Can I Afford a New Car
I have a confession. I bought a new car. I have another confession. I’ve only ever bought new cars. Now most personal finance blogs tout the wisdom of buying used cars. But here’s the rub. If you look at depreciation curves, add in a few sprinkles of negotiation and take a look at what is actually available then you may just lean to buying new.
Now first off a few rules for cars.
Don’t Buy a Luxury Car
We’ve covered this in our Buck Builders – Get the big things right – but a key to financial security is to make sure when you’re behind the wheel you’re sitting in a Toyota, Honda, Kia and not their corporate cousins Lexus, Acura, expensive Kia (come on Kia, come out with a cool label for your expensive cars).
Sure at some point you’ll realize, hey I can get this used Lexus for as much as that new Toyota, why not just do that? Because then you can’t go back. It’s like the Seinfeld episode where Jerry’s already been exposed to first class, he can’t go back. So forget the “L”, go with the “T.”
People usually argue lease vs. own with financial figures. But that’s not important. The key to leasing is that it has a set date that forces you to walk into a dealership and see all that glimmering steel. Of course you’ll like the new version of your car with 10 extra horsepower, two extra gears, a larger cup holder and a sensor that knows when you’re backside is cold and automatically turns on your heated seats. Oh how I hated pushing that button.
Then there’s the fact that you didn’t actually own your car. So you’re already paying $500 per month, why not keep doing that and get the new one. So don’t lease. Buy a car. You’ll be amazed that when you arrive at day 1,095 you somehow don’t get into your car and suddenly realize you need a new one.
0% Financing isn’t free. Some car dealers will offer you thousands off if you pay in cash. If you can’t pay cash for your car you’re buying too much car.
Don’t Negotiate in Person
If you have been in a poker game for a while, and you still don’t know who the patsy is, you’re the patsy. – Warren Buffett
You have to realize that you’re the patsy when you sit down to negotiate with a car salesman. They have more info and they do this all day, every day. So don’t sit down. After you’ve done your test drives, call and email the dealers. Pit them against one another so at least you know you’re getting the best price available. When I bought my 2015 VW Golf a quick call to another dealer saved me $1,200. They said I had to come in, but I remained firm, said I didn’t have time and listed the exact model and options. They want your business, they’ll call back.
Now there are a ton of tools out there that will make you feel like you’re wise to their game. Sites like edmunds, unhaggle and CarCostCanada.com will send you the dealer invoice so you think you know exactly what you pay. But these sites have also been found to be lead generators for dealerships where they know how much you’re willing to pay. So use them, but take them with a grain of salt.
Drive it For a Long Time
Every time you buy and sell a car you’ll likely take a hit. You’ll rarely get full value out of your used car. So buy it and drive it for a long time. My first car I drove for 11 years. My wife drove her car for seven. So drive them until life changes and you absolutely need something different, or your annual repair costs are more than a new one would cost.
So next up, depreciation curves. Oh yeah! Now the common sense is that a car loses about 99% of its value when the first two wheels are off the new car lot. But if you actually take a look at what’s available in your city, you may be surprised. My wife ended up wanting a Nissan Pathfinder because it had enough car seat latches that she could take our kids and their friends around town.
Side note - finding a 3-row SUV with enough car seat latches is oddly difficult, if you have the same problem check out the car seat lady, it’s a huge time saver!
So if you pull up the depreciation curve from usedfirst you’ll find that it’s clear I should buy a 2016. I’ll save 30%! That’s a no brainer so away I go and get on autotrader and craigslist and buy a one year old used car from a reputable dealership. Done and done, I’m so smart!
You look at what’s different in the new vs. one year old vehicle. Okay, it has a minor facelift, but it’s still not as cool as its competitors. Ah, but it has a more powerful engine, an improved transmission, more towing capacity. Uh oh, I’m in the same issue as the lease guys now. I’m being wooed by the shiny steel. Let’s get back to numbers instead of incremental improvements.
So I call around to get quotes. I know the dealer invoice price (at least what they’ll let us see on edmunds, unhaggle, etc.) and it’s a few grand cheaper than the published list. But I call, get a salesman and say “I want a 2017 Nissan Pathfinder SL, with these options and in this color... I’m looking for your best price.” The salesman said “no problem I’ll call you back in 30 minutes.” That’s a good sign. Then the sales manager called me back, that’s a better sign.
They offered me the car for $7,300 off retail list, drive off the lot price including all taxes (I’m in Canada, expect less in the US, with your superior dollar).
So this changes things, guess what a similar 2016 goes for… $500 less than a 2017. Seems like a no brainer to me to pay the extra $500, get a better engine, transmission, more towing capacity and know that it’s been serviced and treated right. So the actual depreciation curve looks a bit different in my city on the front end than the one on usedfirst. There was no way I could get a one year old vehicle for 30% off a negotiated new price.
Now some people will say, just buy a 4-5 year old Honda or Toyota, that’s the way to go. I’d agree, they’re great vehicles, typically bulletproof and have great resale value. But I’d also take a look at other options. After you negotiate on a new vehicle you may be surprised to find that they’re not as expensive as you thought. Just remember, don’t buy more than you can afford. And if you’re borrowing, you can’t afford it. Cars are typically the second biggest expense for us, but they are thankless depreciation monsters.
Finally, this advice works for most people who are looking to retire sometime in their 50 or 60’s. But if you’re looking to retire in your 30’s or 40’s… Get on that bike! If you need a car, search for a great used hatchback and think that every mile you drive it costs you 53.5 cents for every mile that you drive (based on the IRS’ estimate of total cost per mile).
Here's what the new ride looks like.