Okay okay, I’ll resist the easy joke. Is there a case for buying a new car?
Sure there is. There just isn’t much of one. And it probably doesn’t apply to you.
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New car costs
Let me be clear: there is almost no justification for buying an expensive purchase that’s only going to go down in value (and quickly). This is especially true if you take out a loan for it.
The average new car costs somewhere in the vicinity of $25,000. Do you have $25,000? No? Then you don’t get to buy a $25,000 car.
The arguments about new cars being safe don’t hold water (pretty much every car on the road is safe, and you can do research to find the ones that are safest). The justifications about getting a 0% down loan don’t work either. A car can go down in value by as much as 30% in its first year. Even being generous and saying 20%, that’s still around $5,000 thrown out the window the first year, on average.
Cars and household income
Let’s look at things as they relate to median annual household income.
In the U.S., these days the median household income is around $60,000.
So a new car is around 42% of median annual household income.
That’s almost half a working year to buy a car. That’s almost 1,000 hours (2,000 if the household has two incomes). And remember that $5,000 of that (which is 8% of yearly income, or one month’s worth) is going to evaporate after the first year.
How a new car can “feel” affordable
How much do you feel like you would be okay with throwing out the window to have a luxury? $500? $1,000?
Let’s be generous and say $1,000. That means that for $5,000 to “feel” like $1,000, you’re going to need to make five times as much money.
So in our “average” case, with median income and an average new car, that $60,000 income is going to have to rise.
When you make that kind of cash, you can afford a $25,000 purchase (which is now around one month’s gross pay). Could someone with that income throw $5,000 out the window in a year? You bet.
People with six figure incomes do buy new cars without troubles. But one’s income doesn’t mask the larger truth: you still don’t need to buy a new car. You can get a really good deal on a slightly used car and save yourself thousands of dollars.
So what’s even better than being able to have so much income that you can afford a new car? Having all that income and not buying a new car. Wins all around.
There are no $5,000 new cars
Let’s move in the other direction. Let’s keep your annual income at $60,000, but in order to make the car “feel” affordable by comparison, it’s going to have to be worth a fifth of what we originally thought.
Can you buy a new car for $5,000? Nope, you can’t. They don’t exist.
But you can buy a used car for $5,000. And since the depreciation on a used car is much more slight than with a new car, you could probably afford a few thousand dollars more, at least if you had the money saved.
So you see, the math doesn’t work out for most of us when buying a new car. And when the math does work out, the question still worth asking is, why bother?
If you have a new car, I’m not trying to make you feel bad. Whatever decisions you made in the past are done. Your job now, though, is simple: run it into the ground.