The Disadvantages of Buying a New Car
Despite the seasonal sales pitches by car dealers to take advantage of some of the best pricing of the year, the disadvantages of owning a car should continue to keep you far away from automobile showrooms.
If you see a car strictly as an investment — one that depreciates and has opportunity costs and high yearly maintenance fees — you’ll quickly discover owning a car is a pretty poor use of your money.
If you also view owning a car from an environmental standpoint, you’ll have more reasons to swap your car this year for other forms of transportation — maybe a sleigh like Santa’s.
A new car is a rapidly depreciating asset
Although you’ve probably heard this warning more times than your favorite yuletide carol, the moment you drive your new car off the dealer’s lot, it loses value. It’s true. On average, a car loses between 15 percent and 25 percent of its value each year for the first five years. Imagine if after you were handed the keys to your new house and your real agent told you that the $200,000 home you bought on Monday was worth only $170,000 (15% of $200,000) on Tuesday. And in year two, it would be worth even less, $144,500 (15% of $170,000). You wouldn’t stand for it, but for some reason, millions of car-buying customers do.
It gets worse. Let’s say, on your $32,000 car, you put down 20 percent ($6,400) and financed the other 80 percent ($25,600) over four years at 5 percent. Your monthly payments for the next 48 months would be $589 (the figure will vary slightly depending on the calculator you use). Now imagine, maybe 24 payments in, your car has lost its new-car smell and special glow and sports some minor dings and scratches, including a little wheel rash on your front rims. Your once-hot romance with your car has cooled considerably, but for the next two years, you’re still on the hook for nearly $600 each month.
Money squandered on a car siphons money away from other investments
As you no doubt heard many times growing up — maybe after badgering your parents for new hockey skates or a new snowboard — money doesn’t grow on trees. So, if you chose to “invest” your entire savings of $32,086 in a new car, you would not have money left over to invest in other things, like real estate, stocks and bonds or a savings account.
These missed opportunities are what are known as “opportunity costs,” which are lost opportunities to cash in on better-paying investments. For example, if you leave a cash balance in a non-interest-bearing account, the idle money is an opportunity cost in terms of lost interest.
Investing in a car, however, is even worse than letting your money idle away because a car is a rapidly depreciating asset.
Cars are costly to maintain
In May, AAA released the results of its annual Your Driving Costs study, revealing that the cost of driving had actually fallen 2.7 percent from the previous 12 months, to $8,876 per year, based on 15,000 miles of annual driving. Costs included not only gas, but also tune-ups, oil and tires, insurance, registration and parking.
That’s $739 a month. Imagine, if you had to add that monthly amount to a monthly loan payment of $589. That would mean bringing your total cost of owning a car to $1,329 a month.
That’s real money in anybody’s pocketbook! Unless you’re using your car for business and get to write off a portion of your car expenses, you have to pay that sum every month with after-tax dollars.
Buying a car jeopardizes other purchases
As a rule, you shouldn’t devote more than 10 percent of your monthly income to car expenses. So, turning to our example above, if you earned less than $13,292 a month (or $159,504 annually), you would be devoting more than 10 percent of your income to your car. If you were still determined to make your car payment and keep your car on the road, and not exceed the 10 percent rule, you would have to cut spending in other areas.
Let’s say, you made $100,000 a year, you would still have to cut spending by $59,504 a year. Would you cut out your weekly bowling night or dinner at the Red Lobster? Would you cut cable? Would you skip the annual summer beach rental? Having to crack such a tough car nut each month, you would hardly be in a position to make other purchases, unless you loaded them up on your credit cards.
As for qualifying for a house, if you’re already financing a car to the tune of nearly $600 a month, your mortgage lender is going to wonder whether you’ll have enough financial resources left to keep up with a mortgage. If you try to take out your car loan for more years to reduce your monthly payments, you’re only prolonging your financial agony and further clouding your credit.
Interestingly, in a study published earlier this year by Interest.com, it said that purchasing a new vehicle was out of reach for people in medium-income households in all but one of the 25 largest metro areas in the United States. If you lived anywhere else other than the Washington D.C. metro area, you could not afford that average-priced $32,086 car. Had the survey also factored in maintenance costs, no metro area would have qualified.
Affordable solutions to owning a car
You could buy a used car. These days, a well-maintained pre-owned car can easily push the odometer past the 200,000-mile marker. Yet the average price of a used vehicle sold at new-car dealerships is $19,268. And with monthly maintenance costs of $739 or more (it is a used car, after all), you’re still talking about an outsize portion of your budget going to car expenses each month.
The best solution, of course, is to ditch your car altogether for public transportation. For example, an all-month Metro Rail pass in Los Angeles runs $100; a MetroCard in New York City goes for $112. Compare those monthlies with the $600 a month or more to keep your car in commission.
When you absolutely need a car, you can rent one the traditional way (for 24 hours) or try Zipcar or Getaround, services that bill by the hour or the day. If you need a lift uptown or downtown, you can call a conventional taxi or connect via a smartphone app to a ridesharing service like Uber, Lyft or Sidecar.
Today, unless you live in a one-horse town, opting for public transportation is increasingly becoming a viable solution for people who want to ditch their cars. There’s no longer any stigma attached to not owning a car. Not owning has even become cool in some sectors. Last year, ridership on New York subways surpassed 1.6 billion, a level not seen since the end of World War II, when cars weren’t nearly as ubiquitous as they are now.
Naturally, going carless is also a plus for the environment. Removing each car from a gridlocked transportation corridor reduces air pollution. One less car parked downtown also relieves the need to build more parking structures and frees up space for less congested, more pedestrian-friendly urban centers. Using your own two feet to propel you around town is also healthier and more slimming than sitting behind the wheel of your car for long stretches.
Peter is a staff writer at MyBankTracker.com who covers banking, personal finance, investing and homeownership.