Everyone loves that new car smell—you know the one. It smells like expensive leather and brand-new tires. It gets you daydreaming about a shiny coat of paint and the latest navigation system. The driver’s seat in a new car wouldn’t even have a dent yet! It sounds pretty good. But is it worth $500 a month?
That number might sound crazy high, but it’s actually pretty close to the average payment on a new car. To add insult to injury, most of those loans drag on for more than five years. That’s a long time to keep a ball and chain wrapped around your ankles.
There’s a laundry list of reasons buying a new car is a bad idea. Take a peek at three of the biggest reasons to pick new-to-you, used vehicles over something straight off the assembly line.
1. New cars depreciate at a rapid rate.
Imagine if your investment professional called you up and said, “I have this great opportunity for you. It’s going to cost you $20,000 today. But I can guarantee it will be worth $12,000 in just three years. It’s a great deal!” Would you bite at the chance to toss your money away? No way, Jose!
If it’s got a motor, it’s going to drop in value—plain and simple. A new car loses about 19% of its value in the first year and about 11% as soon as you drive it off the lot. That doesn’t mean you should go without a car altogether. Just don’t spend all your hard-earned money on a new one that’s going to lose you thousands of dollars as soon as your tires hit the highway.
2. Car payments steal your wealth.
Of course, this is true for new and used cars, but the monthly payment on a new car is close to $500, remember? That’s more than a lot of people’s grocery budget. Tack on what you pay in interest every year and you’re losing out on a big chunk of change.
Think about this. If you were to invest $500 a month for five years, you would have “spent” $30,000 out-of-pocket. But with compound interest, that $30,000 could turn into $40,000. Meanwhile, your $20,000 car will only be worth about $7,000. Ouch.
3. Used cars are just as reliable.
There was a time when cars only lasted for a few years. But today’s cars are a far cry from what our relatives drove back in the 60s. With modern technology, used vehicles are more efficient and reliable than ever. Someone has already worked out—and paid for—the kinks! And the good news is they don’t cost an arm and a leg.
Just think: That brand new car could cost around $20,000. But if you spend $5,000 on a new-to-you car and give yourself a $2,000 emergency fund for car repairs, you still come out ahead—by $13,000! Invest that $13,000 for the length of the average car loan and, even if you never add another penny to it, you’re sitting pretty with about $21,000.
Keep in mind that buying a used car doesn’t mean you’re going to end up in a Fred Flintstone mobile. You should do your research and avoid the clunkers, but don’t fear the new-to-you models. And whatever you do, don’t sign on the dotted line and tow a car payment behind you for the next five years. The new car smell is good—but it isn’t that good. The smell of “paid in full” is much sweeter.