When Buying a New Car Makes Sense

October 6, 2022
Is buying a new car worth it?

Buying a new car is typically frowned upon by money nerds. Personal finance experts everywhere will trumpet the error of buying a brand new vehicle so quickly and fiercely that it will leave your ears ringing. 

But personal finance is personal. And our podcast is all about helping people save money for the future while also prioritizing things they value today. That mostly comes down to thinking long and hard about what we value. If driving a brand new car is high up on your list of values, you’ll be glad to know that we aren’t going to scold you for making that purchase. 

But if you haven’t spent much time thinking about your values in relation to your spending, we would highly encourage you to do that before you booking a test drive in a brand new F-150 at the car dealership this weekend.

Personally, I’m not a fan of buying new cars. In fact, I’ve only done it once and that was under some unique circumstances. Basically, the federal government and my state government offered some incredible incentives that made my Nissan Leaf cost less than a gently used second hand car. We’ll talk more about those electric car incentives when car shopping below.

Why buying a new car typically doesn’t make sense

Why are new cars not up my alley? Well, the largest cost of owning a vehicle is depreciation. Although we tend to place a lot of importance on the price of a gallon of gas and how much fuel we use in a typical month, that’s a drop in the bucket of the overall cost of ownership. 

It’s not how much you spend on fuel, the annual registration fee, or even the cost of your car insurance that is demanding the most from your monthly budget. AAA reports that depreciation of a vehicle is roughly 36% of the overall cost of your new or used car! That percentage will be even higher if you buy a new car every few years.

That’s why money nerds (like us) will often recommend that you buy used – to sidestep the steep cost of depreciation. Other costs get squashed if you buy used as well. Taxes and insurance will cost you quite a bit less if you choose to drive older cars and avoid buying fancy new ones. 

But isn’t it expensive to repair a used car?

Repair costs will almost certainly be more frequent on an older vehicle than on a brand new one. And that means more money out of your pocket to have work done on your ‘vintage’ vehicle. But you might be surprised to find out that annual repair costs on older cars really aren’t all that bad, according to Consumer Reports.

Here are the average maintenance costs for 5 year old cars vs. 10 year old cars, broken down by manufacturer:

And if you confine your vehicle shopping list to only include cars with high reliability ratings you’ll find that repair costs are actually pretty miniscule. Who knew that a 10-year-old Toyota will likely only cost you $298 a year in repairs!?

But enough about how great used cars are. Is buying a new car worth it?

New cars have the newest safety features

One of the biggest reasons a car shopper opts for a brand new car is the increased number of helpful new safety features. From backup cameras to stability control to the possibility that your car can safely drive itself – safety features have come a long way in the last ten years or so. 

If you have kids, newer safety features are often an even bigger concern. These new features really do save lives and provide peace of mind to drivers. 

This could, of course, be turned into an excuse to buy a new car every few years. But if having some of the newest safety features on your vehicle is something you place a lot of importance on then it might make sense for you to purchase a new car instead of a used one.

Plan on owning a new car for at least ten years

This is a solid reason to buy a new car. I’d still encourage you to purchase a well-loved used car and to drive it for the next decade, but the longer you plan to own a new car the less of a strain it puts on your finances. 

One of the main issues that come with buying a new car is the desire to buy another new one every 4 or 5 years. And since most buyers are financing their vehicle over 5 or 6 years, they owe more than the car is worth for almost the entire length of the car loan. And they never get to experience years where they don’t have a car payment.

If you can buy a new vehicle with a loan term of 48 months or less and you can keep that car for a decade or longer, your budget won’t be nearly as traumatized by that new car purchase.

Buying a new electric vehicle

You can certainly opt to buy a used electric vehicle. But EV’s have come a long way in the last five years. So a new EV will have a longer range and better features. And the federal tax incentive remains in effect if you purchase from certain car manufacturers. One vehicle to consider that will allow you to take advantage of the full $7,500 federal tax credit is the new Ford Mustang Mach e. In an Ask HTM episode we discussed buying an expensive Rivian electric truck. And it seemed to make sense for Will despite the high sticker price.

Some of the state tax rebates also remain in effect which can drop the cost of that new EV even more. Electric vehicles will save you money every month on fuel too. No more gas station stops necessary – unless you’re just looking for a snack that is.

And did I mention that electric vehicles are way more fun to drive than gas ones? Instant torque means faster acceleration. EV’s can go faster and handle better than their gas-engine rivals. All those factors make buying a new EV a worthwhile consideration.

You are financially independent

If you have amassed a small fortune and the sticker price of a new car is more akin to a drop in the bucket than a payment that’s hard to stomach, go for it! Astute blogger and recent guest JL Collins falls into this car buyer category and wrote about his recent new car purchase.

I’m not encouraging frivolous spending here – and neither is JL. But if you have been diligent to save and invest over a long period of time then a reward is likely in order. Some financially independent folks might decide to take an incredible multi-country trip but others might prefer to swap their old car for a new. 

Either way, if buying a new car doesn’t impact your level of financial freedom then I think there’s merit to the new car decision.

Choosing the right new car model

Buying a new BMW 7 series? Terrible decision. But if instead you purchase an inexpensive new car that holds its resale value well, the monetary tradeoff isn’t all that bad. For example, a 2020 Honda Civic LX with a six-speed transmission will cost you roughly $228 less over five years of ownership than buying a 2017 version according to Kiplinger’s. 

The numbers also look favorable for a brand new Toyota Tacoma truck when compared to its 2017 counterpart. While the difference in what you’ll pay for that new car are slight, it’s nice to know that you will get to enjoy the new car smell and that you’ll incur fewer maintenance issues over the coming years.

Tips when buying a brand new car

Research and preparation are paramount to getting a good deal on a new car. Before you rock up to the car dealer, here are some things that might help you get a good deal:

  1. Consider your long term needs: The longer you keep your new car, the better deal it will turn out to be over time. So make sure you envision as far into the future as you can to pick a car that suits any upcoming life changes.
  2. Work out financing *before* getting to the car dealership: You don’t want to be making flash decisions at the car dealer. It’s their job to talk you into financial products that they want to sell, not necessarily what is best for you to buy. Like we mentioned above, paying cash (or getting zero or low interest loan) is the best way to go.
  3. Track prices aggressively: Thanks to modern apps like KellyBlueBook and Cox Automotive sites, you can track a specific car price easily online. Also check out surrounding areas, as it could be worth it to drive a couple hours away to another city or state if it means getting a better discount on a new car
  4. Buy in October, November or December: In the later months of the year, manufacturers are focusing on getting rid of current year models and selling next year’s line-up. Also dealerships have stellar promotions due to end of year pressure to meet and exceed sales quotas.
  5. Research available incentives: If you’re planning on getting an EV credit or incentive, it’s important to know how the rebate/credit will come to you (and when). Figure out the process *before* you buy a new car.
  6. Test drive (like you own it!): You’re going to spend MANY hours in your new car, so take your time during any test drives, making sure it’s 100% what will suit you for the next 10+ years. Look up user reviews before your test drive so you know what. to look out for during your test drive.

Related Podcast Episode #470: Buying a car the right way

Buying a used car with confidence

Purchasing a used car is often touted as buying someone else’s problems. And I must admit, I’ve had a couple of older rides that gave me a lot of trouble. The main difference between the used cars that performed well over the years and the ones that were in the repair shop more frequently was my own due diligence (or lack thereof). 

You’ll save yourself a lot of potential misery – and money – if you get a used car that you are considering checked out by an independent mechanic. You’ll typically pay that mechanic for an hour of his or her time but that is a small price to pay for what you will learn about that car.

If you don’t currently have a mechanic that you trust, that’s an important relationship to have! Check out Car Talk’s mechanic search tool to find a well-reviewed independent shop in your area. And ask if the technicians are ASE-certified. That’s a good sign.

Also, if you need some help determining what repair costs should be for problems that arise, Consumer Reports has an excellent car repair estimator

Why the “total cost of ownership” trumps everything

The biggest thing you should consider when buying any car is the likely total cost of ownership. Doing a price-per-mile calculation gives you an apples to apples comparison of the cars you are considering. You might be surprised at the numbers you encounter as you compare potential vehicle purchases with a calculator like this one from the folks at Edmunds. For instance, one surprising calculation showed that a Tesla Model 3 has a lower total cost of ownership than a Toyota Camry. 

And, as I mentioned above, some lower priced new cars will cost you less over a five-year ownership cycle than opting for the same gently used vehicle. 

Ultimately, if you are in the wealth-building phase of your life, you should likely opt to buy a used car. And if you buy a roughly decade old car you’ll put yourself in an even better financial situation. 

Buying a new car can make sense in some situations, but it almost never makes the most sense from a numbers standpoint. That is in part because of the opportunity cost associated with your purchase. That means that your new car payment will prevent you from investing your money in ways that will have a massive benefit on your financial future. If you want to dig even deeper into that decision this opportunity cost calculator is very helpful.

Putting your hard-earned money to work for you instead of sinking it into a rapidly depreciating asset will have major ramifications on your ability to achieve financial independence. The value of that money invested in index funds for the next 30 to 40 years instead of shoveling that cash towards a car loan will give you freedom and peace of mind. This might be considered good debt instead of bad debt.

Is it worth buying a new car?

That depends on a lot of factors, many of which are situation specific. But for money nerds who are still working their way towards financial independence, buying an old car usually still works out financially better.

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