New cars are alluring. Who can deny that? The combination of something being all new, mixed with the sense of freedom (real or imagined) creates an intoxication that is hard to resist.
Notice I said “intoxication.” Like lots of intoxicants, it can cause you to do regrettable things.
Zero is not nothing
I’ve talked with a few people who recently bought new cars. What was interesting to me was that one of the rationales for buying new was that it was eligible for a 0% interest loan, which was much better than then interest rates available on any used cars.
The details of anyone’s decision are complicated and shouldn’t be oversimplified, but this does seem to be a good example of why I think focusing on interest rates is overrated.
Let’s talk about a Toyota Camry, as that’s a solid, middle-of-the-road car. A Toyota Camry that was bought this year will cost around $21,000, not terrible as new cars go. A five year old Camry in good condition from a private party will probably set you back $12,000. (Numbers in this post were taken from Kelley Blue Book. I couldn’t find an easy way to link to the specific prices, so understand that these are estimates.)
Let’s say you decided that this was a car you needed right now, and you had no money saved up for it. I’d like to think of a funny scenario that would cause this: say an alien landed, held you at ray-gun point and said, “take me to your car dealer.” But I recognize that these things happen without the need for aliens.
You can probably get a car loan these days for 4%. Over 60 months of payments, you’d pay a little over $13,000 in total for the used car. On the new car, assuming no interest, you’d pay $21,000.
- Which one has a lower interest rate?
- Which one saves you more money?
But we’re not done. After five years (assuming zero inflation), the new car would be worth $13,000, and the used car would be worth about $7,000. One lost $8,000 in value, while the other lost $6,000 in value. (And even these numbers feel oddly close to me.) So by buying new, you’ve lost even more here.
Show me (something other than) the money
Let’s talk about reliability, as that is often raised as an argument for buying new. (Although, do you really think that a five year old Camry wouldn’t be reliable?) I highly doubt that in five years of ownership, the extra repairs required on this car would add up to the $8,000 difference in price. It’s of course possible, but it hardly seems likely.
There are other arguments, such as buying a new car so that you look good. Status symbols are a case where reasoning goes out the window. I can talk about how being reliant on things for your self-worth can be a terrible move. I can talk about how anyone who matter will be able to see past your used car. I can say that your pursuit of status symbols before you can afford them will likely torpedo your ability to actually afford those things one day. I can say any number of things, but if you’re still convinced that buying a used car is somehow beneath you, then I don’t think I can change your mind. (Though please pick up a copy of The Millionaire Next Door on your way out.)
What about safety? Are new cars safer? I can’t find any evidence to support this. Can you?
I’m running out of ideas here. At this point, I can’t find any strongly compelling reason to buy a new car. That said, if you have the cash and can throw it on the table without breaking a sweat, then I guess that would be fine. But I sort of feel like the person who would be at that point would have gotten to that point precisely because they wouldn’t do something like that.
Can you think of any reason why buying a new car is a better idea than buying a used one?