We’ve all seen it, that fancy, shiny new car someone is driving next to you. Then, we drive by the numerous dealerships with those funny looking windsocks with the goofy faces on them along with banners showing there is a “big sale” and “lowest prices ever!” And don’t forget the zero percent financing! And the commercials on TV, you can have this brand new Chevy Silverado pickup with zero down and no payments for 12 months. This all sounds like a dream come true, right??? And it may make you think you are ready to buy a new car. I hate to break it to you, but as the saying goes, if it sounds too good to be true, then well it probably is.

 

Stats on new car purchases

Yet, the commercials and sales advertising must be working. Between 74 and 78 million people globally buy a new car every year. According to research summarized by Lending Tree, Americans take out $62.2 billion in new auto loans each month.

In America, people borrow an average of $41,445 for new vehicles, and the average new car payment was over $715 at the end of 2022. Auto loan debt has more than doubled in the last decade to a staggering $1.5 trillion of debt.

Now, car loans may not really fit in with the high interest debt category, at least they don’t at the time of this writing in 2023. According to Value Penguin, the average care interest rate has gone down over the years since the 2008 financial crisis, but really since then it has been no higher than 7%. As of a couple years ago, new car rates hovered around 4%, which isn’t exactly high interest. However, with high inflation in 2022 & 2023, new rates have gone higher.

How do credit scores impact this?

Credit scores do play a part when it comes to buying a new car. In the same report, it shows a dramatic difference. For someone with a very good credit score, they on average would get a much lower rate of 3.6%, But someone who has terrible credit history, they might get a rate of over 15%! Now we’re getting closer to the high interest debt we want to absolutely avoid. 

 

  

Depreciation of vehicles

 Depreciation is the loss of value in an asset over time due to normal wear and tear. In other words, it is basically the difference between what you pay for at the dealer and what it is worth when you go to sell. For cars, it can be 20% of the value just in the first year. And after 5 years, it can lose 40% of its value.

Let’s go back to some previous numbers. Let’s say you take out a loan for $41,000 for a brand new car that we will assume is worth the same amount (in other words, you put nothing down) and sign up for a 60 month loan. At 4% interest, you will have paid a little over $4,000 in interest on that loan and then after 5 years it will be paid off. With depreciation, on average, all other things being equal, that car will be worth $24,600. So you have an asset that is worth $24,600 and you put in $45,000 in total.

Let’s take another approach. Let’s say you decide to invest that $41,000 into low cost balance mutual funds or an S&P 500 fund. All things being equal, if you earn 8% interest (this is around the average historical return before inflation), in 5 years that 41,000 would be worth around $61,000.

So does it make sense to buy new or used?

So the question you have to ask yourself is, if you are to invest money, do you want to buy a new car and know that you are investing in a depreciating asset like a vehicle, or invest in stocks that will grow over time.

Now, this doesn’t answer the issue of getting a car. We all need vehicles to drive, to run errands, to get to work, etc. But, when you can, buy used. I get there are lots of caveats, like possibly maintenance issues. And as of writing this in 2023, the used car market is still nuts. Prices are so high where it seems like it would make more sense to buy new. However, my suggestion is to save up cash over time and buy used. Don’t take out a car loan, because the investment just isn’t worth it.

I hope tthis guide is helpful to you in your search for a vehicle. Buying a new car can be exciting, but don’t fall for it!