Have you ever gone to a dealership and sat in a brand new car? You step inside, close the driver door, and suddenly all of your anxieties and hardships from that day melt away. The dash is illuminated with light, the radio looks more like a big screen TV, the sounds from outside are hushed, and every feature that you can think of (and beyond) can quickly be performed with a single push of a button. A smile comes across your face and you get the feeling that if you owned this car, you’d be happy for the rest of your life.
You want to know the truth? Yes, this car is probably nicer than anything you’ve ever sat in, but after a few months, it’s just a stinkin car, just like all the others. The only difference is, if you decide to purchase this new vehicle, it could set you back for years financially. Is it really worth it? Well, let’s take a look and find out.
The New Car Stats
Let’s say that this new car of your dreams has a sticker price of $25,000. Like many others, you don’t have $25,000 in cash, so you put $1,000 down, and you trade in your $6,000 Jeep for $4,000 (the trade-in value is often a couple thousand dollars less than the actual value of the car). Now, you have earned the right to the keys, but there’s still $20,000 that needs to be paid over the course of 4 years at 2.9% interest (remember, car financing is negotiable).
- $25,000 new car
- $1,000 paid up front
- $4,000 for your trade-in
- $20,000 owed over the course of 4 years
The New Car – 4 Years Later…
Alright, it’s been 4 years, and you own your car completely! I would say congrats… but let’s take a look at the numbers first.
How Much Was Paid For the $25,000 New Car?
- $1,000 down-payment
- $6,000 vehicle value(unfortunately, you only received $4,000 in credit for you new car…)
- $20,000 in principle payments
- $1,206.55 in interest payments (assuming a rate of 2.9%)
- $28,206.55 – AMOUNT PAID FOR YOUR NEW CAR
But What’s Your Car Worth Now?
You might not think that $28,206.55 is that bad but Im not even including additional things such as car warranty cost. I mean, your car is super sweet. However, it’s been 4 years since you bought this car, and the average vehicle value goes down 60% in the first 4 years. That means that your super-sweet car is really only worth $10,000 today. You just threw away $18,206.55….and you’ll never see that money again. How do you feel now?
Here’s What I Would Do Instead of Buying a Brand New Car
Since it seems that you enjoy a newer car rather than an antique, I’ll advise that you buy one that’s only 4 years old. At this point, it probably doesn’t have more than 50,000 miles on it, and it’s still driving like a dream! This is also how you will get the cheap car insurance quotes.
For that new car of yours, the payments were $441.80 a month. I would advise that you simply save that $441.80 (which you have because you didn’t buy that new car) for 24 months. After 2 years, with no interest whatsoever, you’ll have saved $10,603.20!
It’s time to head out and buy that 4 year old car for cash – buy from a private party, and you might strike yourself a pretty sweet deal too! Get some good tires online and get a normal check up and you’ve got yourself a car that’s probably in better shape than most vehicles on the road that rarely get these things checked.
Let’s say you spent all of your $10,603.20 on that car, but remember, you still have your Jeep (now probably valued at about $5,000 instead of $6,000). Let’s sell that car and put the money in savings.
Amount of Extra Money, Plus You Own a Fairly New Car
After two more years, you continue to save that $441.80 a month, which amounts to another $10,603.20, plus you have $5,000 from the sale of your Jeep, which means you now have $15,603.20 in savings, AND your car is probably still worth $8,000. That means you have a net worth of $23,603.20.
Do you remember what you had after paying off your new car? Only $10,000 (the value of the car).
So, because you bought a car that was slightly used rather than new, you are now $13,603.20 richer.
Did you have any idea that a new car could be so costly? Wouldn’t you rather have an extra $13,603.20 after the course of 4 years?
Crystal’s Comments: Yes and no. I hate errands and most used cars are going to have a few more issues than new cars. But, my husband bought a used car – a 1 year old Prius – in 2008 that hasn’t given us any problems at all, so I know all used cars aren’t problematic. So, from here on out, we’ll probably buy used and pay off any loan as fast as possible, but I will be having my mechanic check out the car from tip to tail to make sure it won’t give me a headache, lol. I’m also not replacing my car until my stupid Chevy Aveo gives up on me completely. Great post Derek!