Things To Consider Before Signing Anything
There are good reasons not to buy a new car that you may have not considered. I have many friends who have bought new vehicles, and some who are currently considering it. New vehicles can be great. You get to be the first owner, have that new car smell, great long-term warranty etc. Owning a new vehicle might be the perfect fit for you. I have found however that most people don't understand the long-term financial and lifestyle implications that come with such a huge purchase. There are a few good reasons consider a new vehicle, a lot of reasons not to buy a new car. I want to address the reasons why I think most people should reconsider purchasing a new vehicle. Check out these 6 reasons not to buy a new car before you go to a dealership and get all of your information from a salesperson
1. You Probably Don’t Need A New Car
Let’s define the word “need”. When you really need something you absolutely can not do without it…how often is this actually the case? I have heard time and time again, “I need a new car because I need a reliable vehicle” or “I need a new car because it will be better on gas”. Rethink your use of the word “need”. Have you ever safely gotten somewhere you needed to go in a used vehicle? Do you know anybody who owns an old car that doesn’t constantly deal with mechanical issues or high fuel costs? You probably know a few. Consider that a 1995 Honda Civic gets around 35 MPG, and a 2012 Honda Civic gets the same 35 MPG. The fuel argument doesn’t hold water. There are some people who need a new car. Perhaps you are a taxi driver who leases his car for business use or have a business that requires that you drive a new vehicle. Or…just maybe, you want a new car and actually have the money on hand to buy one.
2. Dealers Make Money Off Your Purchase In More Ways Than You Think
Want an outstanding reason not to buy a new car? A dealer makes money buying your new vehicle from the manufacturer, and reselling it to you at a higher price. That’s all right? Wrong. There are a lot of different ways that a dealer can take your cash from extended warranties to financing insurance, under coating, paint protection, prepaid maintenance, box liners, tint, fabric protection, customer service fees, documentation fees etc. Could you get away with billing somebody $100 for giving them a few pieces of paper? No, you probably couldn't, and neither should they, but dealerships do it every day. There is a more exhaustive list of ways the dealership makes money off your purchase here.
3. New Vehicles Can Have Major Mechanical Problems
I wouldn't say that this is one of the main reasons not to buy a new car as much as something to just be aware of. New vehicles are not immune to mechanical issues. I bought a new truck in 2008. It cost me way too much money and I no longer own it. Within 2 months of ownership it needed a new clutch (twice), new engine sensors and a couple other minor repairs. 2 MONTHS!! This story isn’t typical but it isn't rare either. A car that’s been on the road for a couple of years and been broken in is more reliable than one that has just been assembled. I would not expect a brand new vehicle to fail but I certainly don't want you to think that it doesn't happen.
4. High Pressure Sales
This is one of the best reasons not to buy a new car. Even though high pressure sales can exist at used dealerships as well, my experience has been that at the new vehicle dealers they will literally block the door to stop you from leaving. Bad decisions are made in high pressure situations. I don't think anybody should ever sign anything that could cost them money when they're feeling pressure.
Dealership salesmen are trained professionals at putting on pressure and keeping you in that office until you buy. If you don’t know exactly what you are going into and prepare yourself accordingly…you may sign away a lot more money than you want to. If you insist on buying a new car, let me make a suggestion: never purchase the first or even second time you go to the dealership. The salesman will try to convince you that there’s some awesome deal that is only available today. It's not true, it NEVER is. If the guy at Ford doesn't want your money today, the guy at Honda will take it tomorrow. There's always another deal.
5. A Dealer Will Undervalue Your Trade
At least they are fairly honest about this one. The salesman will try and convince you to trade in your old car and tell you that there are tax savings and it’s less hassle than selling it privately. The tax savings are minimal and it may be less hassle, but I don’t know many people who wouldn’t be annoyed that the Toyota they traded in last week for $2500 is now for sale on the lot for $5999. Make sure you understand what your used car is worth in a private deal before signing it over to a dealership.
6. You Haven’t Done The Math On How Much This Car Will Actually Cost You
This is, in my opinion, one of the best reasons not to buy a new car. I don’t believe financing a new vehicle is a sound financial decision for most people, but if I can’t talk you out of it I will say this. You need to know exactly how much you will be paying for your new vehicle over the term of your loan. Let’s assume for a minute that you aren't going to buy the financing insurance, accessory and maintenance packages. You are just buying a vehicle . And we will assume a 6% finance rate.
I know what you’re thinking now, “Company X will finance at 0%!”. That may be true, a lot of vehicle manufacturers are offering in-house financing at 0%. But owning that finance company comes at a cost. They pay customer service employees, loans officers, office space, utilities, coffee etc. to keep that business running and that money comes from somewhere. It's built into a higher sticker price and recovered from those who don’t qualify for the 0% and pay a higher interest rate. When I bought my truck, the dealership was jumping back and forth each month between a 0% financing promotion and a $2000 cash back promotion. They plan on making a certain amount on each vehicle that they sell, and they are just offering 2 different ways of getting the same price and making you feel like you’re getting a better deal than you are.
So here’s our deal. The salesman will try to avoid you dwelling on the whole cost and instead focus on the monthly payment which he typically will insist is “easy”.
A 2012 X Brand coupe sells for $21,000
Taxes in my area are at 12% so I will use that. 12% tax on $21,000 is $2,520
So if you don’t have any cash and will be financing the entire amount with tax, you are financing a total of $23,520
Your payment will be $389.79 per month, not so bad. Let’s look at how much money that will add up to be over the term of your loan.
$389.79 per month for 72 months = $28,064.88
Now we know that cars depreciate as soon as we drive them off the lot so lets factor in an immediate 15% depreciation.
You now owe $28,064.88 on a vehicle that is worth $17,850 and have owned it for a total of 30 minutes.
If you sold your vehicle later today you would have to pay $10,214.88 just to get out of the loan. It doesn't seem like such a great deal anymore. Remember that this is without extras. You will be much farther in the hole if you add on all the extra shiny things.
Let's assume that in this situation we had continued driving our old vehicle and waited 6 years to buy a car. We put away the amount our monthly payment would have been into a savings account and let it accumulate, we would have $28,064.88 saved before interest. We could now buy a nearly new 2 year old lease return car with a factory warranty for $16,000, and have more than $12,000 in the bank. What's a better deal?
Owning a new car may be the right thing to do for your family, just make sure that you have the facts and know exactly what you are getting into. There are a lot of reasons not to buy a new car that nobody seems to talk much about. Most money is made from people who overstate their needs, fail to do their research and make impulse purchase decisions that can’t be reversed.