Financing a New Car: A Bad Investment
If you have ever read the book “The Millionaire Next Door” (Longstreet Press, 1996) you are probably already familiar with the piece of advice I am going to give you here – never finance a new car! Financing an expensive new car is one of the worst investments you can make. It is the only asset that will you will ever own that decreases in value from the minute you sign your name to the loan papers.
Today cars can cost in excess of $40,000 and will undoubtedly be traded in or sold after a few years. Yet millions of Americans stand in line for the privilege of paying interest and a high sticker price for that month-long “new car smell”. They gladly will fork over hundreds of dollars a month to drive around in something that they can show off to the neighbors or co-workers. To quote a famous television commercial, “Stop the insanity!”
Sam Walton, the founder of Wal-Mart, drove his old pickup truck to the day he died. When asked why a man in his position didn’t drive something more suitable he replied, “It’s paid for and it’s mine.” People who are serious about maximizing their savings and being able to retire early know that a new car is a poor choice when every dollar counts when building a retirement portfolio. They have specific goals in mind and know what they have to do in order to achieve them – and those goals don’t include a car payment.
Maintaining the car you already have, or purchase a good, used car will help you save a monthly car payment – a payment that can go towards other things such as your 401(k) plan or IRA. Just ask yourself this, would you rather give you money to someone else to get rich off of or would you rather keep it and make yourself rich? I think we both know the answer that!
Thanks to services like CARFAX (www.carfax.com) buying a used car isn’t the scary proposition it used to be. In fact, many people find out they can afford to buy a more luxurious car with the money they have available when they buy used than they could if they bought new. Thanks to advances in technology and manufacturing cars are staying on the road for upwards of 300,000 miles compared to cars that just 10 or 20 years ago could barely make it to 100,000 before serious mechanical problems would start to appear.
Click and Clack, the Cartalk guys (cartalk.cars.com), give this advice to their weekly listeners who call in to their syndicated radio show, “It is cheaper to maintain a car than to buy a new one”. Just look at it from a purely financial point of view, if you have a car that is paid for even if it needs a major repair, let’s say a new transmission for $2,000, that is still cheaper than a $600 a month car payment over 5 years.
If you take half the amount of money you would pay in monthly car payments and put that in a savings account then you will be prepared for any major repairs, or for the inevitable task of purchasing another car. However, unlike many others, you will be able to buy a low-mileage used car with cash and walk out the door knowing that all that money you are saving is going directly into your other investment choices and actually earning you money instead of earning the finance company additional profits.
So the next time you need to purchase a car look at sides of the puzzle. You may find that putting your money into a used car can be one of the best financial decisions you ever make!
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Written by Robert on April 19th, 2006 with
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April 19th, 2006 at 11:11 am
amen to that
May 19th, 2006 at 11:16 am
I disagree with your hopeless contention that one should never (a) finance (b) a new car. I’ll get to financing in a minute. But first, manyh people buy a new car not in search of that new car smell, but rather, because they simply don’t want to run the risk of buying into someone else’s trouble. Say what you will, owning a new car is greater insurance against a variety of second-hand car ills (tires, brakes, clutches, water and oil pumps, you get the idea). Moreover, they buy a new car because it makes financial good sense: they buy and hold—just like Sam Walton. And scores of studies have shown that retaining ownership for 5 or 10 years is the best way to wring the most value out of a auto purchase. This is particularly true if you take care of a car. T
The financing of a new car is a red herring in your argument. I financed my last new car at 1.9%. Moreover, I paid it off in 10 months, not the 48 or 60 months that the suckers go for. My bill for financiing: $122.
Moreover, the whole notion of buying “used” is overworked. So your car is significantly depreciated the moment you buy it? Doesn’t it follow I should buy my clothes at a second-hand store? And my furniture from the Goodwill? And buy food brands I do not prefer merely because I have a coupon?
That’s a lifestyle that’s not for me.
May 19th, 2006 at 11:55 am
Charles,
Thanks for comments! First let me say there may sometimes be exceptions to our advice and some are based on personal opinions (and in this case, our contributor Robert).
I’d agree that there could be many times when financing a new car could be the best route. For example when I purchased our last new vehicle which actually happened to be new, they offered a couple thousand discount for financing through them. I made sure there was no prepayment penalty. I then took my savings for financing through Ford credit but then paid off the loan in a matter of a couple months.
In regards to “running into someone else’s trouble.” I’d advise to always get the vehicle first checked out by a qualified mechanic. Were not talking about buying a 15 year old clunker. But looking for a vehicle that is just a couple years old with low miles can possible save you a lot of money.
I would agree to that as well.
It is true however that most new cars DO depreciate in value substantially the moment you drive it off the lot. Some vehicles much more than others. “Most” vehicles are not considered investments. I’m not against splurging on a nice expensive vehicle but most people have to make a lot of sound financial decisions in order to get to that point (which may include cutting down on expenses elsewhere and making good investment decisions).
Thanks again for your comments. It brings in some good points to the discussion.
January 27th, 2008 at 9:28 pm
Personally, I like owning a new car. 0 - 2% interest makes it worth financing for me… and the if I need the amount I would have saved from a small amount of interest or the difference between a similar car in used condition come retirement, I’m seriously in trouble.
I believe in living for today, and working for what I want. It’s a luxury to own a new car, especially one you really wanted. I work, save for retirement, and budget for a car payment because it makes me happy. That’s an investment I get a return on every day when I drive to work: a car I want to be in.
February 5th, 2008 at 6:05 pm
Call me crazy, call me insane, call me lunatic, call me a dreamer.
I’m about to finance a 21000.00 car at 6.9% over 48 months.
In other words, that car will cost me around 25000.00 in 4 years.
Thats 4000.00 im giving away to the bank.
I 100% agree that car is a very investment. Financing it is even worst.
But sometime you just want to enjoy your life sooner, have some fun sooner. We all die anyway.
Its a big dilema, should i save every single peny, take the city bus, use my bicycle to go to work and eat sandwiches everyday, and buy myself a franchise like Mcdonalds after 30 years of saving ?
or should i finance a car every 4 years over 30 years ? if you do that you will spend 500000.00+ in transportation after 30 years if u include gas and insurance.
With 500000.00 you won’t have enough to buy a mcdonalds but you certainly will have enough to finance another 500000.00 to buy a 1mil franchise. or open your own.
Now who will be richer after say 50 years ? Does it worth it ?
I see so many youngs wanting a camaro or a mustang or tuning their car into a 50000.00 modified car.
Also if a car can enhance your social life, meet new people possibly help you to get married,, money sure can’t do that… only thing you can buy with money are sex workers or people wanting your money.
Its really a choice you have to make.. Die poor and happy or die rich and wishing something you never had when you were younger.