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.
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.
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?
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.
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.
- 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?
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.