If you’re in the market for a car, you’ve probably had half a dozen (or more) people tell you that it’s better to buy used than new. I’d bet dimes to dollars that very few, if any, have told you why. I’m not certain most people know why, other than “A new car depreciates in value as soon as you drive it off the lot.” Which is true, but still not very useful.
When my husband and I decided to get a new (or new to us) car in July of 2009, I got a lot of advice from friends and family on why I should buy used instead of new. Price was a big reason people gave for buying used; Value, too (see aforementioned comment about depreciation and driving new cars off lots). But at the time I was also a personal finance blog called I Will Teach You to Be Rich, which is now both a book and a blog. The writer, Ramit Sethi, has a very straight-forward, no bullshit style, and he advocates knowing what’s important to you, and not being afraid to spend money on that. I like to this that he’s on the “earn more” side of the personal finance “spend less, earn more” spectrum.
Anyway, right around the time we were looking at buying a car, Ramit wrote a post, “Cost vs. Value: Why I Bought a New Car”. For him, because he loves driving, had money to put down, and wanted a reliable vehicle, he chose to buy a new car. He argues that while the cost of buying a new car is greater at the outset than buying a used car, in the long run, it balances out, more or less.
Ramit also suggests that you do your research, have money to put down on the vehicle, don’t get yourself into an upside-down loan, and that you be willing and able to negotiate with the dealership, which sometimes means walking away. If you can do both of those things, and the peace of mind that comes with owning a new car is valuable to you, then he argues you should go for it.
I admit, despite the advice of friends and family, after reading what Ramit wrote, I was enamored with the idea of owning a new car. The car we were replacing was a ’86 Honda Accord that had definitely seen better days. I loved that little car, but we were moving out to the country, and so needed something that would be able to drive the 30 miles into town reliably, which the little Honda wasn’t capable of.
I came up with a few of my own arguments for wanting a new car:
- History — With a new car, you know the car’s entire history. You know that you’ve given it oil changes at the right time, you know that you’ve had it into the shop for all of it’s tune-ups, etc. You don’t have to second-guess and hope that the previous owner(s) treated it right, and that there’s nothing wrong with it, or, worse, that you’ve been sold a lemon.
- The Warranty — New cars often come with very good warranties, so not only do you know exactly what’s going on with the car’s maintenance, but you also have insurance that, if something happens that shouldn’t (like brakes not working or seatbelts failing, or any of those other things we all hate to think about), you can take it in to the dealer and they will take care of it for you.
- Length of Ownership — If you’re going to own the car for a long time, (as opposed to selling it in a few years when you get bored of it), then it can be worth your while to buy new because the cost of ownerships between new and used evens out over the course of many years.
Buying the Car
I shopped around and researched and dragged my husband on several test drives, and we finally decided that we were going to get a brand new, shiny 2010 Kia Forte EX.
I did my best to negotiate the price down, but the salesman said that the price was set by Kia, and he didn’t get a bonus based on how much he sold the car for (the usual setup) but based on how many he sold and how happy we were with our purchase. I went home and looked up what others were paying for the same vehicle on Edmunds.com and found that the salesman was telling the truth (more or less – I’m sure a more skilled negotiator would have been able to talk him down).
My husband and I didn’t have any money to put down on the car, but we were going to borrow $1,000-$2,000 from his parents (parental loans tend to have a lower interest rate than the bank), but at the last minute that plan fell through, and so we had to go ahead with the car purchase without putting any money down. Our move date was impending, and I felt that we couldn’t wait. (This was possibly not true, but that’s neither here nor there.)
The Details of the Purchase
The car: Kia Forte EX (top of the line)
The specs: Manual transmission (automatic was $1,000 more, and I didn’t want it anyway), 10 year/100,000 mile warranty.
The cost: $16,690 (1).
The current value of the car, 12 months later: $13,665.(2) – The car lost over $3,000 in value in the last year, if not “as soon as we drove it off the lot.”
The monthly car payment: $367.81 (over 72 months).
The actual amount of the loan: $20,862.50.
Our interest rate: 8.7% APR
What we’ll end up paying in interest if it takes us 72 months to pay back the car loan: $6,108.73.
The hidden costs of a car loan
What no one told me about getting a car loan is that there can be a 25% “purchasing fee.” Not having put down any money on the car, we are suddenly upside-down on the car loan, which despite Ramit’s cautions, is much easier to get into than I thought. If we had put down $1,000 or $2,000 we still would have been upside-down, but not by as much, and it would have been easier to close the gap.
Being upside down in a car loan is a problem for several reasons:
- If your car gets totaled, your insurance company will only reimburse you the current value of the car, and if you owe more on the car than its worth, you immediately have to come up with that money to repay the bank.(3)
- If the dealership helps you set up your loan, and they give you a high interest rate, if you’re upside-down on the loan it’s much harder to refinance. I’d say it’s impossible, but I suppose I didn’t explore every avenue when I tried to refinance our loan.
If you’re going to get a loan on a car, make sure you ask about the final price of the loan, and not just the monthly payment amount over X months. I was told this several times by my father and by several persona finance bloggers, but I didn’t really get the why of it until I made the mistake. I hope that you won’t do the same thing.
The hidden costs of car maintenance
When I was considering buying a new car, I didn’t think about how much it might cost to maintain the car once we owned it, which was a mistake. Thus far we haven’t had to pay for more than the oil changes, but in about 4,000 miles the first tune-up is coming up, and we don’t have enough wiggle room in our budget to pay for it. I plan to save for it between now and then, but the fact that I have to save for it means that if something were to happen to the car in the mean time, I would be out of luck.
This applies to any car purchase, and one could argue that it applies more to the purchase of an used car, since they are more likely to need repairs sooner than a new car. Make sure your budget has allowances for both the new car payment and the potential car repairs.
Not taking advantage of all my resources and all possible rebates and discounts
Resources: My father works at Honda. There is a set up for employees where they have first dibs on the 2-year lease cars that employees drive and that are serviced right at the plant. If I had been willing to wait even one month, we probably could have bought a 2-year old, incredibly well-maintained Honda for at least $8,000 less than we owe on the Kia. But I was impatient and thought I needed the car “now.”
I don’t assume that you have a parent or family member who can get you a good deal on a car, but if you open your eyes and exercise a little patience, I bet you’ll see many opportunities for savings that you never would have noticed otherwise.
Rebates and Discounts: We were buying a new car right in the middle of the “Cash for Clunkers” deal. Sadly, we couldn’t take advantage of the trade-in, since my little Honda, aged though she was, was not eligible: her gas mileage was too good. But there was still the $1,000 off for a vehicle that was made in the US, which includes Hondas and Toyotas these days. The sticker price on both the Hondas and the Toyotas was higher than the KIA, but with the $1,000 off, and there were a few other rebates available, plus negotiating down the price, we probably could have walked away with a similar price, if not quite as low.
The other part of this bit is that I really liked the salesman who sold us our Kia. He was straight with me, even though I’m a woman (it’s so hard to find people in the auto industry who don’t talk down to women), and he was a genuinely nice guy. If you’re familiar at all with the book Sales Dogs, he was a Labrador, which I resonate with, because that’s the kind of sales person I am too. Liking your salesperson is all well and good, but it’s not, probably, a good reason to buy a car from that person, especially if you could get a better deal elsewhere.
On the other hand, we were also seriously considering buying a Subaru, and not only was the price not right, but the salesman was an ass. I walked away from that one quite easily.
If you are going to buy a new car:
1. Make sure you can put at least 20% down, 25% is better.
If we’d put 20% down on the original price of $16,690, it would have dropped the price to $13,350. With the 25% purchase fee from the loan, the car would have been right back up at $16,690. With the money that we’ve been paying toward the loan for the last year, we would be barely upside-down on it, if at all.
2. Make sure you can afford both the car payments (if you’re going to have them) AND the cost of maintaining the car.
3. Do your research, be patient, and know what you’re willing to pay for a car.
If the salesperson doesn’t offer you a price within your range, walk away. That’s very common advice, and I’ve learned that it’s incredibly hard to do. (See above comment about liking my salesperson.)
Having gone through the experience of buying a new car, the next time I need a car, I will be buying used. (More on the lessons learned buying my first used car in another post.) I will either pay cash for it outright, or I will put at least 25% down, and I will make sure I have a full Carfax report before making the purchase. Owning a new car is nice, but it’s not a necessity, and I can’t justify spending the money on it.