The American car buying public bought 17.5 million cars and trucks last year. Let’s think about that for a moment. The average price of a new auto has climbed to over $34,000 dollars. Multiply that by 17.5 million, and you get a big number; a really big number. $595,000,000,000 to be exact.
It seems like we may be in the midst of a car buying frenzy. The most recent low for the auto industry was 2009 where about 10 million cars were sold. Last year was about 70% above that level. Obviously, 2009 was a very bad year (even though 10 million were sold), but what factors account for the meteoric rise?
Has the population soared 70% (bigger pool of buyers) since 2009? Nope.
Were cars built in the last few years extra crappy, and 2016 was the year we bought new to replace said craptastic cars? Nope, cars are pretty much reliable as ever.
Did the manufacturers slash prices going for volume increases? No again, the average new car price is over $34,000 an all time high.
Okay…are monthly payments suddenly more affordable? I think you can guess this one. The average new car monthly payment is $503; another all time high.
For the buyer, is this money well spent?
This is a curious state of affairs. None of the logical reasons seem to explain why we would buy so many new cars, and pay such a high price. We just might not be dealing with logic though. I personally consider a new car a want, and in dealing with wants, logic frequently fails.
As I’ve declared before, I’m never buying a new car again. But what is the reasoning as to why so many others are purchasing new?
Could buyers be making flawed assumptions influencing their decisions to purchase new cars? Car manufacturers spent $8.71 billion last year on ads to influence buyers. It must have some effect or they certainly wouldn’t spend such a mind-boggling amount.
Cars and transportation costs are the second largest expense of the average American household. Only housing costs are larger. You can find posts from the financial community (especially the frugal community) everywhere online expressing the opinion that buying a new car is extra damaging to your financial health.
So, we thought we’d look at some of the top reasons people buy new cars; a few counter arguments; and see what conclusions we can come to.
- New car reliability. One of the most oft stated reasons for buying a new car is reliability; presumably when compared to an older model which is beginning to have mechanical issues or major breakdowns. A new car is naturally believed to have better reliability than a used car. Is this a case of the car buying public making an assumption without actually checking the facts? Possibly.
Recalls due to manufacturer defects are actually rising and hit an all time high in 2015. Many of the recalls involved cars a few years old. But it’s important to remember a new car is rarely replaced every year. On average buyers keep their new cars about 6 years. With the incredible complexity of new cars there is actually a good chance you will experience a recall due to a defect in the average time you own a new car.
In this instance, it may be better to buy used. When you purchase a used car you can reasonably expect any current recalls to have been corrected. May be a good idea to double-check though. You can also better verify the long-term reliability of a specific model that’s a few years old. Kelley Blue Book, Edmunds and Consumer Reports all regularly rate different models for reliability.
A useful rule given to me by a mechanic friend was to never buy the first two years after a major model redesign. Gives the manufacturer a few years to work out the kinks, so to speak.
- Less maintainance and repairs.
“Anyone can buy a Ferrari, but only rich people can maintain it” (quote from brother-in-law who owned one)
This is linked to reliability. One could assume that a new car should be more reliable; therefore it should require less maintenance and repairs, at least at first.
I believe this reason comes to the forefront when someone has just been hit with a large repair bill. The thinking process goes:
“I was just blindsided by a $500 repair bill!”
“Stuff is gonna keep breaking.”
“I’m tired of my car anyway.”
“I need to start looking for a new car.”
Indeed, we’ve experienced this faulty reasoning before when mentioning some repair bills on our well used cars.
“Your car is really old, when are you getting a new one?”
“Stuff will keep going wrong, if you get a new car you won’t have to worry about it.”
“Your car has 1XX,XXX miles on it, you’re wasting your money fixing it!”
Our point of view is that maintenance is to be expected with older high mileage cars. The high cost of new just isn’t worth it for us. The average payment now stands at over $500/month. Interestingly, that’s more than my monthly retirement plan deduction when I started my career. Over the course of a year, that adds up to $6,000 dollars and doesn’t include the higher taxes and insurance that go hand in hand.
For the sake of argument, let’s say I spend $500 each and every year making repairs on our older car for as long as we own it. I’m coming out ahead by $5,500 every year! Let’s go crazy and say I have two $500 repair bills a year on our car. I’m still ahead by $5,000 a year.
Let’s go totally over the top and use our highest repair bill ever. When our 2004 Nissan XTerra flipped 100,000 miles, it cost almost $2,000 which included a new timing belt, fluids, brakes, a minor oil leak fix, and A/C system repair. If by some curse of the auto gods, the Nissan required $2,000 worth of work every year, I would still come out over $4,000 ahead each and every year. And the XTerra’s still going strong 88,000 miles later.
Update: As I was writing this, the old XTerra decided to bluntly remind us that mechanical things do wear out. It required a $1,000 repair bill to get it back to its old self. We sternly reminded it that we expect it to do better in the future. Come on, man! 190,000 miles…It’s almost brand new!
- Safety features. Fact: all cars are safer than they used to be.
Fact: while systems like forward collision warning, lane departure, automatic emergency braking and backup cameras are impressive, they aren’t foolproof.
Fact: no safety feature will cancel out bad distracted driving habits.
Fact: your most important safety feature is your seat belt which has been around since…forever.
- New car warranty. People like the idea of being covered by the manufacturers warranty. Be aware there are different warranties with different coverages and exclusions which vary by manufacturer. You must carefully read all the fine print to see what is and isn’t covered.
The first type is a powertrain warranty which covers the drivetrain components of your car. Engine, tranny, etc. Manufacturer defects are generally covered, but normal wear and tear isn’t. This warranty is void if you abuse your car or don’t follow the recommended service schedule.
Next is a bumper to bumper warranty which covers most systems not included in the powertrain. Again, defects are generally covered, normal wear and tear, no. Neither are parts that normally wear out (brakes, etc.). And again, obvious abuse isn’t covered.
Sometimes the warranties are transferable on a used car. It’s always good to check, you may be surprised to get that little bonus. Note that a dealer pre-certified used vehicle may not have a warranty unless specifically spelled out in the purchase agreement
The drivetrain warranty is usually shorter duration than the bumper to bumper warranty. Buying an extended warranty is a minefield. Coverages and costs vary widely, and is usually not recommended.
- Better Fuel Economy. Intentions here are noble, but aren’t backed up by the data. While long-term fuel economy is up, it actually fell slightly in certain months of last year. Gas is super cheap in most of the country, so fuel economy is less of a selling point.
If you look at individual model sales, many of the largest gainers were thirsty trucks, crossovers, and large SUV’s. The most fuel-efficient autos: Prius etc., actually had large sale decreases. In certain parts of the country, electric vehicles are gaining traction, but they have a pretty small sales base right now.
We’ll just point out:
a lot people drive in stop and go traffic, so their fuel efficiency is probably worse than the figure stated on the sticker.
I drove a 21 year old Nissan Sentra that regularly got 34 to 35 MPG. This is better than the majority of cars sold today. I filled up once every 4 weeks.
or if gas ever rises to $4.00 bucks a gallon again, there’s going to be some unbelievable bargains out there on gently used trucks and SUV’s as people drop ’em faster than you can say “…$100 BUCKS FOR A TANK OF GAS IS FREAKIN’ KILLING ME!!”.
- New technology and electronics. Buyers tend to want the latest technology and gadgets. But again, do their actions back up their words? Sort of. Surveys found 20% of new car buyers have never used almost one-half of the technology features in their new auto. One in five buyers either didn’t want, haven’t used, or didn’t even know their car was equipped with a specific feature. Some of the fancy electronics and gadgets tend to be plagued with defects also, affecting reliability. Faulty electronics is one of the largest areas of complaints with new cars.
Another concern is the repair bill when electronics are damaged or fail. A minor bumper blemish suddenly becomes a lot more expensive when it involves a sensor or backup camera.
- Zero percent financing, 0.9% financing and leasing. Saving the best for last. New car buyers love these programs because they seem like great deals…and sometimes they are. Car dealers love them because it gets buyers in the showroom.
Of course, not everyone qualifies for cheap financing. Usually it requires a pretty good credit score somewhere in the low to mid 700’s. Also, accepting the financing may cancel out cash back programs offered by the manufacturer, which may be the better deal. The only way to know is to run the numbers before you get to the dealership.
If you focus on the financing only, you may wind up being penny wise and pound foolish. The dealerships have many weapons in their arsenal and they aren’t afraid to use them.
Now for leasing…leasing does make sense in some cases. If used mainly for business, business owners may be able to deduct it.
For individuals, it’s a mixed bag. You are basically renting a car long term, so the payment is much less then actually buying. You can upgrade to a car you wouldn’t be able to afford otherwise (nearly 50% of luxury cars are leased). You can get a new car, with corresponding new car smell about every 3 years or so.
On the down side, constantly leasing is more expensive in the long term than buying a car outright. If you need to get out of the contract for any reason, it will cost you. There are mileage restrictions that if you exceed will cost you. There are penalties for excessive wear and tear. And as long as you’re leasing, you’ll have cash payments going out which could be invested instead.
We’ve never leased an auto before, so we don’t have anything to base a judgement on. We can only state for a fact, the feeling of paying off an auto is not to be understated. The only thing that could feel better is paying off a house!
For me, I’ve come to realize that most people view their cars very emotionally. I used to be one of those! I loved cars, and in my mid-20’s had four* at one time (before marriage). While I still appreciate cars, my financial take on them has evolved quite a bit. They are expensive, and take time and money to maintain. Rarely can they be considered an asset.
It’s not all bad though. If you are willing to do a little homework; you can find reliable, well maintained, fuel efficient used cars for a fraction of the price of new.
The 20 something me would probably laugh, shaking his head while roaring off in a cloud of blue smoke.
*For those who are interested, they were: a 1974 silver Corvette with a 454 big block engine (11-12Mpg), a 1972 blue Javelin SST (my daily driver and horribly unsafe), a 1985 Nissan 300ZX turbo (bought new for $15,000…damn inflation!), and a Fiat X19 w/targa top (people would regularly roll their windows down at stops and ask what I was driving). (I had another Javelin SST which was used for parts. I don’t really count that since it wasn’t driveable).
Lets hear it! Do you believe in buying new or used? Have you ever leased a car, and what was your experience?