Is it ever OK to buy a new car? You won’t find many people advocating that practice. Rather it’s viewed as the cardinal personal financial sin. Anyone considering buying a new car instead of a used one runs the risk of being called a foolish, image conscious over spender.
That’s a tough rap. I don’t want to be lumped into that crowd. But c’mon…is it really that big a deal to buy a new car?
I’ll answer my own question by saying “It depends.”
Buy a New Car: Want vs. Need
I don’t believe anyone can justifiably say they need a new car. There will always be a used alternative to satisfy any life scenario. Even a family of twelve can find a used passenger van on the market.
Clearly a new car is a want and I’m perfectly fine with that. People should not be condemned for wanting something new. My wife and I just purchased our first completely matching bedroom suite this past week after 18 years of marriage. We’ve wanted a new one for a really long time but kid priorities and other financial matters have always taken precedence.
Could we have bought used furniture somewhere? Absolutely. (Actually already did that one for the first and only bedroom furniture of our marriage.) Will this new furniture decrease in value over the years? Again…yes. Could the money I would have saved have grown if channeled to an investment of some kind? Yes.
But we really wanted a new one and we saved the money to buy it with cash.
Which leads me back to the question I posed at the beginning – Is it ever OK to buy a new car and if so, when might that be?
You Can Buy a New Car If…
I contend that if a person meets these four standards then it’s entirely acceptable for them to buy a new car:
1. Have the right mindset. This purchase is not an investment. Don’t trick yourself into thinking it is one. By no means will this purchase be going up in value.
The numbers vary depending on many factors. Statistics show that new cars depreciate in value 15 to 25% per year for each of the first five years of ownership, with the biggest depreciation hit coming in that first year. So a $30,000 new vehicle could expect to be worth between $10-12,000 in year five of ownership.
As this infographic shows, that $30,000 new car is worth around 35% of what you paid for it new five years earlier at the dealership. That is an incredibly steep decline.
So in order to purchase new, one must first have the right mindset going into the purchase. If you are looking for an investment this isn’t it. Expect to lose money on the deal. If you can’t deal with that thought, then definitely stick to used.
2. Fitting the monthly budget. Unless you pay with cash, those monthly payments won’t be the only thing to deal with in your monthly budget. New cars bring with them additional expenses. Making sure the monthly budget can handle the increases should be a top consideration.
What expenses may increase when you buy a new car? Insurance premiums may likely rise, especially if you’ve hit a mid-life crisis and upgraded to a shiny, two door sports car. So it would be a wise move to check with an insurance agent before purchasing a new car to see how the decision may impact your yearly premium.
Gas expenditures may also increase depending on the type of car being purchased. If you are going from a Honda Accord or Toyota Sienna to a GMC Yukon XL expect for your monthly gas bill to almost double.
Some states also require ad valorem taxes to be paid each year on the value of your vehicle. The newer and thus more expensive the vehicle, the more in taxes there will be to pay.
3. Length of ownership. In order to offset the affects of depreciation a bit, purchasers of a new car must be willing to own that car for at least 10 years or 200,000 miles. Because depreciation occurs rapidly, jumping in and out of new a car every three to five years will be extremely painful on the wallet. That financial hit can be minimized to an extent the longer one owns the car.
4. Be a millionaire. If a person has one million dollars invested in non-retirement accounts they can afford to buy a new car. Given the historical average annual returns of the U.S. stock market, someone with this amount of cash can absorb the hit and recover from a $50,000 new car purchase. It’s a lot of money yes, but not enough to break someone in this financial position.
And one could argue most people with this amount of wealth have earned the right to make this decision based on their hard work, wise investing and personal discipline they have shown throughout the years.
(I’ll admit one million dollars is a bit of an arbitrary number. The point is that a person should have accumulated a lot of money already to deal with the pounding they take from new car depreciation.)
Buy a New Car Tips to Save Money
So, if you want to buy a new car and meet the above standards go for it!
But we still want to stay in the mindset of getting the best deal and saving money on it, right? So follow these suggestions to reduce the total cost of that new car:
1. Buy at the end of the year. The end of the year is a great time to find sales at car dealerships as they look to cash in on Christmas shopping.
2. Buy after the new models have arrived. This usually happens earlier in the calendar year. Try to pinpoint the transition period from last year’s model to the new model for the vehicle you are interested in purchasing. Dealers will give incentives to move the prior year models off the lot.
3. Pay with cash. Logic would assume that since you are a millionaire the new car purchase will be made with cash. You may be able to negotiate several thousand dollars off the purchase price because you don’t have to qualify for financing.
4. Be willing to travel to another market. Shop around and don’t be afraid to travel a long distance for a new vehicle. Our minivan was purchased almost ten years ago in Birmingham, Alabama because we found one several thousand dollars cheaper there than in our local market of Atlanta.
There is great wisdom in purchasing a used car. We most likely will do so when we upgrade from our minivan into a Suburban or Yukon XL later next year. I simply am not willing to pay their $70,000+ sticker price for a new one at this stage of my financial life.
But buying a new car isn’t a sin either. You won’t be wrecking the future if you’ve saved the cash, planned wisely and are in a financial position to deal with the consequences of holding a depreciating asset over a 10 year period.
Questions: Would you ever buy a new car? What if you had one million dollars? What are some other tips for negotiating a car deal?