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"You can buy a used car with cash or by taking out a car loan. Guess which way is the smartest?" -Dave Ramsey
You are quickly approaching the summer months which means that automobile dealers are setting the stage to receive new models. With new automobiles, comes fancy shining marketing and advertising designed to make you desire the new showroom floor and hate your current ride.
It can really mess with your head and make you wish you could just pull out the checkbook and get that new ride. Hold up and take a cold shower.
We can easily talk ourselves into trading our cars for newer ones. But buying a new car isn't always the right answer. Sometimes keeping your older model car is the best solution for you.
Here are 5 Reasons why you should not get a new car!
Reason #1 Pay Yourself, Not the Bank
There are several myths floating around the car dealer community that declares "New Cars are Cheaper". Obviously when most people purchase an automobile they turn towards financing it. The financing or "borrowing" can be extended longer than compared to an older model because of the "shelf life" of a new car.
For example, you are given the option to finance a new SUV for 72 months (lower monthly payments) but if you pick a similar model SUV that has aged a few years and obviously used, you can only finance 48-60 months.
Because of this, it is very easy to be enticed by low payments to include the many more incentives and rebates on new vehicles than when compared to used models.
However, when it comes to financing and borrowing, you need to think both short-term and long-term. While the belief is a new car is more affordable, we often times try to justify it with "Well, it is new so it won't break down" or "This one is more reliable" or "This is more affordable", etc. My older vehicle is cheaper because I have no payments and it is dependable. Even Credit Sesame claims that "it's a basic fact that used cars cost less than new ones. The reason you are borrowing/financing is because you can't afford it.
If you have cash saved up to purchase your dream car then by all means, but if you are needing to finance or borrow the money, then look for an automobile you can afford. That is where you start paying yourself and not the bank.
By paying yourself the car payments each month you will be driving something you can afford in the mean time (paying cash for your auto). While you are driving the affordable car, pay yourself each month for several months until you can afford a more decent car.
If you were to save $600 a month, because that's probably what your car note would have been, for 15 months, you will have saved $9,000 to put towards a vehicle plus selling the car to add to that $9,000. After this, you continue to have no payments and continue saving the $600 per month.
This gives you the freedom and flexibility because now you can sell your older car whenever you want as you work your way to saving and selling to eventually get your dream car.
Reason #2 New Autos Lose Value ASAP (Depreciation)
According to carfax.com, "new cars continue to lose value for four more years, averaging a decline of 15-25% per year". Wow! So not only have you financed it for 5-9% losing those monthly payments but now losing an additional 15-25%. Yeah, but no thanks!
You have heard that once a new automobile drives off the lot, it loses value. Well Consumer Reports claims that within the first three years, new cars lose 46% of their value-OUCH! Even worse, carfax declares that new automobiles lose 10% of its value as soon as it drives off the lot.
So let's put this into perspective. You just financed your dream SUV for $45,000 for 72 months at 5% interest totaling $725 per month. You are feeling good even though you can live with paying the bank for the next six years. You drive off the lot and IMMEDIATELY, you are upside down financially. Your SUV is now worth $40,500.
Worst case scenario because that is how I plan finances. You lose your job immediately the next day. You recognize you cannot afford the $725 while job hunting so you decide to sell the automobile. It is $40,500 but you owe the bank not $45,000 but this amount plus the interest. Where do you come up with the additional $4,500? You are instantly UPSIDE DOWN!
Prior to buying any automobile, you need to check the vehicle's history as part of your due diligence. There are numerous companies that advertise they're the best but with a company like VinAudit.com, they have a direct partnership with the National Motor Vehicle Title Information System and first-level access from state DMVs, junkyards, to insurance carriers.
Reason #3 Reliability
There is a belief that states once you pay off a car, it starts having mechanical problems. This use to be true in the last several decades, but now the average automobile built within the last 5-8 years can deliver more bang for your buck. This is because you can put 200,000 miles on it with minimal service.
Many of these dependable automobiles were built during the recession and the upswing when many workers were being laid off. During this downturn, people wanted jobs and wanted to keep their financial security so more attention and craftsmanship went into the manufacturing of automobiles.
In November 2014, Consumer Reports made published the "Top 10 most reliable U.S. branded cars". Manufacturers from Ford to Buick to Chevrolet dominated small car reliability which gave the U.S. stronger reliability reports to consumers which lagged in the past. According to J.D. Power & Associates, the Most Reliable 2014 Cars are as follows:
Chevrolet Impala, Malibu, & Volt
Honda Accord & Civic
Toyota Avalon, Camry, Corolla, Prius, & Yaris
Fast forward several years and many of these cars are still operating well.
Reason #4 Maintenance
While this is closely related to reliability, I am referring to the total cost of mechanical repairs over the life the car you own compared to the total number of car payments. It can seem troubling and nerve wrecking of having a car in the shop, but earlier I mentioned both short-term and long-term, this is where the long-term comes into play.
Unless your auto is really that unreliable, the long-term solution proves that a car with no monthly payments far exceed one with payments. Earlier we saw you lose 46% of what you paid! Down the drain and never to be seen again.
Nerdwallet reports that the average cost of repairs, maintenance, and tires is $99 a month. Still cheaper than $600 a month auto payment. To calculate your monthly car cost calculator go to Nerdwallet.com.
Reason #5 Safety Features
One cannot debate that technology continues to improve everyday; yet, even 2003 vehicles had dual air bags, ABS, Electronic Stability Control and five star crash ratings. I am still amazed at how many safety features a 2012 Ford Explorer Limited has in it. The SUV can park itself and it is 6 years old.
Yes, today we have back up cameras, Bluetooth, and many other great features, but unless you are driving a 1966 Ford Mustang where none of this exists, we can agree to disagree that many recalls and safety recalls are noticed fairly quickly for a vehicles-used or new.
Now if these 5 reasons haven't changed your mind and you're still going to finance that new ride, do yourself a favor and at least review your credit score before negotiating a deal. You can get your free score with Credit Sesame!