Is It Better To Buy A New Car Or A Used Car?

In 2019, according to Kelley Blue Book’s research the estimated average price of a new car was $37,577. That is absurdly high! That is more than half of the median household income in the U.S. That’s not the worst news. What’s worse is that the average new car loan is right around $30,000! That means that people are financing 80% of a very quickly depreciating asset. Folks are locking themselves into $530 per month ($6360 a year!) that essentially is going into the sewers. That’s the equivalent of a catch-up Roth IRA contribution or a really nice trip to Paris or almost 6 full weeks of work for the average household.

So yes. It’s obvious that a new car is an incredible luxury that far too many people are sacrificing financial independence for. The numbers just don’t work. It makes sense as a rule of thumb to buy a car for no more than 10% of your gross annual income because it’s a tool. A car is an appliance. Don’t sacrifice your life for a really really neat and unnecessary appliance.

If you want a $40,000.00 car then I encourage you to make $400,000 a year! The purchase amount fits within these guidelines. I’m not against nice things. I’m against being owned by things.

Reasons to spend no more than 10% of your gross income on a car.

  1. Depreciation. New cars can lose 20% of their value in the first year of ownership and likely 10% a year over the next four years (that’s being conservative!). If you bought a new $37,000.00 car then after five years it’s probably worth just over $19,000.00. That’s not a good investment.
  2. Opportunity Cost. $37,000.00 invested in the S&P 500 five years ago would be just under $60,000.00 today. That opportunity isn’t guaranteed, but there are hordes of other things you’re giving up if you’re spending more than 10% of your income on a car: vacations, college funding, time off from work, cooking courses, and whatever else makes you really happy. Don’t sacrifice financial independence on the altar of doing what everyone else does.
  3. Increased Expenses. A new car is supposed to save you money on maintenance right? Sure, that’s one of the biggest reasons to buy a new car and maybe you should (so long as it’s not going to cost you more than 10% of your gross income) if this is a huge concern, but new cars break down too and they can be expensive to repair. Maintenance, higher-insurance costs, and taxes all add to the bottom line of the cost for a car and used cars are more reliable than ever.
  4. Contentment. I understand loving cars and getting great joy out of them, and I’m for it! However, most of the time a new car is about vanity – impressing other people or making ourselves feel successful. Driving a new car can increase anxiety, fuel keeping-up-with-the-Jones’-itis, and reduce feeling content. Driving a reliable but maybe a little worn car is freeing to me. I don’t mind if i spill a bit of coffee on the floor mats. It’s okay if my daughter rides her bike into the side of the car and nicks it. I keep it clean and well maintained and it gets me to point A from point B.

How To Buy A Used Car

If your household income is right at the median in the U.S. then that means you’re looking for a car that costs about $6,000.00 if you really need one. How do you make sure you don’t buy a crummy car?

Good news! The internet has a whole lot of information for you to consume! Check out reviews and reliability ratings for used cars. There are quite a few well reviewed sedans and mini-vans in this price range. Make sure you look for a car that performs well in high mileage and old age. The Honda Civic is legendary for its reliability and you’ll be looking for something that’s probably 10 years old or more in this price range. So make sure the vehicle has a great track record of holding up.

Consider buying from a private party rather than a dealer. Craigslist and Facebook marketplace are full of people getting rid of their old vehicles. This will save quite a bit of money but does increase the risks a little. Make sure you check into the vehicle history and make your decision to purchase fairly slowly. Take the vehicle for a test drive and have a mechanic you trust inspect it to let you know what they think.

The Bottom Line

It depends. It really should depend on your income about what kind of car you buy. If you make $60,000.00 a year then it’s going to be very hard to buy a brand new car for $6,000.00. If you make a whole bunch of money then it doesn’t matter a whole lot if you buy new. Far too much of car buying is caught up in materialism. I know that I used to feel embarrassed pulling my two daughters out of a 12 year-old Chevy Prizm in front of my friends in their $75,000.00 SUV. That embarrassment isn’t worth sacrificing my goals for. Really take a deep look at what’s motivating your decision to spend on a car. Remember that it’s primarily a tool: an appliance. You don’t need to buy the best and brand newest refrigerator or toaster – you just need one that works. The same is true of your car.