New Cars Cost Too Much! The math behind a new car purchase.
People say one of the biggest purchases you will ever make is your house, but the biggest lifestyle cost over the course of your life could be car purchases.
I frequently see a habit of purchasing new cars on a regular basis and often using debt. What would happen if a household chose to buy used vehicles instead of new ones? And better yet, what happens if that household never uses debt?
Average price of a new car = $47,962 (KBB)
Average depreciation over 5 years = 40% (Carfax)
Average depreciation over 10 years = 80% (Carfax)
Average interest rate on new car loan = 7.1% (Edmunds) for 72 months
So, let’s think about this . . .
1) Buy a new car for $47,962
2) Finance all of it - $820 / mo payment, paid off in 6 years.
3) Sell the car for $9,592 at the end of 10 years
You will have paid a total of $59,040 on the car loan ($11,078 of interest). With depreciated value, you will have lost $49,448 of net worth over 10 years, more than the vehicle cost in the first place!
An individual could do this 3 to 4 times from age 20 to 60. That adds up to $150k to $200k of lost value, averaging $5k per year.
If you instead invest that $5k per year from age 20 to 60 earning 10% annually, you would have $2.2M.
Is your new car habit worth $2.2M?