A new car can be a really tempting proposition. Maybe you’ve just gotten your first real adult job and want to commute in comfort and style. Maybe you’ve been driving a wreck for years and it’s finally given up and you want something low maintenance. Unfortunately from a financial perspective, the numbers on new cars just don’t stack up, especially if you aren’t paying in cash.
Pouring Money Down the Drain with a Car Loan
Firstly, let’s talk about car loans. If you take out a loan for a new car in New York, the Bank of America will charge you 2.84% APR (annual percentage rate). This means for a brand new $20,000 car, you’re not only paying the running costs and maintenance, but you’re shelling out an extra $570 a year for the privilege. Over the life of the loan you will pay an extra $1,477 plus any fees set by the bank.
While it might only seem like a small amount, $1,477 means you are paying an extra 7% of the sticker price for the car. Not only that, but cars not an investment that goes up in value. In five years’ time your $20,000 car will only be worth approximately $7,500 – a drop of 63%.
Depreciation from day one
While we know that the value of a car drops over time (unless you are lucky enough to have picked a car that becomes a collector’s classic) what some people are unaware of is how much of that drop happens the day you drive the car out of the dealership.
Ex-demo cars are normally a $2,000 – $3,000 cheaper than a brand new car just because they have a few miles on the clock. Depending on how far it is from your dealership to your garage, you might put that many miles into the car, simply getting it home. It’s been said that a car will lose 30% of it’s value the moment you drive it off the lot. On a $20,000 car, you could lose $6,000 merely by taking your new toy home.
While 30% is on the upper end of the price drop, it’s not unusual for values to drop 20 – 25% merely because the car was drive off the lot.
Alternative: Have Your Cake and Eat It Too
Rather than buying a brand new car, think about what it really is that you want from a new car. If it’s low maintenance, then buying a second hand car that’s a couple of years old will give you something reasonable new with a proven track record. If you want something with low mileage or in great condition, look for a car with a single owner who perhaps didn’t travel very far and took pride in their car.
Picking up a second hand car with a couple of years on the clock can save you thousands of dollars. Taking it for a quick service and a detail clean will make it feel like new, while keeping your cash in your pocket.