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Things to Know Before Buying a New Car

December 01, 2020
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For most individuals, a new car purchase, can be one of the worst financial decisions they can make.  From the time you sign the papers to when you drive it off the lot your purchase can depreciate roughly 20-30%. That’s a lot of money down the drain! At the end of the day, we believe your car buying decision should revolve around getting from point A to point B, safely, comfortably, and reliably. All can be achieved by understanding your options and by making an informed decision.  

Did you know, the average cost of a new vehicle in the U.S. was roughly $36,718 in May 2019? Also, did you know that the average annual interest rate for high credit earners is 3.65%? In today’s world, it’s almost the standard to finance a car purchase. Over 85% of Americans finance their vehicle purchase. One thing that we’ve seen over the years is that many new car owners never really know just how much they’ve paid in total for their vehicle. Remember, there is always a cost to borrowing money. In the example below, you will see just how much a $36,718 car will end up costing a new owner.

Price

Down Payment

Interest Rate

Term

$36,718

$3,672(10%)

3.65%

60 mos

Monthly Payment =

$603

Total Cost of Car =

$39,875

*Does not include taxes or insurance which will both be higher for a new car.

If your interest rate is even higher, say 6%, the total cost would be $42,005!

If you are financing a vehicle purchase, make sure you look into all the loan options that are presented to you. Dealerships and lenders tend to offer multiple loan options to consumers. Many times, salesmen put all the emphasis on the “monthly payment” instead of the “total interest” paid. Remember, the longer the term, the more interest you will ultimately end up paying. Don’t buy a car just because you can “afford” the monthly payment. There is something called opportunity cost that you must first look at before making a decision. Opportunity Cost is the loss of potential gain from other alternatives when one alternative is chosen. For instance, if you purchase a cheaper car with a payment of only $300 vs $600, all other factors being equal, you will now have $300/mo to possibly invest. That $300/mo could go towards your financial goals vs down the drain on a more expensive car. Remember, a car is not an investment. An investment appreciates over time while a car depreciates over time. At the end of 7 years your $36,718 vehicle will only be worth roughly $8,500 if it’s still in good condition. That means, that car sitting in your driveway costs you $4,000/yr. Think about what you could do with just half of that amount every year!

A car is a necessity in today’s world but making a poor financial decision when purchasing one, doesn’t have to be. If you are contemplating a vehicle purchase, and have questions, please don’t hesitate to reach out to us. We’d be happy to help you make an informed decision.

 

https://www.cnbc.com/2019/10/22/car-prices-are-rapidly-increasing-heres-why-thats-bad-for-americans.html#:~:text=In%20May%20of%202019%2C%20the,according%20to%20Kelley%20Blue%20Book.

https://www.bankrate.com/loans/auto-loans/rates/

https://www.experian.com/blogs/ask-experian/research/auto-loan-debt-study/