Please Let Me Talk You Out Of Buying a New Car
Buying a new car is fun and exciting, but it is one of the worst things that you can do financially. In America, we are obsessed with the automobile. What you drive has become a statement of who you are. The marketers have done a fabulous job of selling us on this and we have bought it. Let’s face it, we often want a new vehicle for the image it portrays rather than for any practical reason. I’m guilty of this too. Here are some examples of the marketing spin that we are being sold.
If you drive a…
- Xterra, Jeep, or Hummer you are adventurous and nature loving.
- SUV, minivan, or Volvo you are practical, family-oriented, and safety conscious.
- Scion or Honda Element you are hip, cool, and young.
- Lexus, Mercedes, or BMW you are successful, smart, and sophisticated.
- pick-up truck you are manly, hard-working, and all-American.
- hybrid you are green and financially wise.
Do the math before buying any car.
Of course, what the sales and marketing people are selling doesn’t usually tell the whole story. For instance, let’s take the example of a hybrid. Lots of people are thinking of 
trading their cars for something that gets better mileage since gas prices are so high. Now don’t get me wrong, I am as environmentally conscious or green as the next person. However, there are some financial considerations that one should take into account before buying any vehicle. For instance, you will pay more up front for a hybrid. Let’s say that you buy a Ford Escape Hybrid and that you pay $3,000 more for it compared to the standard gasoline version. According to Ford, the hybrid gets 30 miles to the gallon in the city compared to 22 miles to the gallon in the standard gasoline version. If gas costs $3.00 per gallon and you drive an average of 15,000 miles per year, you are saving an estimated $543 per year on gasoline. This means that it would take you over five and a half years to make up the $3,000 premium you paid up front for the hybrid! Your situation may be different and there are other reasons to buy a hybrid. The point is to do the math before making an emotional decision about buying any kind of car.
Logical considerations in buying a car.
For most Americans, their car is their second most expensive possession behind their home. However, we will trade-in our perfectly good, existing automobile for a new one on a whim. If you consider this from purely a logical perspective and remove all the emotional marketing hype, it is ridiculous. A vehicle is simply a mode of transportation. It is not who you are. We don’t get all jazzed up about buying a washing machine. We don’t trade in our old one knowing that we are going to lose money just to get the latest model with the new digital display. We don’t do these things because washing machine manufacturers haven’t brainwashed us into thinking that our washing machine defines us.
Interesting facts that drive my point home .
Facts don’t lie. Here are some that are very interesting:
- The average new vehicle costs over $28,000.
- A car on average loses 45% of its value in the first three years.
- The monthly loan payment on a $28,000 vehicle is over $540 for five years.
- Over 11 million cars were scrapped in 1996 and 25% of the material was landfilled.
- About 20% of new car transactions are leases.
- Leasing will cost you at least, $11,000 more than buying over a ten year period.
What else would we spend so much on that is going to depreciate so rapidly? If you take the $540 you will pay in monthly payments for the average car and invest it in a growth stock mutual fund that earns 10% annually, you will have over $40,000 in 5 years. You could then pay cash for a vehicle and have money left over. Plus, if you did this, you would save almost $4500 in interest!
I’ll keep my 1997 Ford F-150 pick-up truck.
At this point, you might be wondering what I drive. I have a paid for 1997 Ford F-150 pick-up with over 120,000 miles on it. It is dependable transportation that is very handy when I occasionally need to haul or pull something. It isn’t the million mile truck, but it has a few scratches and it makes a noise here and there. However, it is worry-free and debt-free. I’m going to hang onto it until I can pay cash for something else and then I’ll buy something that is two to three years old. I’ll let someone else take the hit on the depreciation. I hope its not you!
Photos by gmeurope and Lutz-R. Frank and Mikey aka
Please give this a Stumble or Digg by clicking the links below!
Frugal Dad | Mar 28, 2008 | Reply
I enjoyed this one because I just hate seeing young families trap themselves in huge new car payments. You’ve presented a thoughtful, logical approach to car buying and I wish more people followed this kind of advice.
Thanks for including my million-mile truck post - maybe yours will hit it one day!
Jeff | Mar 28, 2008 | Reply
@FD - I bought my first new car right out of college. Back then, I didn’t even know it was possible to live without car payments. Now I have tasted the freedom and I will never go back!
Tejvan Pettinger | Mar 28, 2008 | Reply
Great post and I agree wholeheatedly. I have only bought one car in last 12 years (but I do own 6 bicycles
)
Kevin @ Change Your Tree | Mar 28, 2008 | Reply
you don’t need to talk me out of it–I already got bit once (a long long time ago) and that was enough to never do it again. I’ve since done a lot of personal finance and I only purchase used cars with cash now–no financing whatsoever.
Jonathan Mead | Mar 28, 2008 | Reply
Great points Jeff. Although I would rather by a hybrid for the environmental impact, rather than the savings. And I wouldn’t buy a ford hybrid, right now Prius is still the king and will save you a lot more on gas.
Jeff | Mar 28, 2008 | Reply
@Tejvan - Six bicycles!? You must be an enthusiast.
@Kevin - Paying cash is the only way to go. I’m glad to know that there are others out there that feel the same way.
@Jonathan - I agree that there are other reasons to buy a hybrid and there are other hybrids one should consider besides the ones that Ford offers, but it is still important to do the math and know exactly how the money is going to work out.
Thanks for your comments! I enjoy hearing from you.
benny | Mar 28, 2008 | Reply
Nice points.
It’s also interesting to consider that ALL ads on tv or anywhere are designed to essentially fool you into buying things. They try to change a want in you to a need or induce that need in you via appetizing and alluring imagery and subliminal messaging.
We should all be aware of every outside attempt to manipulate our minds.
Peter | Mar 28, 2008 | Reply
I had a car loan back in Australia. When we moved to Canada I sold the car and paid it out. Once in Canada, we bought an inexpensive car and I have loved not having a car loan to worry about. So, in summary, good advice Jeff! Hopefully some people listen to you
Jeff | Mar 29, 2008 | Reply
@benny - You are right. All advertising is designed to influence our thinking. It plays upon our emotions which are powerful forces in our lives. We must be vigilant in examining how these efforts effect us.
@Peter - I can’t believe what some people pay per month for their cars. A part of financial freedom is making good choices. As someone else said in their comment, we want the things we own to serve us instead of the other way around.
I appreciate the comments!
Pinyo | Mar 29, 2008 | Reply
Sometimes, it’s a hard decision. My family is talking about buying a minivan since our cars are not big enough to take the whole family in one ride.
summer | Mar 31, 2008 | Reply
i paid up my car last year, it’s not bad 4% apr in 5 yrs. as of now i’m saving money for a car (used or new) in case my 6 yr old car bogs down. i am gearing towards a big down payment or cash the next time i will buy a car. i am praying that it will be 4-5 yrs from now.
Jeff | Mar 31, 2008 | Reply
@summer - It sounds like you have a great plan. I’m glad to hear that you are already anticipating your next purchase. I think you are on the right track.
Good luck and thanks for commenting!
ERAU student | Jul 30, 2008 | Reply
I’m currently in college, my first vehicle was an ‘05 Town & Country (I love large SUV’s but my parents are irritatingly pro-environment). At any rate I drove and took care of that car maintaining it every 3K miles, nevertheless it managed to have some part of it fall off every time I drove it. At 36k miles the radiator blew up, literally blowing the hood off of it. The replacement was a Taurus (small but reliable), from the insurance payoff. The Taurus has been great, and I plan to keep that until it dies, but in addition, when I graduate I would love to get my dream SUV, an Expedition, or LR3 Discovery. Believe it or not an LR3 in the highest trim on it can be found for $22k with 33k mi on it, compared with the $38k base price new. I’m all for buying used if it’s still in good condition, and if you can get the extended warranty on it, as I did for the Taurus which will last until the car passes through 100k miles regardless of how old in years it is.
Jordan | Jun 16, 2009 | Reply
You simply have to be able say ‘no, thanks at that price’ at least once to the dealer. This gives them a strong message that you are serious about your research.
You should also bring a piece of paper to the dealership and make sure you do all the math of the finance calculations yourself. The point is not that they will do the math wrong. The point is you will see exactly how the deal is structured. Do not be afraid to take the time to do this or look like a fool for mapping out your car deal in the dealership.
My dad swears by this process, http://tinyurl.com/nxutm2