Second only to the purchase of your first home, buying a new vehicle is one of the largest investments you’ll make. This fact alone should compel potential buyers to exercise due diligence before signing on the dotted line. There are many positives that come with buying a brand new vehicle but there are also a few caveats that should be taken into consideration. We go into the pros and cons below, but you can also work with a financial advisor to determine the right choice for you.
The Pros of Buying a New Car
The continual and historic low-interest rates set by the Federal Reserve have trickled down to auto loans, as well, over the past several years. Interest rates have started to climb for the first time in recent months so it’s important to consider the purchase before interest rates climb further. Rates are still low but won’t remain so forever.
Most vehicles come with a manufacturer’s warranty that, on average, covers three years or 60,000 miles. It’s also common for vehicles to come with a 10-year, 100,000-mile powertrain (engine and transmission) warranty. The dealer will even offer an extended warranty beyond the manufacturer’s expiration date. These warranties make it more of a safe bet to make a large purchase, in case something breaks down ahead of schedule.
A used 1990 Camaro might b your dream car but it won’t have the navigation system, internet access, satellite radio, or a built-in MP3 player the most recent model has. Newer vehicles (2015 and later) can also go upwards of 10,000 miles between oil changes. Some other perks of new cars include lane departure warnings, collision avoidance systems and self-parking. Plus, some vehicles today can drastically lower your gas bill through either a hybrid or an all-electric system.
The Cons of Buying a New Car
Edmunds estimates a car loses 11% of its total value as soon as you drive it off the lot. By the time you’ve paid off the five-year loan, the car will be worth, on average, about 40 percent of its original value. And that’s only if you’ve taken good care of it — the depreciation rate is even worse with more expensive cars. Popular Mechanics pointed out a brand new 2008 Cadillac Escalade, with a $60,000 price and only 41,000 miles, selling for $32,000 a couple years later.
All dealerships and financial institutions will require you to carry full coverage on your vehicle until it’s paid in full. Insurance premiums are based on several factors, including the age of the vehicle (and driver). The newer the vehicle, the higher the premium will be, whether full coverage or liability because the more expensive parts will be to fix the vehicle if you get into a wreck.
Return on Investment
Some people buy homes in developing areas that will experience extensive new construction and thus higher property values. Whether you buy a new car in Beverly Hills or on Skid Row, you will not turn any sort of profit on the investment. Even with a relatively modest 6% interest, a $20,000 new vehicle will ultimately cost $22,545 at the end of a basic five-year loan.
The decision to buy new, used, or lease will come down to an inventory of your finances and personal preference. If you decide that buying a new car is right for you, consider talking to a financial advisor first. After all, buying a new vehicle is one of the largest investments you’ll make. Ultimately, the right answer is going to be different for everyone but you’ll never recoup the investment you make into a vehicle. Your purchase decision will likely be based more on the quality of life, safety, and enjoyment of the vehicle than it will on the type of return you’ll get on the investment.
Tips on Buying a Car
- Buying a car is a big life decision and it should be treated as such. You may want to consult a financial advisor to determine whether you should buy or lease or how much you should budget based on your financial goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Have you made the decision to buy a car? Now the determination becomes between buying new or used. If you need help making that call, check out our resource on why you should buy a new car.
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