The True Cost of Buying A New Car

There’s no denying that climbing into a brand new car feels good. The smell of new leather is amazing. The sound the doors make when you close them, and the feeling of ownership that you get when you drive it off the lot makes it very appealing.

The truth of the matter is, the only one who got owned is you. I hope that this article will help you make the right decision if you’re on the cusp of buying a new car.

Unless you’re positioned financially to be able to lose 30-40% of your money in one transaction with no possibility of ever recovering it, then buying a new car is a losing formula for you. No amount of new leather, new car smell, warranty, or low mileage will ever offset the financial loss you’ll incur once you sign up for those new car payments. Not even paying cash for a new car makes sense, because you still incur the loss.

I Got Suckered

In 2008, I was suckered into buying a new car. They threw the bait out and I bit hard. At the time, I had a 1998 Toyota Tacoma that was paid for. No payments, no worries. Then, as I was entering the world of Real Estate, I decided that I needed a different vehicle; one that was nice enough to shuttle people around in from house to house. I found the perfect class of car for me, and headed right out to the dealership to get me one. Knowing that I could get zero down financing allowed me to purchase the car without trading in my paid for truck, which booked at $8000.00.

I was banking on selling my truck to fund the first 15 months of payments. How stupid is that? I was essentially making a decision to throw away a perfectly good truck to get into a car that had huge payments. I’ll explain how I threw it away in a second.

The car that I chose was a 2008 Honda CR-V. The sticker price was $27,895.00. In my mind, I was spending less than $30,000 for a new car. It seemed affordable, especially with the reserves from my not-yet-sold truck. Here’s a little tip for you. If you’re at a dealership, you’ll be sold on a payment, not on the cost of the car. If the payment falls within your cash-flow budget, you’ll be suckered into thinking you can afford it. You can’t. Let me expound.

The tax on my new car was $2,259.50. License and Registration was another $514.00. There’s a documentation fee that the dealer “cannot waive” of $368.00. And then there’s the finance charge. If you’re planning on borrowing money to buy a car, you’re going to get hosed. In this case, the finance charge was $8162.47. Oh, and I forgot, you have to register annually, and new cars in Arizona cost about $400.00/year to register, declining by 12% every year. So add another fee for every year.

All in all, the total amount that I was committing to purchasing this vehicle over 72 months was $39,199.68. ???@#$!@#%?

Are you serious? You’re telling me that I am agreeing to buy something that books at $27,000 new for $39,200? How much more stupid could I be? It’s a CAR. It goes down in value.

I Sold My Car

Dave Ramsey’s theory on vehicles is this: Add up the current value of all of your motorized toys. If the sum is greater than half of your annual income, it’s time to sell. If the sum of your vehicles’ values do not exceed half of your annual income, then the next qualifier is whether or not you can pay them off within 18 months. If the answer is no, sell them. “You have too much tied up in things that go down in value,” he’d say.

Not only does it go down in value, it loses nearly 30% of its value in the first 24 months. My car, that beautiful 2008 CR-V, at the time that I sold it (yes, I sold it), went for $20,000. At the time I sold it, I owed $23,000.00 which means in order to release title and transfer ownership, I was required to come up with the difference of $3,000 cash, out of pocket.

I made 22 payments of $544.44 for a total of $11,977.68 of which $8000.00 came from the sale of my paid for truck, which means I came out of pocket and additional $3,977.68. Add that to the $3000.00 check I had to write when I sold it and you have a total of $6,977.68 + a perfectly good 4X4 truck down the drain.

My Stupid Tax factor for this purchase was $14,977.00. That’s how much real equity I lost over 22 months. This would be akin to renting a car for $680.00/month.

What if I Had Waited?

I took on huge payments when I didn’t need to. What if I had made a commitment to save those payments rather than buy a new car? Well, it’s pretty clear that I would have $14,977.00 in the bank with which to begin shopping for a good 2-3 year-old vehicle, loaded to the hilt with upgrades which I would currently own, payment free. Let’s say, for the sake of argument, that I managed to purchase a good vehicle for $10,000.00 leaving me with $4,977.00 in savings. What would that savings look like if I invested them over 30 years in good growth stock mutual funds averaging 10%?

Well, you’d grow that money to roughly $98,000.

Conclusion?

The true cost of buying a new car is hidden from you by lulling you into submission through the amount of your monthly payment. You can see both the short-term loss and long term potential loss from a decisions such as this. I am currently driving someone else’s car, and I consider it a blessing, but I’ve learned my lesson regarding purchasing not just new cars, but new anything.

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The True Cost of Buying A New Car

I Got Suckered

I Sold My Car

What if I Had Waited?

Conclusion?

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