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Here Are Four Reasons Why You Should Never, Ever Finance A New Car

Here Are Four Reasons Why You Should Never, Ever Finance A New Car 810Tax

Owning a desirable car is a rite of passage that nearly every adult hopes to experience at least once in their lifetime. It’s the gratifying feeling of satisfaction and status that drives most people to finance new cars. However, if you can lend me your ear, I’ll yell in it about how that is the dumbest idea ever.

4. It’s A Horrible Investment.

Buying a new car in general is a bad investment, and just like most bad investments, it’s driven specifically by emotion. That’s why all the advertisements for new cars try to entice you with the amazing driving experience, some new feature you have to have, or they try to circumvent your logic by following the age-old formula of “give out worthless shit for free”, like a dealer giving a $1500 cash back offer, by either artificially inflating the price to reflect the change, or just making up for it in “optional extras” that are surprisingly now mandatory.

Car manufacturers, as a rule of thumb, aren’t in the business of taking losses on cars, and they don’t give you rebates because they love you. They understand that just like Oprah’s $2.99 free meal deal at KFC – which had people waiting for hours for what amounted to fried chicken paste and an open invitation to type 2 diabetes – giving people free stuff will get butts in seats, no matter what it actually costs them in the long run.

Let’s analyze just how bad of an investment financing a new car can be with a simple thought experiment:

You can buy a brand spanking new mid-size sedan for $25,000. I’ll use round numbers for this example, so it’s easier to follow. You don’t have enough money to purchase the car outright, so you decide to take out a loan. Let’s say your credit is decent, and you get an interest rate of 3.5 percent, with a $3000 down payment, and $1000 on the trade in of your ’98 Subaru Forester with 250,000 miles and a head gasket that won’t make it to 251.

The average length of a car loan, as of last year, is just over 60 months, but let’s round to 60 for simplicity’s sake. Let’s also take taxes out of the equation, since each state varies. Per month, you’d be paying $382.02 before tax. It’s a nice, affordable number, and exactly why people get stuck in these predatory loans. When you extrapolate that figure over 60 months, you’d pay $26,921.20 for that $25,000 car.

Now, let’s add to this equation the dirty word that new car dealers want you never to consider: depreciation. The fact is, the first year you have a new car, it loses 22 percent of its value. At the full 5 years? You’re looking at a 55 percent loss on average. That means that $25,000 sedan that you paid $27,000 for, plus tax and associated fees, is worth maybe $11,500 on a good day. Let’s hope you didn’t get the base model.

What this means is that about halfway into your loan, what you’re doing is essentially taking $400, placing it gently in a quilted paper towel, wrapping it twice snugly, and flushing it down the toilet – every single month for the next two and a half years. You will never, ever see that money again.

I do understand that some may object to my line of thinking, likely huffing furiously at an iPad with upturned noses, saying “Hey! I don’t care about the value of my car after the loan is over, I’m not trying to get a return, because I’ll never sell it!”

If that makes people feel better about overpaying by double, then go for it, by all means, but just because you’re getting use out of something doesn’t mean it’s inherently more valuable in the market, even if you’re not earning a return in the most optimistic scenario. Case in point: You buy a Big Mac value meal at McDonald’s, with two options – $7.00 now, or McDonalds charges you a few cents a month for the next several years, making the total amount of the purchase more than double than what it would’ve been up front. The value remains the same, there is no chance of resale, but one option is obviously better financially, since you’re not tying yourself in debt over a long period of time and paying for something that has long since exhausted its financial worth.

But wait – there’s more! Since the value of the car is so much less than what you paid, you don’t actually have the money to buy another new one – and you do need another new car, since that sedan is looking a little long in the tooth. You go ahead and finance again with this one as a trade-in, for something bigger and better this time. With the average trade-in mark being just under 6 years, it seems the general public is unequivocally addicted to debt, which brings me to my next point…

3. You Don’t Actually Own The Car.

Ownership is an interesting concept. It basically means that something becomes your property based on the fact that you legally acquired it. The problem is, when you agree on loan terms with a car dealer or bank, you’re paying them for the privilege of using their car until you’ve paid enough to satisfy the loan. You can check this by looking at the car’s title – which should have the bank’s name in black and white letters in the “Lienholder” part. If you get laid off, experience a financial emergency, get stranded on a deserted island for 4 years with nothing but a volleyball and mysterious suitcase, or for any other reason miss your scheduled payments, the bank or dealership will take back the car without your consent, using exactly the methods that car thieves use, and they are well within the law to sell that same car on their lot immediately afterwards. What’s even worse is that the Destiny’s Child Anthology that you had in the backseat of your newly repossessed car is now in the trash, courtesy of the judgmental, minimum-wage service department trainee. But seriously, Karen, who listens to CDs anymore?

Sure, this is a small price to pay to have something nice if you’re financially responsible, but as more than 1/3 of all car loans in this country are sub-prime, it’s a very real issue that many well-meaning, but otherwise financially oblivious people can find themselves encountering. At least while the car’s in your possession, you won’t have to worry about its reliability, right? Well, about that…

2. Your Warranty Will Likely Run Out Before Your Loan Payment Schedule Does.

Most people buy new cars because they don’t have to deal with the headache and uncertainty of used car history. I’d imagine it would be a fair bit easier to manage my life if I didn’t have to worry about if the previous owner of my car was an elderly hirsute nudist that loved to practice cartwheels in the backseat with the heater on full. It’s a lot to handle, honestly. People want the peace of mind that comes with the new car smell and a factory warranty.

It’s unfortunate that neither stays around for very long. The new car smell goes away after 2 hearty trips to Taco Bell (which, for the west coast readers, is like Del Taco, but edible), with the average warranty edging it out in longevity, but only just. As we learned above, the average car loan length is around 5 years, or 60 months. The average warranty on a new car is 3 years, or 36 months. This means that for the average new car owner, if some electrical component fails on their car, allowing the horn to blare uncontrollably at 3 AM, and they’re on month 37 of ownership, take a wild guess who has to take their loud-ass nightmare to the dealer and scream the problem at the service tech over the ear-piercing wail of a car alarm, while retaining all of the privileged fun of paying for all of that out of pocket -with 2 years of payments left to go, which at this point, is money that might as well be placed on the surface of the sun.

In addition, the “free maintenance” gimmick that dealers pull to get people into tens of thousands in debt doesn’t save you much in the time it’s enforced, with the larger, more costly repairs to come afterwards, and more importantly, out of your pocket. But if new cars are such a waste of resources, used cars have to be much worse, right? Well, it just so happens that…

1. Used Cars Are An Infinitely Better Value.

I’ll admit that I’m highly biased. I’ve owned more than 10 cars in the last 2 years and I spend my nights religiously researching nearly all aspects of the car market. The BMW M3 you see above is one that I sold last week, for half the price of a new 4 cylinder Honda Accord. I live and breathe this stuff because it allows me to own awesome cars for next to nothing, and even if I don’t sell them for a profit, it’s a far cry from paying monthly for half a decade, only to have a guaranteed net loss of 55 percent.

My daily driver, a Mercedes S500, was purchased brand new, and likely financed for a hair less than $100,000, and I bought it a decade and 89,000 miles later for $3000,and got it to be one of the best examples of the model available for a little less than double my initial investment. It’s also been the most reliable car I’ve ever owned, and I’ve had 3 Hondas, so that’s saying something. When you know what to look out for as far as potential issues, you no longer fear the future with a used car. But I’ll go one step further and bring my fervor to the level of the person that isn’t willing to get dirty and wants to have the comforting assurance of a warranty.

The number one thing to do when looking for a car is to analyze the market and do your research. You can start by looking up the features and reviews of the car on Edmunds, looking through eBay listings to see what the selling prices of certain cars are, and making sure that every car you research has a clean history. It’s tens of thousands of dollars that you’re paying for something, so devote a few hours to finding the best deal and everything you can about it. The people that refer to cars only by their colors and amount of doors are usually the ones that get fleeced by dealers without considering that their money is better spent on the secondhand market, so it literally pays to be well-informed.

A good rule of thumb for the novice looking for a nearly new car is to purchase a car that’s 3-4 years old. It will still be relatively new with low miles, but the first owner will have eaten the larger portion of the depreciation. This means that when you’re done with the car, you can likely sell it for near the purchase price, and you can then put that money towards something even better.

The second thing to consider is never to finance. Here’s a great video to illustrate how not financing a car can be one of the best financial tools you can have in your life. (Note: I don’t necessarily sign off on the proposed 12% return on investment, but the car loan stuff, in principle, is spot on.)

The third thing you need is to find a trustworthy mechanic that can give you a reasonable rate, honest advice, and dependable service. There are also plenty of dealers that offer extended warranties for used cars, some of which are an absolute insane value for money, like the CarMax warranty to which Doug DeMuro’s Range Rover owes its current existence.

There is absolutely no reason why you should lose a substantial amount of money when buying a car, since it is a lifestyle choice, not something that can potentially bring your lifestyle to a grinding halt, or even something that should put a dent in living life the way you want. A car should not be a hindrance to financial success, it should be the vehicle that gets you there. If you have all of the above sorted out, you’ll find no shortage of spectacular cars for prices you never thought possible, like in these articles:

You’ll be living the dream without owing a dime, and making sure that you have a dependable mode of transport. What more would you need? Go find something interesting and make it your own!

The original article was posted at Tavarish is the founder of APiDA Online and writes about buying and selling cool cars on the internet. He owns the world’s cheapest Mercedes S-Class, a graffiti-bombed Lexus, and he’s the only Jalopnik author that has never driven a Miata. He also has a real name that he didn’t feel was journalist-y enough so he used a pen name and this was the best he could do.

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