Why I Don’t Buy New Cars

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I’m 54 years old and have yet to own my first new car. In this article and the next, I’m going to explain why I never buy new and show you exactly how to find a $5,000 car.

When I graduated from the University of Arizona in 1977, my parents gave me a 1975 Toyota as a graduation present. Much to my parent’s dismay, however, within a few weeks I’d sold that car and used the proceeds for the down payment on my first house: a 900 square foot concrete box in a dicey section of Tucson that I bought for less than $20,000. For wheels, I borrowed a couple of thousand dollars from a credit union and bought a 1958 Triumph TR3; a car I drove every day for more than a year.

While I did ultimately sell both house and car for a profit, the point of this little story is that the way you approach cars, houses, saving and investing is really limited only by your imagination. And most people don’t seem to have much.

When it comes to buying cars, the vast majority of people I’ve known over the years approach the subject with no imagination at all. They simply do what the commercials tell them to and what their friends do: trudge down to the nearest dealer and buy a new car. If they want to feel like informed consumers, they comparison shop, kick a few tires and talk to a few salespeople in an attempt to get a decent deal. But even if they drive the hardest possible bargain, that new car is still guaranteed to lose thousands of dollars in value before they can get it home.

And that’s especially true if they pay interest by either financing that car or leasing it. Paying interest to finance a depreciating asset is not how you get rich. In fact, with the possible exception of gambling, it’s one of the fastest ways to get poor.

I’ve explained this concept several times during my TV news career and written about it in books.

Check out the following news story I did about opportunity cost and new cars, then meet me on the other side for more.

So the point of this story is that when you buy a new car with $5,000 down and make $400 monthly payments for five years, your opportunity cost is about 30 grand: money you could have had if you’d earned 9% rather than paying it.

Whenever I run an example like this, I invariably and understandably get responses like this: “I can get a car loan for less than 9%.” And “Please tell me where I can earn 9% on my savings!” Both statements are valid. I used 9% in my story because it better serves to illustrate the point: paying less, or earning less interest, would indeed lower the $30,000 opportunity cost of owning a new car.

That being said, however, there certainly are people who pay more than 9% on a car loan: plenty of them. There are also plenty of people who can and do earn more than 9% on their savings: the stock market has averaged about that much over the last hundred years or so. Although, it didn’t do that for the first 10 years of this century and has never done it without risk.

Bottom line? The next time you’re thinking about shelling out for something really expensive… especially if payments are involved, don’t just consider the cost. Consider the opportunity cost: the money you could have made by putting those payments somewhere else. Then think about ways to make more on your savings and to spend less on life’s major expenses, like cars.

Speaking of which, understanding opportunity cost is only half this story. Tomorrow, I’ll post the next part where I go over the details of finding and buying a $5,000 car.

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  • NotreDave

    Dead on. I rank buying a new car as #2 on my list of most costly decisions, between divorce and carrying credit card debt. I just shake my head at how often I see people driving new cars, but then I smile realizing I can just buy it off them for cash in a few years when the vehicle is down 50% in value and they are looking to get into the newer models again…silly, silly, silly.

    I also laugh, or rather cry, when I ask people what made them get a new instead of used car and they all say “I don't know anything about cars so I need a new one that won't break down.” Really?

  • Drivingmynewminivan

    Give me a break! Who earns 9% interest these days? And I certainly never have gotten a car loan charging that high.
    Dealers are offering 0% financing – that is the super deal on our 2009 Suburban!
    Plus we had saved enough money to buy our 2010 Honda Odyssey with cash. The peace of mind I have knowing I am driving a new vehicle and not an old $5000 clunker is worth it! We plan to keep these cars till they run into the ground.
    So if you have to pay 9% interest, then don't buy a new car. But if you are wise and get a good deal and are good at saving so you have cash, then do it!

  • http://www.facebook.com/profile.php?id=100000176924231 Connie Garza Charles

    I like buying a new car because I like to know what I'm getting. When it's used, I'm buying history I don't know about. The author thinks that folks buy new cars at $30k, my new 2007 Nissan Sentra cost $14,500. I will drive it to the ground until I get another new again. I know plenty about cars to keep up with the maintenance and repairs to hold off on buying for quite a while.

  • NotreDave

    …you could have bought the same car, only a few years old, for about 60%-70% of what you paid for new, and then driven that into the ground, too. If you “know plenty about cars,” as you say, then this method of buying and driving until dead could save you a good amount of money.

    That's the way the math works out, but if new is worth it to you, then you can pay the extra cost for sure.

  • NotreDave

    Except you instantly lost 15-20% of value the second you rolled off the lot. Even without interest through financing, that was a quick drop in the bucket.

  • http://pulse.yahoo.com/_GHMZE3ZCOYEOYNA6KMZ4J6F45M Rater

    Everyone…Listen to this and pleasssssseeeeee Pay Attention as you read the statement below. I have been in finances for 10 plus years and I am yet 30 yrs old..you do the math……READ WHAT A FRIEND TOLD ME AND LET ME KNOW IF THIS MAKES SENSE WHEN WE SAY THIS:

    2011 Honda Accord(which will hold it’s value right??????..come one all honda’s do right? All cars do right?)

    Payments @ 0% @450/mnth(all the bells and whistles)
    5400/yr for 4 yrs right? equals=21,600 bucks over 4yrs…….WELL I TOOK HIM BY THE COLLAR….DROVE HIS CAR BACK TO THE DEALERSHIP AND RETURNED IT THE SAME DAY AT 0% APPRECIATION VALUE(THANKS TO THE DEALER). HE WAS GOING TO DRIVE THE CAR(21,600$) INTO THE GROUND AND UNTIL THE WHEELS FALL OF AND HE’S ONLY 21 YRS OF AGE(ARE YOU LAUGHING YET??) TOOK HIM TO THE AUCTION AND HE HAS THE SAME CAR THAT AN INSURANCE COMPANY WAS SELLING FOR ONLY 6K$. QUESTION FOR YOU? CAN YOU DRIVE A HOUSE INTO THE GROUND OR UNTIL THE BRICKS FALL OF? IF YOU FIGURED OUT HOW TO DO IT BY SIMPLY LIVING IN IT..LET ME KNOW. PEOPLE…A CAR IS A CAR. WE HAVE HORSES THAT ARE WORTH MORE THAN CARS.

  • Peter Belles

    Everybody should buy at least one new car in their life, you only live once.
    What are you going to do, leave your money to your lazy kids.

  • Anonymous

    i buy my honda cr-v  se 2011 cash, took me a month to decide, i went to all dealers for a coute i remember went to he same dealer 4 times the last time was 10pm and we still talking about price finally we agree in 23k i got my honda with only 7miles and now after 9 months i got 21k i wonder if that is too much for a new vehicle. but so far the vehicle is been good to me, is a 4×4 and give and average of 32mpg and almost 35 in the freeway,

  • http://pulse.yahoo.com/_DOV2KB2H4X4LFIVS7E6RYRHY5I Mark

    My current car is a 1997 Subaru that had 172,843 miles on it when I bought it and it has a SALVAGE Title… It was involved in a minor fender bender accident and the insurance company paid the owner off for the book value… They they auctioned it to someone who owned a repair shop.. The repair shop then fixed the car, repainted it and it looks like new… Then they  put it for sale on eBay and of course no one bids because it has a SALVAGE Title.. I bid and end up winning this Subaru for $1523.

    This used Salvage title Subaru has power everything, beautiful and clean interior, everything works perfectly, AC included, New Paint, Looks awesome, I get comments all the time and I tell them my story…

    I have owned this beautiful car for over 3 years and it currently has 198,654 miles and runs PERFECTLY. I get 25MPG in the city and 30+ on the highway. I have not had a single thing wrong with this car, Sure I spent a few $$$ putting a new timing belt on just to be sure and new tires. Other than that, the car is amazing… Especially considering I only paid $1523!!!!

    Think of the $$$$ I have saved by driving this car..