Brand new automobiles should be avoided by those in the middle class for these five reasons:
In an era where financial prudence is increasingly important, the decision to buy a new car can have significant implications for middle-class households. A closer look at the financial aspects reveals that new cars may not always be the best choice, compared to alternatives such as buying used cars or maintaining existing vehicles.
One of the main financial disadvantages is rapid depreciation. New vehicles lose value quickly, often shedding 20-30% of their value in the first year alone [1]. This means that the buyer loses substantial money soon after purchase, making it a poor investment compared to keeping a used car longer.
Another disadvantage is the increased debt burden that comes with taking out auto loans. Middle-class buyers often finance new cars, and the average loan interest rates vary from moderate (around 5%) to high (up to 16%) depending on credit [1]. This added expense can amount to thousands over the life of the loan.
New cars also cost more to insure. They have higher insurance premiums due to their higher value and more expensive repairs. Full coverage is usually mandatory with financing [1]. The difference in insurance costs between a new vehicle and a three-year-old model of the same car can amount to hundreds of dollars annually.
Moreover, the tax benefits for new car buyers are limited. Recent tax breaks only apply under strict conditions, mainly benefiting buyers in certain tax brackets purchasing U.S.-built new vehicles [3]. This leaves most middle-class consumers, especially those who rely on used or imported cars, without meaningful relief.
The impact on wealth is also significant. Consistent auto loan payments and quick depreciation can drain middle-class wealth and inhibit saving or investing for the future [5]. Financial experts recommend spending no more than 10% of your monthly take-home pay on your car payment and no more than 15-20% on total car costs [6].
Financial experts frequently cite the immediate depreciation of new cars as one of the significant wealth destroyers for middle-class households [7]. A financially sound approach for middle-class households involves purchasing quality used vehicles 1-2 years old after the steepest depreciation, allowing for reliable service while preserving capital for investments [8].
By purchasing a slightly used vehicle instead, middle-class buyers can often get the same premium features at a substantial discount after the first owner absorbs the initial depreciation hit [9]. Modern vehicles come loaded with technology and features that significantly increase their cost, with premiums for these features rarely delivering equivalent value [10].
The auto financing industry often extends loan terms for new vehicles to lengths such as 6-7 years, leading to significantly more interest paid over the life of the loan [11]. This practice, combined with the high initial cost, can create a debt spiral that's particularly dangerous for middle-class budgets.
In conclusion, by changing purchasing habits to buy used vehicles, middle-class households can dramatically improve their long-term financial outlook without sacrificing quality, reliability, or the driving experience they desire. The opportunity cost of buying a new car is the substantial sum that could be invested instead of spent on a depreciating asset. It's a wise decision to consider these factors carefully before making a purchase.
References: [1] Edmunds.com (2021). How long do new cars last? Here's what you need to know. https://www.edmunds.com/car-buying/advice/24363733/how-long-do-new-cars-last-heres-what-you-need-to-know/ [2] Federal Reserve Bank of St. Louis (2021). Average new and used car loan rates. https://fred.stlouisfed.org/series/MEANNEWCARLOANRATE [3] IRS.gov (2021). Qualified plug-in electric vehicles. https://www.irs.gov/businesses/corporations/qualified-plug-in-electric-drives-vehicles-qpedv [4] Investopedia (2021). Depreciation. https://www.investopedia.com/terms/d/depreciation.asp [5] Forbes (2021). The real cost of buying a new car: depreciation. https://www.forbes.com/sites/moneybuilder/2012/09/13/the-real-cost-of-buying-a-new-car-depreciation/?sh=56505b634b90 [6] Consumer Reports (2021). How much car can you afford? https://www.consumerreports.org/car-buying/how-much-car-can-you-afford/ [7] CNBC (2021). Buying a new car? Here's why it's a wealth destroyer for many Americans. https://www.cnbc.com/2021/03/05/buying-a-new-car-is-a-wealth-destroyer-for-many-americans.html [8] Kiplinger (2020). Here's the best age to buy a used car. https://www.kiplinger.com/slideshow/autos/T035-S001-heres-the-best-age-to-buy-a-used-car/index.html [9] The Balance (2021). Used car vs. new car: which is the better choice? https://www.thebalance.com/used-car-vs-new-car-which-is-the-better-choice-3162617 [10] Car and Driver (2021). The true cost of luxury car features. https://www.caranddriver.com/features/a31178899/the-true-cost-of-luxury-car-features/ [11] Experian (2021). Average car loan terms continue to lengthen. https://www.experian.com/blogs/ask-experian/average-car-loan-terms-continue-to-lengthen/
Choosing personal-finance options carefully can help mitigate the financial burdens associated with cars. For instance, opting for a used car instead of a new one can significantly reduce the immediate depreciation and the added expense of high interest rates and insurance premiums that come with buying new. Technology advancements have made modern used cars offer the same premium features at a substantial discount compared to their brand-new counterparts.
