The Cost of a New Car

How many of you dream of that new car smell? Of driving away from the dealership with a brand new car, never driven by anyone else? For many Americans, being able to buy that new car (or better yet, being seen in your new car) is a big deal. We tie up some of our pride in our vehicles, so it makes sense that we would want to be seen in the latest and greatest. But as you dream of leaving the car lot in your brand new car, does your dream include the impact that purchase is going to have on your finances?

All too often, the purchase of that "dream" car turns into a nightmare when the reality of monthly payments kicks in. Even if you purchase your new car outright (with no financing) there are extreme costs associated. So, before you decide to go to the dealership, let's take a look at some facts about new cars and the most common reason people buy new cars.

What are the costs of buying a new car? For the sake of this discussion, we're going to compare average new cars to average used cars. Most of us need something to drive, so new or used are your two options. The first cost of new cars is also the most obvious: They're more expensive. Like, a lot. According to Kelly Blue Book, the average cost of a new car is $37,000, while the average cost of a used car is $20,000. Check those numbers. You could almost buy two used cars for the price of a single new car! This while the average US income is a little over $60,000.

However, there's a much more important hidden cost to buying a new car: depreciation. That $37,000 new car is going to decrease in value to around $30,000 in the first year alone. That's $7,000 in lost value in a single year. To better understand that number, take a $20 bill out of your wallet and light it on fire. Every day. For a year. After 5 years, that $37,000 vehicle is now worth a measly $16,000. That's $21,000 of value gone in 5 years, $4,200 per year. This is happening no matter how you purchased car, through financing our buying it outright. So, even if you paid cash for your new car, it's costing you $4,000 per year.

But, many don't pay cash for their new cars. Let's face it: Most people can't. Half of Americans can't cover a $1,000 dollar emergency with savings. You can forget about saving up $37,000 to buy a new car. So, what do we do? We finance it. According to the Consumer Financial Protection Bureau, in March 2019 Americans took out 2.5 million vehicle loans. That's one month! Overall, Americans owe an astounding $1.2 trillion (that's with a T) in auto loans. So, clearly, debt is a common way for us to satisfy our new car dreams. But what is that costing us? According to Lending Tree, the average new car loan payment is $550 per month. If you were to invest that amount and get an average of 6% returns, in 40 years (say age 25 until age 65) you would have $950,000. Of that $950,000, your payments only make up $264,000. So those new car payments are costing you a potential $700,000 extra. If your investment returns averaged 10%, those payments would grow to $2.75 million. So, it's no stretch to say that consistently buying new cars could keep you from being a millionaire.

But, the astute of you would say, "I can't invest that full $550 payment because I have to have a car to drive." Good point. The average used car payment in $390. If you invested just the difference between a used car payment and a new car payment, in 40 years you could have $900,000 at 10% average returns. And if you're anything like me, that $400 used car payment seems insane. What kind of used car are people driving?!

Cost, though, isn't the only part of the equation. Reliability is the number one reason people listed for buying new cars versus used cars. There is a perception that new cars are inherently more reliable than used cars. It's often said as, "I don't want to inherit someone else's problems." Or, "You never know how well someone maintained a car." And there is some truth in those statements. However, a good inspection of a used car can avoid most costly issues. Also, keep in mind that you are losing $4,000 per year in value with a new car. That doesn't include maintenance costs (even new cars have maintenance requirements). You can do a lot of maintenance for $4,000 a year.

This perception is based on an assumption that because a car is new, it will have less issues. However, that has proven to be far from the truth. According to Cars.com, in 2018, Ford recalled 4.2 million vehicles less than 5 years old. Some of those were the newest model year (i.e. Brand new cars). And Ford is one of the largest US manufacturers! New cars also lack actual reliability data. Groups like Consumer Report and JD Power put together reliability information taken from actual owners of those cars, but that data takes a few years to really become reliable. This can make 2- or 3-year-old used cars the most most reliable purchase you can make. They typically haven't been driven enough to cause major damage or wear to engine components, but they've been out long enough to get a real idea of how many issues they might have. This is especially true in the first production year of a new model or a major redesign. In these cases, there are often new major design features and new components that are untested. Subaru saw this happen in 2017 when they redesigned their Impreza. Only 3% or 2016 Impreza owners reported problems, but 20% of 2017 owners reported problems.

In short, new car reliability is overrated. While new cars will have less wear and tear on them (like, none), they can still have major issues. Careful research and inspection can land you a used car that is just as reliable as a new one. In fact, I drive an 18-year-old Mazda which I bought used, and I've only ever done the scheduled routine maintenance on it. It's had no repair issues. And it cost me a whole lot less than $37,000. Even if used cars will cost more to maintain and drive, keep in mind the added costs of a new car, especially depreciation. In the end, a quality used car is almost always going to cost you less.