When you’re fresh out of school and thrilled to be jumping into your first “real” job, it’s tempting to want to splurge on a big luxury, like a brand new shiny car to get you to and from work. But does it make financial sense for you to do so?
Chances are it doesn’t. Here’s why.
Luxury vs. Essential
When we hear “new”, we often think “better.” But that’s not always true. While a car may be necessary for your commute, you don’t have to go new. A used car will get you to work the exact same way.
Get the Most Bang for Your Buck
When you start car shopping, you’ve probably got an idea of what you can afford to spend. Say you’ve budgeted $15,000. You could get a new basic economy car or a three-year old more fully equipped car with low miles.
The difference can be even more dramatic. The last time I bought a car, I initially fell for a cute little 2011 model that didn’t even have power locks. But after shopping around (or rather, working with my car dealer dad to look into other options), I went a few years older. For half the price of the first car, I got heated seats and a moon roof.
Go for a Car that Keeps Its Value
A car’s value depreciates most dramatically in the first four years of ownership – by 45% according to Consumer Reports. When you buy used, the car will hold its value longer.
Depreciation matters most if you have a loan on the vehicle and end up owing more than the car is worth. If you’re upside down on your loan and total the vehicle, your regular insurance won’t cover the balance you still owe. (This is why we recommend GAP insurance if your vehicle will depreciate faster than you pay down the loan. GAP covers that difference.)
Don’t Pay Extra Interest
Because of Risk Based Loan Pricing, you’ll likely be quoted a lower rate on a new car than a used car. But when you pick your car, don’t just ask yourself if you can afford the monthly payment, and then go for the most expensive vehicle that you can. Consider your car purchase in the context of your future financial goals.
If you overextend yourself by choosing a car that you can just afford or by going with the longest term loan you can make minimum payments on, you’ll end up paying far more in financing than you need to.
Avoid Paying More for Car Insurance
Since a new car is worth more, you’ll pay more to insure it – especially when you’re young. Don’t decide your car purchase on the price of the vehicle alone. Make sure you can afford all the things that go along with car ownership – insurance, gas, maintenance, and emergencies.
Choose Something Reliable
Often car buyers go for a new vehicle because they feel more comfortable knowing the car comes backed by the manufacturer’s warranty. But when buying used, you can have the same peace of mind by making sure you do your research and choose a car with a high reliability rating. Then, make sure you keep up on maintenance. By properly caring for your car, it will last well beyond 100,000 miles – and maybe even 200,000 without a major issue. And if you do need to make a few repairs, by buying used, you’ll have the savings to afford them – and then some.
The bottom line: Whatever vehicle you choose, make sure it fits in with your overall financial goals.
Source: Tara Struyk for GoBankingRates.com: 6 Reasons Why You Should Never Buy a New Car If You’re Under 25