure of the new car has been one of the biggest white whales we face in our society. This is one of those things that we know deep down is bad for us though we still fight to achieve it.

    When you consider that a car never appreciates in value and even more it losses a huge bulk of its value as soon as you drive it off the lot, it’s a wonder why anyone would buy new. But then we are faced with the marketing drive. Car companies sell the sizzle and make us drool over something we know better than to mess with.

  4. Whata Dumb Rule January 18, 2014 at 6:40 am

    You and your 20% rule are stupid. You don’t take anything else into consideration. What if I made $500 per year? I can afford a $100 car? No, I’d need that money to eat. What if I made $1 million per year? I can only afford a $200,000 car? Besides taxes, assuming net $1 million, why would I only be able to afford a car about $190,000 more than others when I’d make over $900,000 more than them annually?

    You also don’t take how long you’re going to keep the car into consideration. A $50,000 salary person can buy a $10,000 car every year? Every 3 years? 5 years? 10 years? No time frame = dumb rule.

    You don’t take mileage or condition of a cheap car into consideration. Someone making minimum wage, say $15,000 as an example. What are they going to buy for $3,000 these days? A when the engine or transmission dies on their 150,000 mile garbage car? Then what happens to your 20% rule? High maintenance or repair costs to hold onto some beat up old car?

    You don’t take gas mileage into consideration.

    Your gross salary basis doesn’t take cost of freakin living into consideration? Wow. So if two people make $30,000 per year each, one has $600 per month in expenses while the other has $1600 per month in expenses, they can both afford to pay the same amount on a car? So Dumb.

    etc. etc. Such a stupid blanket rule with no legitimate criteria.

  5. I strongly believe the comments on this site was far more insightful than the blogger.

    • Sam – I really wish you’d add some more insight to your insight because such a general statement doesn’t help anyone… maybe you have some great tips, if so, please share!

  6. Great post. I’m 20 years old working full time and have saved most of the money I’ve made up to this point. When I turned 18 my dad bought my a 12 year old car, it ran great the first 2 years and now all of a sudden it has become a money tank. Two $500 repairs within a span of three days, a $500 repair two weeks before. I’ve footed every repair cost simply because I got it for free so I view this as my costs as if I were to go out and buy a used car, but it definitely puts a dent in the way I look at used cars. Be very wary, as some of them will leave you worse off than if you had bought new. I drive a Saturn (GM). As much wisdom is in this post, I would still gladly save every penny I make for a year or two and buy a brand new Toyota that’ll last my entire career than buy another used car every 5-10 years with tons of potential repairs and issues that were caused by previous owner(s). Even a mechanic can’t inspect everything on a used car, so it’s a gamble even. My used car has left me stranded and in life threatening situations (break down in bad parts of town, or something breaks in car and I lose control….it’s happened and very scary), be smart. I drive 30,000 miles a year, a good car is a must.

  7. Hello Dan! help me! plis! thanks for all you tips and advice, you say this is not for all scenarios, plis help me with my! I recently arrive to the USA, so my credit is bad 551, next week I star working and I will make 45k a years, and my work is 1:30 from home 🙁

  8. So I am about to graduate, and I have always wanted a truck since I was 10. I am finally able to satisfy this wish, and thus I am looking for a new big diesel truck. The price tag is between $38000 and $42000 for one of these, and I have money saved, and a vehicle to trade in to bring the loan down to a more reasonable number. The loan amount will be 32% of my pre-tax income; however, the monthly loan payments will be 9% of my pre-tax income, and I will finance the vehicle for 4 years. My yearly spending on a vehicle is less than the 20% rule, as I am spending 9% or my income on a new vehicle, but I am purchasing a vehicle with a loan greater than 20% of my income, is that cheating the 20% rule?

    • Hi Dave – I made a very similar decision as you’re debating when I graduated college. I always wanted a big beautiful SUV… so I bought it… and it was the worst financial decision I’ve ever made. It took me years to dig out of debt, and I felt like I had to keep my job just so I could pay the large loan. You have definite car fever… and this one decision might very well determine how you do financially the rest of your life. I’d advise against making the big purchase.

      • Hi Dan – I just want to say that this advice you are giving is very informative, and will keep people out of debt; however, I will also say that for me, the vehicle I drive is not a status symbol, its an experience. I don’t use a car to get from point A to point B, I drive. I like to drive. I like to drive my vehicles hard, I love the noises they make, and the feeling of being put to the back of the seat. For me, this truck purchase is like you taking your vacation to see the world, the experience. I would rather have the experience of driving around essentially a small semi, than spending my money on a vacation. I appreciate the reply, and I figured your answer after seeing other reply’s. I will let you know what happens come October. Another note, I will still be saving 10% of my income towards retirement, and will save an additional 5% to build up my safety fund. Plus, the hobbies I intend to pick up will require me towing a large trailer a couple times a year, and using the pickup bed regularly. Also, I figure I better get the expensive vehicle while I can, before I get tied down with other expenses, like children. Your only young and dumb once. Like you have also said, we humans can reason ourselves into and out of any decision we desire…

  9. I couldn’t agree more with you that new cars suck. I got stuck in the belief that in order to have “stuff”, I’d have to get a loan. So get a loan I did. I bought a new 2012 Ford Fusion at 4.59% APR. The total cost after my 6 year loan was almost $33,000, $462.46/ month. I put no money down for it, and rolled over my other unpaid auto loan into that car loan. What was I thinking!? That was the problem, I wasn’ttthinking. I came from a low income earning family, so being able to buy a new car felt awesome. I couldn’t wait to show off my new debt, I mean car to my family. A year later, I came across Dave Ramsey. I listened to him over and over, and that’s when it finally sank in, GET RID OF THE CAR!!! I took out a small personal loan to cover the remaining balance that I owed after selling the car back to the car lot. Now, instead of coming up with reasons as to why I deserve a new car, I remind, and will continue to remind myself why new cars suck- my 2012 Ford Fusion.

  10. I am terrified of new cars, all that electronics is just a ticking bomb, that will cause a million problems, within a very short time, and it will cost the owners and workshops lots of money and time, not to mention down-time.
    Also this stupid infotainment systems are very dangerous, since you need to enter and exit tons of menus, just to turn down the volume of the stereo, and in that time, you may have run somebody over, or you may have run into a ditch and crashed.
    No stick to old cars, with less electronics, and no stupid tv screen inside the car.

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