Reasons Why Buying A New Car Hurts Your Finances:
- Higher Upfront Costs: The downpayment is one of the biggest hurdles when buying a new vehicle. Think about it when you need to but 20% down on a $40,000. That means putting down oer $8,000. Sometimes it can be hard to build that big of an emergency fund and then save thousands for a down payment on a brand new vehicle vs used. Then to top it off you may still end up using over 10% of your gross monthly income on vehicle related costs and expenses.
- Higher Monthly Payments: With a higher purchase price, comes with a higher monthly payments. While a longer-term loan may reduce what you pay per month, in the end it can mean paying more in interest and owing more than what the vehicle is worth. A shorter-term loan means paying more per month, but a longer loan can mean you're still paying off the vehicle when repair costs become an issue.
- Vehicle Depreciation: We touched upon this, but any new vehicle takes the biggest deprecation hit as soon as it drives off the lot. According to Edmunds, new card generally lose 23.5% of their MSRP in their first year. In 5 years they may lose about 60% of their MSRP. Thus meaning, the average vehicle retains about 40% of it's original value.
- Costly To Insure: Typically lenders require vehicles to be fully covered until its paid in full. It costs more to insure a new vehicle due to it's higher value vs a used veicle. Also if you need to make a claim on your new vehicle, it will be more expensive because new car parts cost more.