When Buying a New Car Makes Sense

June 23, 2020

Buying a new car is typically frowned upon by money nerds. Personal finance experts everywhere will trumpet the error of buying a brand new ride 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 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 take this article as a sign that you should walk into a dealership this weekend and start browsing.

I’m not a fan of buying new cars myself. 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 most gently used cars. We’ll talk more about those incentives to purchase electric vehicles 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 cars 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 or oil changes 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 vehicle! 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’ ride. 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. 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 $420 a year in repairs!?

But enough about how great used cars are. When does buying a new car make sense?

If you place high importance on the newest safety features

One of the biggest reasons people opt to buy a new ride 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.

You plan on owning the car for at least ten years

This is a solid reason to buy new. 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 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.

You will be going electric

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 price tag.

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 purchase 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 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 the smell of a new Tesla. 

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.

The decision to buy new hinges on the make and model you choose

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.

The ticket to 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 used car that is roughly a decade old 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 payment will give you freedom and peace of mind. 

So does buying a new car make sense? That depends on a lot of factors, many of which are situation specific. But for money nerds who long for the freedom that financial independence can bring, older used cars still come out on top.

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