Economics of new cars

[HeiferRichter]

I've never understood the economics of new cars and how they can be 'affordable' to the common person.

From my lowly point of view, my used vehicle costs, on average, $150 per month to drive, I'm not sure a new car could be had for that.

How are the majority of new vehicles introduced into the market? Who purchases them? How are they 'afforded'?

 

[Bobby_M]

Most people who buy them can't afford them but that's not what I think you're asking. A lot of them are leased too. I think a lot of people put way too much priority on having a brand new car like they're entitled just because they have a job. Don't forget all the spoiled high school and college kids who's parents buy them. One advantage to buying new though is that you know the entire maintenance history and if it was beat on, at least you did the beating.

 

[brewkinger]

Yeah, a new car is something that is more of a status symbol for Americans than it is a necessity.
Your thought process is exactly what the car industry realized about 15 yrs ago. People could not afford the price tag on a new and reliable car.
Those that could "afford" a new car did (and still do so). The hitch is that they can afford more than a basic car, so the more "economical" cars (that are mass produced) sat unsold.
The car industry solution??? LEASE

I am of a VERY firm belief that a lease deal (a.k.a FLEECE DEAL) is the absolute worst choice a consumer can make. I have the mathematics and numbers to prove it.

It allows a person to "afford" an otherwise unaffordable car, just so that they can have the status symbol of having a new car.
You are basically renting the use of a new car and then having absolutely nothing to show for it after the deal ends. (other than all your friends and neighbors thinking that you can afford it OR knowing that you cannot.)

 

[mb82]

Yeah, a new car is something that is more of a status symbol for Americans than it is a necessity.
Your thought process is exactly what the car industry realized about 15 yrs ago. People could not afford the price tag on a new and reliable car.
Those that could "afford" a new car did (and still do so). The hitch is that they can afford more than a basic car, so the more "economical" cars (that are mass produced) sat unsold.
The car industry solution??? LEASE

I am of a VERY firm belief that a lease deal (a.k.a FLEECE DEAL) is the absolute worst choice a consumer can make. I have the mathematics and numbers to prove it.

It allows a person to "afford" an otherwise unaffordable car, just so that they can have the status symbol of having a new car.
You are basically renting the use of a new car and then having absolutely nothing to show for it after the deal ends. (other than all your friends and neighbors thinking that you can afford it OR knowing that you cannot.)

The nice thing about a Lease is those of us who have figured out it is not worth it to purchase new get a gently used car with fairly low miles for way less then the price of a new car. It is what I did with my car 10 years ago, bought it with 28K on the odometer and now at 184K I am starting to think what I want next. I think I got my $8K out of the car.

 

[dryboroughbrewing]

I have to admit I buy my cars new, my 14 year old Altima is still running like a champ. When it dies I'll buy a new car, and drive that one to death.

 

[TyTanium]

I've never understood the economics of new cars and how they can be 'affordable' to the common person.

Simple. You sell financing vehicles too.

 

[manoaction]

This has always befuddled me as well. A Kia Rio can retail at $18,000 and I just don't know who out there really needs a Kia Rio and can't wait to spend $18,000 on it.

 

[TyTanium]

This has always befuddled me as well. A Kia Rio can retail at $18,000 and I just don't know who out there really needs a Kia Rio and can't wait to spend $18,000 on it.

Because they're not spending $18,000. They're spending $300 per month.

 

[user 144271]

Some of us need very dependable cars and new fits the bill
Besides where do you think all the used cars come from? LOL

 

[Xpertskir]

One advantage to buying new though is that you know the entire maintenance history and if it was beat on, at least you did the beating.

This is true, another thing about a new car(under warranty) is that you have a known cost of operation and any outlier events are not your responsibility.

My current car was a new purchase. Previously I have only purchased used cars. My last used car cost me more to operate than a new one due to repeated mechanical complications. The worst part about one of those situations is you then get on a slippery slope and every issue that comes up you have to figure out if its worth fixing. Its also terribly difficult to view your prior investments as sunk costs, and the more you put in the more you think "well, half the car is basically new, this will be the last major thing for a while." The recent bad experience and my car finally blowing up at an inopportune time basically drove me to buying new.

Anyways, the long and short of it is with the current cheap or free financing, a long enough amortization schedule, proper maintenance intervals, and avoiding some bad luck, owning a new car can make financial sense.

As for leases, their are many contracts that are pretty terrible but every once in a while the numbers for leasing can make sense. I have yet to lease a car but sometimes due to overproduction of a certain model or some internal corporate issue the pricing gets out of whack between leasing and buying.

 

[HeiferRichter]

So those buying new must have a secure job or feel secure in their job *and make enough money* to pay $300+ per month plus mortgage payments etc...

How are those of you advocating new cars determining that you can afford it and that it will pay for itself (above and beyond simple math)? How do you determine that it makes financial sense for you?

Besides where do you think all the used cars come from? LOL

Seriously?

 

[rharvey]

I had the same view on used cars until the last two cars I owned turned out to be headaches. They booth seemed mechanically sound at the time of purchase, but both lasted only one year, and averaged about $300/month.

With the interest rate the way it is, as well as buying at the right time, it made too much sense to not buy new. Why pay 300/month for a 10 year old car, and deal with the headache of repairs (I do all of the repairs myself) when for the same price I can drive a brand new vehicle, not have to worry about repairs, and be left with some value (as little as it may be) after it is paid off?

 

[Yooper]

So those buying new must have a secure job or feel secure in their job *and make enough money* to pay $300+ per month plus mortgage payments etc...

How are those of you advocating new cars determining that you can afford it and that it will pay for itself (above and beyond simple math)? How do you determine that it makes financial sense for you?



Seriously?

The people that "need" new cars are the same ones who "need" cool smartphones and pay only $350 a month for the car and only $100 a month for the phone. We have a "payments" society.

Same with a house. It's "only" $1300/month. It's not like it's really $300,000.

 

[SpentGrains]

I had the same view on used cars until the last two cars I owned turned out to be headaches. They booth seemed mechanically sound at the time of purchase, but both lasted only one year, and averaged about $300/month.

With the interest rate the way it is, as well as buying at the right time, it made too much sense to not buy new. Why pay 300/month for a 10 year old car, and deal with the headache of repairs (I do all of the repairs myself) when for the same price I can drive a brand new vehicle, not have to worry about repairs, and be left with some value (as little as it may be) after it is paid off?

I came to the same conclusion when I was car shopping, here is what i saw for commuter cars:
1. Well used cars (80k+ miles) under $10,000
2. Lease returns (usually upgraded models) ~$15,000
3. New basic model ~$15,000

They all would of had to be financed so I went with a new small car.

 

[andycr]

Reliable used is always going to make more sense than new. A 3-year-old used car is statistically more reliable than a brand new car, and doesn't lose 20% of its value the second you drive it off the lot. It's best if you're strategic on what brand you buy, and not get attached to any specific car, though.

I will admit I see people with brand new cars and get a little twinge of "I could have had that!" But I really do believe it's worth it. Cars are liabilities, not assets. So much of our trouble comes from holding things we believe to be assets, but are really just liabilities.

If you make sure it's reliable, you won't believe how much cheaper used is. Buying a car with cash is fun, too. (No seriously, actual cash. The look on the sellers face is priceless. )

You really do have to put on your negotiation hat, though, and some people aren't comfortable with that. If you won't let me take it to my personal mechanic to do a thorough inspection, no deal. If you think blue book value is a good way to measure what a car is really worth and refuse to budge, no deal.

This video, while a little 'flashy', is full of good advice.

 

[reverendj1]

I bought my current car (2008 Honda Fit) new for ~$17,000. When I was looking at used cars (this was also during the cash for clunkers rebates), I couldn't find one under $10,000 that had less than 100,000 miles on it. I figured with the extra $7,000 up front, it would more than pay for the extra 100,000 miles I would get out of it. I also liked the thought of not having to do any maintenance for a long time. I think you are also assuming that everyone who buys a new car sells it after a few years. That is definitely not money-smart, no. It does make sense when you plan on keeping the car for several years after you pay it off. I plan on keeping my car until I run it into the ground, which is why I bought one that is so dependable.

My last car was a 95 (I think) Buick Regal with ~130,000 miles on it. I think I paid like $2,000. Between the average monthly repairs being ~$100, time missed from work/fun fixing it, and the savings in gas, it was almost a wash buying a brand new car. I drove that until (almost literally) the wheels fell off.

 

[baulz]

I am of a VERY firm belief that a lease deal (a.k.a FLEECE DEAL) is the absolute worst choice a consumer can make. I have the mathematics and numbers to prove it.

I lease, but always thought it was a crazy idea. As a business owner and salesman I can write-off the majority of the costs. Plus a low lease rate, high residual value, and the ability to beat the **** out of the car for 3 years then give it back all makes sense to me.

 

[JeepDiver]

It doesn't make financial sense, but I like having a car I know I can depend on to drive cross country and not worry about. Issue with a low mileage used car, is why was it traded in. Could be someone couldn't afford it so got rid of it, or it could be that it was a lemon and they kept having problems with it. So you are taking a gamble.

That being said, now that my current Jeep is pushing 66,000 miles (and been paid off for 3 years) and I am thinking about getting something new, the prices of a nicer new vehcile have gotten crazy. Not sure I will be doing it this time. 300 a month is for a lower end car, start looking at a mid-level towards luxury and you are looking at 400-500 a month at least for 60 months and a lot of the loans are going to 72 months. Just no way I can justify that

 

[Darwin18]

So those buying new must have a secure job or feel secure in their job *and make enough money* to pay $300+ per month plus mortgage payments etc...

How are those of you advocating new cars determining that you can afford it and that it will pay for itself (above and beyond simple math)? How do you determine that it makes financial sense for you?



Seriously?

Hmm...I was able to make my monthly payments of my Honda Civic ($450 a month...) and split the payment for the mortgage with utilities with my wife on $36K a year. I certainly was poor as hell and couldn't afford to do anything fun but it's not rich people who always buy new.

My parents talked me into buying a new car after college and the day I paid it off was a great, great day! I certainly would not do it again - I would go back in time and buy a pre-owned vehicle that came with a warranttee. My previous car, a Buick LeSabre, that belonged to my grandfather before he passed away decided the brake lines were going to fail as I was commuting home at night. I had to pull over to the crest of Storm King Mountain, otherwise I would gone down the mountain with no brakes.

 

[Yooper]

That being said, now that my current Jeep is pushing 66,000 miles (and been paid off for 3 years) and I am thinking about getting something new, the prices of a nicer new vehcile have gotten crazy. Not sure I will be doing it this time. 300 a month is for a lower end car, start looking at a mid-level towards luxury and you are looking at 400-500 a month at least for 60 months and a lot of the loans are going to 72 months. Just no way I can justify that

One thing I do is make car payments to myself. I started about 20 years ago. I paid off my car, and then continued to make payments to myself by putting the same amount into a bank account. When I paid off my 1987 truck in 1990, I kept putting $300 a month into the bank. It was hard, but I did it.

Then, just by making car payments to myself, I've paid cash for my last three vehicles! Trust me, even with 0% interest and all that, you get far more for your dollar when you don't finance. One, you get the interest when you put money in your own account (although for the last 5 years, rates have been abysmal, before that they were pretty good!). Two, you can take advance of all rebates and cash incentives when you don't finance.

I first bought a 2004 Chevy truck, for cash. Then, during 'cash for clunkers' I traded in an old Suburban and bought a 2009 Hyundai for a total of $9,000 after the clunker/rebates deal.

So then, I had two vehicles that were paid for. Last summer, I sold that Chevy for $15,000 and paid cash for a 2012 Toyota Tundra for the balance (about $14,000).

I still put my "car payment" into my bank account every month, but I have two vehicles, paid for.

It takes discipline but once you get out of the mentality that car payments are a given, it makes sense to pay cash.

 

[SpentGrains]

Reliable used is always going to make more sense than new. A 3-year-old used car is statistically more reliable than a brand new car, and doesn't lose 20% of its value the second you drive it off the lot. It's best if you're strategic on what brand you buy, and not get attached to any specific car, though.

I like Dave Ramsey's style (I have his book) but that video was WAY too optimistic. It assumes you have a reliable $1500-$6000 car that requires no maintenance or breakdowns FOR YEARS, and are making 12% ROI on your money?

A used car certainly still loses 20% when it goes off the lot, just try to sell it back to the dealer or put an ad out and see how much you can get for it.

I thought about the $1500 well used car option btw, but certain government programs have scrapped them all...

 

[Xpertskir]

The people that "need" new cars are the same ones who "need" cool smartphones and pay only $350 a month for the car and only $100 a month for the phone. We have a "payments" society.

Same with a house. It's "only" $1300/month. It's not like it's really $300,000.

I didn't see anyone in here saying that they needed a new car, merely that financially speaking it's more equivalent to the cost of owning a used car that a lot of people think. This main driving force is the increased maintenance costs and decreased efficiency of many older cars and that doesn't take into account the hassles of dealing with increased vehicle maintenance and downtime without a car. Another part of this equation is the more attractive financing available for new cars and the impact of TVM over the life of ownership.


I'd be interested to see the financial argument made for people who "need" an electric 3 vessel set up with a control panel and pumps to make a quality of beer that can be made on a more basic system at 1/10 the cost. You cant finance that at 0% and pay it back with less valuable money over time either.


Instead of making blanket statements, I will simply say that it's a case by case situation, and there are situations in which all three car ownership possibilities will make sense from a bottom line financial cost standpoint.

 

[Xpertskir]

Dave Ramsey has done more harm to middle America than most.

Some debt is a healthy thing, especially at low interest rates. Clearly, credit cards and other forms of high interest rate debt for items you don't need are unwise. Everyone needs a place of residence and in most cases a car, both of which have some of the most favorable interest rates available. To be clear I'm not advocating overspending your means for these two items. The long and short of what I disagree with Ramsey is this: If you spend all your time paying down your debt you will miss out on a lot of years of building wealth(through compound interest), which is actually what allows financial freedom and retirement.

 

[andycr]

A used car certainly still loses 20% when it goes off the lot, just try to sell it back to the dealer or put an ad out and see how much you can get for it.

Certainly not 20%, but that's why you don't buy used cars on a lot. Buying from the owner is the way to go, and make sure you negotiate aggressively. Buy when you're in a position of strength, sell to someone in a position of weakness. You can save money buying, make money selling, and offset a large amount of depreciation if you do this right - but it is hard to do right, which is why most don't do it.

Dave Ramsey has done more harm to middle America than most.

Some debt is a healthy thing, especially at low interest rates. Clearly, credit cards and other forms of high interest rate debt for items you don't need are unwise. Everyone needs a place of residence and in most cases a car, both of which have some of the most favorable interest rates available. To be clear I'm not advocating overspending your means for these two items. The long and short of what I disagree with Ramsey is this: If you spend all your time paying down your debt you will miss out on a lot of years of building wealth(through compound interest), which is actually what allows financial freedom and retirement.

I went through that phase. You end up feeling like a monk stoically sacrificing to pay off debt to the detriment of the rest of your life.

That said, I don't want to build assets that may get taken away if my position in life changes. It's great that your investments are growing at 8% while your debts are growing at 6%, but if there is a disaster, your investments wither, your income dwindles, your debts feel like immovable objects, and you're utterly screwed. I feel better if I just don't have debt, and while Ramsey's way is aggressive and headstrong to an extreme I find hard to take (only $1000 on hand while paying off debt? I'm self-employed, my risk tolerance would send me into a heart attack if I followed that), it certainly sends you in the right direction.

I can't say any debt is a healthy thing, but foaming Ramsian evangelism isn't great either. It's all about balance...

 

[TyTanium]

Dave Ramsey has done more harm to middle America than most.

...The long and short of what I disagree with Ramsey is this: If you spend all your time paying down your debt you will miss out on a lot of years of building wealth(through compound interest), which is actually what allows financial freedom and retirement.

Are you advocating a form of interest rate arbitrage? Borrow for 5% and invest at 10%?

 

[brewkinger]

The long and short of what I disagree with Ramsey is this: If you spend all your time paying down your debt you will miss out on a lot of years of building wealth(through compound interest), which is actually what allows financial freedom and retirement.

Those of us that have never been in debt and have never spent all my time paying it off would strongly disagree.
I have spent the last 24 years raising a family of 3, buying used cars and investing everything else into wealth and college funds for the kids.
My wealth is due to corporate greed and in no way shape or form has my middle class America been harmed.

 

[fbold1]

I've never understood the economics of new cars and how they can be 'affordable' to the common person.

From my lowly point of view, my used vehicle costs, on average, $150 per month to drive, I'm not sure a new car could be had for that.

How are the majority of new vehicles introduced into the market? Who purchases them? How are they 'afforded'?

Because buying a used car is like buying something that someone couldn't wait to get rid of, get a good warranty.

 

[PapsD]

I'd also say affordable is relative. Atleast from the prices I've seen in the Chicagoland area, a used car costs almost as much as a new car. Because of the body rot from salt and the beating cars take on the roads here, I'd say a new car is the better value compared to a used car.

Any car you buy is a losing proposition money wise anyway. You're basically blowing that money out of your ass on a vehicle every month.

Which is why I drive beaters.

 

[andycr]

Because buying a used car is like buying something that someone couldn't wait to get rid of, get a good warranty.

Buying a warrantee on a used car is gambling - to stay in business, the only way they can offer them is if most people don't get their money out of them. The trick is to not buy so far out of your price range that you can't afford the maintenance, and you'll statistically save money.

The only time you should do something like that is on something like car insurance for collision, or health insurance - something where, in the unlikely case you need it, you simply wouldn't be able to afford paying cash.

On anything else, you're just gambling on yourself having bad luck.

 

[fbold1]

Buying a warrantee on a used car is gambling - to stay in business, the only way they can offer them is if most people don't get their money out of them. The trick is to not buy so far out of your price range that you can't afford the maintenance, and you'll statistically save money.

The only time you should do something like that is on something like car insurance for collision, or health insurance - something where, in the unlikely case you need it, you simply wouldn't be able to afford paying cash.

On anything else, you're just gambling on yourself having bad luck.

We are not talking maintenance cost here, we're talking catastrophic failure!