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Top 5 Ways You’re Losing Money When Buying a Car

According to USA Today, over 17.5 million new cars were sold in the U.S. in 2015…. And then a new record was set in 2016 with sales topping 17.55 million.

losing money when buying a car

We Americans sure love our cars, and sometimes we get so enamored with the look, the smells, and the status symbol of the brand that we lose all sense of logic during the new car purchase. And with the escape of logic, we often find ourselves questioning our purchase just hours after the buy…

Top 5 Ways You’re Losing Money When Buying a Car

You’re losing money, you know it, but what’s really happening during the car sale? And how much are you getting screwed because of what you don’t know?

It’s time to stop the madness. Take note of these 5 ways you’re losing money when buying a car and vow to never let them happen again.

1) Spending More Than 20% of Your Yearly Income

When you look at a $50,000 BMW vs. a $20,000 Chevy, what’s the real difference? The BMW goes faster, has a softer interior, and has more buttons. So what? The purpose of your car is to get you to and from work, and to occasionally have some fun on the weekends. The Chevy will get all that done for you (watch out for those Fords though, they’ll probably die in a heartbeat…:-/). All the extra spending on a BMW won’t gain you any more than an entertainment value.

My rule of thumb when buying a car is that you should spend no more than 20% of your yearly income.

  • If you earn $100,000 a year, you can buy that $20,000 Chevy.
  • If you only make $50,000, then you should find a nice used $10,000 car.

Why does it matter?

It’s all about cash flow.

When you spend too much money on your cars, you take away from the money that could have been invested in the stock market or real estate. So instead of earning 8% on your money, you’re probably losing 15% on your depreciating car… That’s a bit of a difference.

2) Buying Your Car With a Loan

Even if the car you’re buying is less than 20% of your income, if you don’t have the cash then you just shouldn’t buy it.

I say this for multiple reasons:

  • the additional amount you’ll lose in interest payments
  • reduced cash flow for the next 5+ years of your life
  • it removes all leverage from the purchase (so you end up paying more)

Buy with cash or don’t buy at all.

3) Buying a Brand New Car

Yes, brand new cars are pretty sexy, and yes you do get a rush when you sign the paperwork and drive it off the lot. But, buying a brand new car can really kill your net worth – not just with the amount you pay, but with the depreciation.

I bought a used Pontiac Vibe in 2015 for $3,900. Today, two years later, it’s worth $3,400. This car has essentially cost me $500 to own.

If I would have purchased a new car for $30,000, guess what it would be worth today?

About $20,000…

And in another 2 years, the value would plummet to $15,000. A loss of $15,000 from my $30,000 purchase.

That means that if my net worth was $100,000 when I bought it and nothing else changed. Today, I’d be worth $85,000.

Well that sucks… Who signed me up for that??

That’s exactly what a brand new car will do to you though. Without even seeing it, a new car will suck your overall value down during ownership. You won’t see it in the moment, but it will hit you when you make the sale.

Related: How to Buy a Car: The Definitive Guide

4) Buying From a Dealer

Here’s the car dealer’s model:

  • They buy a car
  • Mark it up by $2,000
  • Sell it
  • Pay their business mortgage, electricity, water, sewer, employees, cleaning, gas, and insurance
  • Keep $300 for their profits

In other words, there’s a TON of overhead that a car dealership needs to cover with each car sale. And who’s keeping their business rolling? You are! The consumer.

If you don’t want to overpay for a vehicle, focus on private party sales (I use Craigslist when I’m in the market for a new used car).

Bonus Tip: Don’t trade your old vehicle in either. The dealership will give you next to nothing for it. Take the extra time and sell it yourself.

5) Ignoring the Vehicle History and the General Check-Up

When in the buying process, some people just start drooling, point at a car, nod their head, and then drive it off the lot. This is obviously a TERRIBLE idea.

If you want to get a true deal on a car, then you’ll want to buy one that doesn’t cost you in repairs all the time. And you don’t want to go through all that hassle anyway!

So here’s what you should do when you’re in the process of buying a car:

  • Do your research up front – have these types of cars been dependable? Or are they the worst model ever built? (check Consumer Reports)
  • Once you get a sense for the price range and are in agreement with it:
    • Get the car looked over buy a mechanic. Sure, this might cost you $40, but that’s better than $4,000 a month from now.
    • Run a Carfax to check the history of the car. Was it in any accidents? Does it seem like it was maintained well by the previous owner? How many times has it been bought and sold (a high number usually means it’s a lemon)?

Doing your homework can really pay dividends when buying a new used car. You’ll spend far less than the cost of a brand new car, but you’ll still get the dependability.

Stop Losing Money When Buying a Car

Alright! Now you’re equipped to find a quality used car that won’t cost you an arm and a leg AND won’t leave you stranded on the side of the road.

Just remember:

  • Spend less than 20% of your yearly income
  • Buy with cash
  • Avoid the new car smell
  • The dealership is not your friend
  • Know the quality you’re buying before you buy it

And now that you’re an informed shopper, it’s time to find a deal!

Are you used to losing money when buying a car? Got any good stories?

Battle of the Mind Money Save Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

15 Comments

  1. 20% huh? Thats way more generous than my 10%. I read an article about the sales “bubble”, inventory etc etc and the industry is in turmoil on what to do. It stated that giving longer loans terms and how cutting out foreign competition would help the American buyer. I wanted to scream so loud at these idiots. Median income of 50k and even the plainest of cars avg 20k… Seriously. The vehicles I use, if bought new, would run closer to 40k (work trucks, vans). And Im not paying that for them. I buy vehicles at or around 6k because not only is that less than 10% but it makes it so much easier to pay cash for, recoup your $$ etc etc. Then you get into depreciation blah blah blah.
    A person is free to choose what they think they want and to go into debt over it. But the numbers just don’t lie. Im waiting to see what happens over the next few years with the auto industry. I think there’s going to be a reckoning and pricing is going to have to come down, but at a cost. I think we the consumer will be stuck holding the tab before its all said and done.

  2. My wife and I made all these mistakes when we bought her car. Luckily we are quick learners and won’t be doing that again.

    Bought my car used, in cash, from a private owner.

    • We all make mistakes. The key is that you learned from yours. Most do not…

  3. I just hate car payments in general. If possible buy a used car with cash from a very dependable maker and invest everything you would have spent on payments. If the car breaks down you will have enough to pay for it because you have been saving it. You will end up with a hell of a lot more assets at the end of five years than if you had bought a constantly depreciating new vehicle.

    • Thanks to no car payment, we were able to pay off our house. Without car payments or house payments, we can save $30k a year on a mediocre income! Naturally, I shake my head at new car buyers.

  4. Great article. It’s so easy to get trapped in the new car fever mentality. I myself have purchased a new car (before I knew better), but we’re actually still driving it – 10 yrs later. So it hasn’t been all bad.
    Thanks for sharing.

    • It really is easy to get into the car fever. The key is to have goals that are bigger than a fancy car.

      Our goal is to buy a second rental property with cash so we can send our kids to private school. Buying a brand new car would be pretty selfish with these goals…

  5. Speaking of the Vibe, I have one also, inherited when my mother stopped driving a 2003 with 130,000 miles on it 2 years age. To date, very reliable and the hatchback down provides a lot of room for transporting items. Too bad they discontinued this model as it has a rep for being reliable and the cost of maintenance is low. I figure less than $2,000/year total spent which includes insurance, gas and repairs/maintenance. Cheers!

    • Nice! Yup, I still love our Vibe and don’t plan to get rid of it any time soon! 🙂

  6. Hi there. Good points for sure, and they are even more important for younger buyers who also have student loans, not a high income etc. But there is also something like a fun factor and quality life. Let me explain with this anecdotal story: One of my uncles had the same approach to (not) spending. Although he really liked cars (like me) and used to take me to car shows etc, he never paid a lot for his used cars. In fact, he never paid anything expensive. He was single, made a ton of money and all he did was saving and investing, but living like a pauper. Cheap food, cheap clothes, cheap toothpaste, cheap everything. By the time he was 40, he could probably retire, and then when he hit 50, he got cancer. At 52, he passed away. He had zero fun in his life and he was ALWAYS on the penny. For everything! This is not the way to lead a life. You have to balance it. I don’t drink, smoke, don’t care for expensive fashionable clothes, I am simple with food (flexitarian) and my house is nicer becomes my wife wants it. But when I needed to replace my 16 year old car with 300+K miles on it, I told my family it was my turn, and Iwanted to do it right and one time in my life, I wanted to buy new. Obviously not MSRP, and so I was looking for deals. took me 4 months! Long story short, I ended up buying (out of state) a new car that happened to be an outgoing model, and since the redesigns were coming on the lot, I ultimately got 20% off. I paid almost 32K for a car that was almost 40K to begin with, but I negotiated the lower APR that would normally be applicable only to the redesign. Is there depreciation? Sure, in spite of the discount, yes. Would I lose money if I trade it in soon? Absolutely. But I am not going to. This car stays in the family so there is no need to worry about selling. Here is the thing: I enjoy every ride in my car. Almost a year has now passed at the time of this writing and the new car smell is still there, because I keep it meticulously clean (and my family hates me for that!). No eating/drinking in my car, no ice cream, no smoking, no sweatness (yes, you can take a shower), no junk stays in my car. It’s a car and not a closet. And this new car smell is not going away either, promise! I keep the outside clean as well, washing waxing etc. I really enjoy my purchase and the payments are easy on my income. Looking ahead, would I buy a new car again? Maybe not, nothing wrong with a CPO, for example. But for heaven’s sake, you only live once. You cannot take your money and wealth in your grave, even if they put the gold with you in the coffin. Spend wisely, but do spend and if every drive in my new car gives me a smile and a good feeling for the next years to come, it is money well spend.

    • Hey Car man! I agree (mostly). I used to be cheap too – cheap everything, just like your uncle… All I thought about was money – how to save it and how to make it. I put it above our family experiences even (check out my post, “Your Money or Your Wife“).

      Ultimately, I learned that life isn’t all about money. Money is meant to be given away, spent, and saved. In order to be satisfied in life, you really have to do all three.

      But, having said that, I believe that cars are a serious money pit – especially new cars. Unless I’m a millionaire and earning more than $150k a year, I’m not buying a new car. It’s just not worth the depreciation…

      • A 3 year old car that comes out of a personal lease with clean carfax would be a good option. CPO warranty, drives like new, great chunk of depreciation is gone. Such a car can last you easily 10 years with normal maintenance

        • Yup, definitely a better option than buying new!

  7. In regards to “how not to lose money when buying a car”, paying cash for a depreciating asset such as a vehicle is a major misconception. The value of a car depreciates almost as fast as furniture. Now, this concept is with no doubt, based on the over all value of the vehicle at purchase. A $2500 car is certainly not in this category. But a $20,000, $30,000, $40,000 car?? Never pay cash for cars in this price range. You might as well just take $10,000 cash and throw it in the toilet on the first day you buy it! Top ranked lease programs are the best way to go. Drive new every 2. Driving a new car every two years keeps you from wasting a lot if money in things like, new tires, servicing, tune-ups, and the list goes on. Never pay cash for something that depreciates as fast as your living room furniture.

    • Totally disagree, Raymond. Leasing a new car is like renting a fancy apartment. You’re definitely paying extra for the experience.

      If you’re looking to become rich and stay rich, buy vehicles that are 5+ years old that have already gone through the deep depreciation phase. There’s plenty of life left on these cars, but for a heck of a deal compared to a new car or a lease.


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