Cars: A Fast-Depreciating Asset

Buying a new car is a bad investment for several reasons. Firstly, the cost of a new car has risen faster than salaries, making it an increasingly unrealistic purchase for many. This is further exacerbated by car dealerships offering longer loans with higher interest rates, resulting in buyers financing more of the purchase over a longer period. Additionally, new cars are depreciating assets, losing value over time, with the biggest depreciation occurring in the first year. This means that buyers often owe more on their new car than it is worth shortly after purchase. Furthermore, new cars come with higher insurance costs, and the warranty period may not cover the entire loan payment schedule, resulting in additional expenses. Finally, used cars offer better value, as buyers can get the same car for a lower price by waiting a few years, saving them thousands of dollars. Therefore, buying a new car can be a costly decision that may not be the best investment.

New car prices have risen faster than salaries

The allure of a new car is often irresistible, but it is important to remember that buying a new car is one of the worst financial decisions anyone can make. In this section, we will focus on how new car prices have risen faster than salaries, making it an unrealistic purchase for many.

Let's take a look at a personal example. In 1972, my grandparents bought their first new car, a Chevrolet C-20 three-quarter-ton pickup, for $3,027. This was equivalent to 4.3 months' salary for them at the time. Fast forward to today, and the modern-day equivalent, a 2018 Chevrolet Silverado 2500HD regular cab, would set you back $34,400 before any upgrades. That's more than 11 months of my take-home teaching salary and 2.5 times the number of months it would have taken my grandpa to pay off his truck in 1972. This example clearly illustrates how the cost of a brand new vehicle has outpaced the increase in salaries over the last four decades, making it much more challenging for people today to afford a new car.

The rising cost of new cars is not just a matter of prices increasing over time. In fact, new car prices have been rising faster than household incomes throughout the last decade. Between December 2020 and December 2021, new car prices rose by almost 14%, while household incomes are estimated to have increased by only around 8% during that same period. This discrepancy means that even with larger paychecks, many people are still unable to afford a new car. As a result, new car buyers are trending older and wealthier. In 2020, the average age of a new car buyer was 53, up from 48.9 in 2012, and 70% of new cars were purchased by people earning more than $75,000.

The gap between new car prices and salaries is further exacerbated by the longer loan periods that buyers are opting for. The average car loan now spans 69.3 months, or almost six years, with an average monthly payment of $517. This means that Americans are committing a significant portion of their monthly income to their car payments for a much longer period.

The combination of rising new car prices, slower salary growth, and longer loan periods makes buying a new car an increasingly unrealistic and burdensome financial decision for many individuals. It is important for buyers to carefully consider their financial situation and explore alternative options, such as purchasing a used car, to make a more financially prudent choice.

Low monthly payments result in longer, more expensive loans

Why buying a new car is a bad investment: Low monthly payments result in longer, more expensive loans

When it comes to buying a new car, it's essential to understand that low monthly payments can lead to longer and more costly loans. Here's why this happens and how it impacts your finances:

Longer Repayment Periods

The primary reason why low monthly payments extend the loan duration is that the total cost of the car is spread out over a more extended period. For example, a car payment of $400 per month for five years (60 months) equates to $24,000. However, the same $400 monthly payment spread over six years (72 months) increases to $28,800, and it jumps to $33,600 over seven years (84 months). This extension of the repayment period results in you paying a lot more for the car in the long run.

Higher Interest Charges

When you opt for a longer loan term, you end up paying more in interest over time. Interest accrues on the outstanding loan balance, and with a more extended repayment period, the interest accumulates for a longer duration. As a result, the total interest charges you pay are significantly higher. For instance, a 60-month loan with a monthly payment of $546 and a total interest charge of $2,761 would have a lower interest cost than a 72-month loan with a reduced monthly payment of $463 but a higher total interest payment of $3,323.

Negative Equity

Longer loan terms can lead to a situation of negative equity, especially if you have a low down payment. In the early stages of a long-term loan, the car's value depreciates faster than the loan balance decreases. If your car is stolen or totaled in an accident during this period, you may owe more on the car than its depreciated market value, leaving you with a financial burden.

Opportunity Cost

By committing to a longer and more expensive loan, you are potentially forgoing other investment or savings opportunities. The money that could have been invested or saved is instead tied up in a car loan, limiting your financial flexibility and ability to grow your wealth.

Emotional Decision-Making

Car dealerships often advertise low monthly payments to make the offer seem more appealing and affordable. This can lead to emotional decision-making, where buyers focus on the short-term relief of lower monthly payments without fully considering the long-term financial implications. It's essential to look beyond the monthly payment and understand the total cost of the loan, including interest charges, over the entire repayment period.

In conclusion, while low monthly payments may seem attractive at first glance, they can result in longer and more expensive loans. It's crucial to understand the financial implications of extended repayment periods, higher interest charges, negative equity, and opportunity costs. Making an informed decision based on the total cost of the car and your long-term financial goals is essential when considering a new car purchase.

New cars = expensive insurance

If you're thinking of buying a new car, it's important to consider the costs beyond the initial purchase price. One significant expense that new car owners often overlook is insurance.

New cars often come with higher insurance premiums for a couple of reasons. Firstly, new cars are typically worth more than used cars, and the cost of insurance is largely based on the value of the vehicle. This means that if your new car is stolen or written off, the insurance company will have to pay out more to replace it, and they factor this risk into your monthly premiums.

Secondly, new cars often require more extensive insurance coverage. For example, you may need to add gap insurance to your policy, which covers the difference between the amount you owe on your car loan and the current value of the car. This type of coverage is especially important in the first few years of owning a new car, as that's when depreciation is highest.

The exact amount that your insurance will increase depends on a variety of factors, including your age, driving record, location, and the make and model of your car. However, as a general rule, you can expect to pay more to insure a new car than a used one.

In addition to the higher insurance costs, there are several other financial considerations to keep in mind when buying a new car. These include the cost of depreciation, interest on car loans, and the opportunity cost of tying up your money in a depreciating asset.

So, if you're considering buying a new car, be sure to factor in all the associated costs, including insurance, to make sure you're making an informed decision. It might be worth considering a used car instead, as it could save you a significant amount of money in the long run.

You don't actually own the car until the loan is paid off

When you take out a loan to buy a car, you don't actually own the vehicle until you've paid off the loan in full. This is because the car's title, a legal document that shows who owns the vehicle, will be in the lender's name until the loan is paid off. This means that the lender legally owns the car until you finish paying off your loan.

The implications of this are significant. For example, if you get laid off or experience a financial emergency and can no longer make your loan payments, the lender can take back the car without your consent. They are well within their legal rights to do so and can even sell the car on their lot immediately afterward.

Additionally, having the title in the lender's name can affect your ability to sell the car. It can be very difficult to sell a car if the title isn't in your name, and you won't be able to sell or trade in your vehicle unless you satisfy the loan during the process or before.

Furthermore, the title shows who is liable for any infractions or issues involving the car. If you don't have the proper paperwork, you could run into serious issues or be fined.

In most states, once you've made the final payment on your loan, your lender will update the information held by your state DMV, and you'll be sent an updated title automatically. However, in some states, you'll be sent a lien release document, which you'll need to take to your state DMV to apply for an updated title. This process can take anywhere from two to six weeks, and if it takes longer, you should contact your lender.

It's important to note that in some cases, you may be able to get a title on a car that is not fully paid off. However, this can be complicated, as your lender is not obligated to release their lien on the car.

Used cars offer better value

In contrast, buying a used car allows someone else to take the initial hit of depreciation. A good rule of thumb is to buy a car that is 3-4 years old, as it will still be relatively new with low mileage, but the first owner will have already borne the brunt of the depreciation. This means that when it comes time to sell, you can likely sell it for near the purchase price.

For example, a 2018 Chevrolet Silverado 2500HD regular cab may set you back $34,400 before any upgrades. However, a 2007 model with less than 90,000 miles will only cost you $19,500, saving you almost $15,000. That is the same car, just a few years older, and still in great condition.

Another benefit of buying a used car is that you can often find low-mileage trade-ins that have been well looked after. Car salespeople are known to keep their eyes out for these types of deals, and with mechanics and service people at their fingertips, they can snap up a bargain and still make a profit.

Additionally, buying a used car can save you money on insurance. New cars often have higher insurance premiums because they are worth more than used cars. By choosing a used car, you can find a balance between a car that is not too old and not too expensive to insure.

Finally, buying a used car can give you peace of mind. While a new car may come with a warranty, the reality is that the average car loan length is around 5 years, whereas the average warranty on a new car is only 3 years. This means that for the last 2 years of your loan, you will be responsible for any repairs or maintenance out of pocket. With a used car, you can choose to purchase an extended warranty, giving you that extra bit of security.

In summary, buying a used car is a smarter financial decision than buying a new car. You can save thousands of dollars, avoid the initial depreciation hit, and still get a reliable vehicle that will last you for years to come.

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