Are you dreaming of that “new car smell” and having a brand-new car to avoid maintenance?
There are many advantages of buying an expensive car but there are several hidden costs as well. These costs can add to your purchase cost and make it difficult to be financially stable.
Here are a few points to consider before buying your next vehicle.
Average Cost for a New Car
How much does a new car cost?
According to Edmunds, a brand-new car costs $40,573, on average, in December 2020. If you think paying $40,000 or more for a vehicle is expensive, you’re correct.
Brand-new vehicles are more expensive than ever, according to Edmunds.
The same Edmunds study also lists these car financing costs:
- Average down payment: $4,734
- Average monthly payment: $581
While vehicle prices rise each year due to inflation and other factors, costs also rise as more Americans prefer SUVs and trucks which cost more than compact cars.
Luxury cars are also popular and more expensive than a standard car.
As brand-new cars cost more, used car prices increase. If you track car prices using car buying apps, you may be familiar with how prices can fluctuate.
What Determines a Car Price?
Several factors calculate a car’s value:
- Vehicle type (i.e., car, truck, SUV, minivan)
- Manufacturer (i.e., Ford, Chevrolet, Cadillac, BMW, Mercedes-Benz)
- Features (i.e., leather interior, oversized wheels, optional safety features)
- Current demand for vehicle type
- Age of vehicle
There can be other reasons why some vehicle models are cheaper or more expensive than others. We’ll dive into these reasons.
The True Cost of a New Car
Instead of only looking at the sticker price for your potential vehicle, you need to calculate the true cost of owning a car. Here are several “hidden costs” to consider.
Auto Loan Interest
You may qualify for a 0% APR auto loan from the car dealership. If not, a portion of each monthly payment is loan interest.
When comparing auto loan quotes, look at the total interest charges.
Making extra loan payments reduces your total loan costs and the final purchase price for your vehicle.
It can also be possible to refinance your auto loan in the future for a lower interest rate. But, there isn’t a guarantee that rates will be lower when you’re ready to refinance.
Taxes and Fees
Expensive cars have higher upfront taxes and registration fees because they are more valuable.
If your state also charges an annual property tax on your car, the recurring tax for pricier vehicles is likely higher than if you buy a cheaper car.
Expensive Car Insurance
The monthly car insurance cost is higher for expensive vehicles because they are worth more.
If you get a car loan, the lender will also require you to carry collision and comprehensive coverage.
This optional coverage is a wise move for any newer vehicle. You may choose this coverage even if you pay with cash.
But being required to obtain additional coverage may be a surprise expense if you drive an old car that only has liability coverage.
Whether you buy an expensive car or not, it’s always wise to compare car insurance rates for potential vehicles.
Also, compare rates at least once a year to make sure you’re getting the best price on your current vehicles. You can use a free comparison tool like Gabi to effortlessly compare multiple insurance providers in one search.
Depreciating car values is one of the worst hidden costs. If you were to buy a brand new vehicle and sell it one year later, it would be worth approximately 25% less.
Selling your car after five years results in a 60% depreciation from the purchase price.
If you buy a $40,000 vehicle, it may only be worth $16,000 in five years.
Some makes and models don’t depreciate as quickly. But unless you plan on keeping your brand-new car for nearly ten years, your car is a liability if you sell it sooner.
Higher Car-Related Spending
If you buy an expensive vehicle, your car-related spending may increase to keep your ride looking nice. It’s also hard to live frugally.
Some of the extra costs can include:
- Valet parking
- Interior accessories
- Exterior vehicle cover
- Car detailing supplies
- Frequent car washes
- Extended vehicle warranty
The car dealership may also be more likely to pressure you into buying add-on services if you have a pricier car. You only want the best to protect your dream car, right?
Depending on which car you want to buy, you may have to visit the dealership for repairs. Dealership mechanics perform quality work but can cost more than other mechanics.
If you buy a luxury car such as a BMW or Mercedes-Benz, repair parts cost more than domestic manufacturers.
Research potential maintenance costs and potential vehicle problems for the car models that interest you.
New cars are less likely to need repairs than pre-owned vehicles. But the occasional repair can be cheaper than the higher monthly payment and depreciation of a brand-new car.
Owning an expensive car can make your life more stressful in several ways.
First, expensive cars have a higher monthly payment if you borrow money. If you pay cash, you have less cash in the bank than if you buy a cheaper car.
Second, scratches, dents and dings are inevitable if you drive regularly. These imperfections can be stressful on an expensive vehicle but not so much on cheaper cars.
Third, you may be more afraid to drive an expensive car in certain public places. Yes, a fancy car is a status symbol but it can also put you at higher risk of vandalism and theft.
Lost Passive Income
The higher upfront expenses that accompany an expensive vehicle means less money to save and invest. Spending money on a car means less money to earn passive income.
Are Expensive Cars Worth It?
Here some factors to consider to decide if an expensive car is worth it.
True Ownership Cost is Higher
The true cost to own a car is often higher than expected due to the hidden costs. Look beyond the asking price to determine the actual ownership costs.
To be fair, cheaper cars that need extensive repairs or have higher ongoing maintenance costs can have a high ownership cost too.
Used Cars are Reliable Too
Cars that are only a few years old or less fancy can be as reliable as new models. You can buy used cars on Craigslist that are safe and affordable.
They also cost less money as the original owner experienced the depreciation costs.
Any reliable car can let you complete these tasks:
- Drive to work
- Take the children to school
- Run errands
- Go on vacation
While you may not have your “dream car,” you get around town safely and save money.
Choosing the right car for your budget can help you comfortably live within your means.
If you want to stop living paycheck to paycheck, an expensive car makes it harder to have extra money each month to save.
Average Value of a Millionaire’s Vehicle
According to Thomas Stanley’s The Millionaire Next Door, the average price that millionaires spend for their cars is $34,000.
This book was published in 2010 so that average value is likely a little higher. However, most millionaires are not buying the most expensive cars they can afford.
Given their net worth, why is it that most millionaires choose to spend so little on their vehicles?
Likely because they understand the problem of lost opportunity cost. What is opportunity cost? Let me explain.
What is Opportunity Cost?
When you buy a new car according to today’s statistics, you’re not just spending the average price of $40,573.
You are also paying interest and losing potential passive income.
Auto Loan Monthly Payment
If you take out a loan with an average rate of 4.79%, with an average loan term of 67 months (assuming you put 20% down), in reality you are paying $45,170 for the car.
If you put zero down (an “attractive” deal that many dealerships are offering these days), you’ll pay a total $46,320 for the car. But the nearly $5,000 in interest is not all you’ve lost.
Let’s assume for a moment that you chose instead to spend $5,000 in cash on a quality used car and chose to put the $691 a month you would’ve spent on your new car payment (assuming you put zero down on the car) into a mutual fund instead.
Invest the Money Instead
According to Investopedia, the average return on the S&P since its inception is 10%. However, for the purposes of this exercise let’s be conservative and use a 7% rate of return.
If, instead of spending $46,320 for that car with a 67-month loan, the buyer instead puts that money into the stock market each month, at the end of 67 months he or she would have a whopping $61,762 in the bank.
So, not only does the new car buyer lose the $46,320 he or she spends on the car, they also lose the $15,465 in potential investment income by investing in stocks.
So we take that $46,320 in monthly car payments plus the $15,465 in passive income.
Then we subtract the $5,000 purchase price of a quality used car to get the opportunity cost of the vehicle.
So, in essence, that new car just cost the buyer over $56,000 in savings and investments.
And what’s worse is that by the end of the 67 months, that new and shiny $40,000 car will be worth well under what they paid for it.
Even if you don’t feel comfortable investing, saving the monthly payment in a high-yield savings account can be better than going into debt.
What’s Your “Why”?
So if you’re considering buying a new car, you have to ask yourself one question.
“Is this $40,000 car really worth $56,000 of my money?”
The answer to that question will depend largely on your “why”.
Most people have a dream of having more liquid cash in their possession.
So the question becomes “Why do you want to have more money?”
Is it to buy more stuff? Or is it to buy more freedom?
Would you rather have a new car? Or would you rather not be tied to your job?
Is living a paycheck-to-paycheck lifestyle okay? Or would you prefer to be debt-free?
Only you can answer that question.
Everyone has different goals and dreams.
But after several years of living in the world of online personal finance blogs, I’ve never yet seen anyone say things like:
- “I like not having any extra cash.”
- “I like being stressed and worried about whether or not I’ll be able to pay the bills.”
- “I like not having any extra money set aside and then freaking out when the water heater goes out.”
- “I like not knowing whether or not I’ll ever be able to retire.”
Those statements are a reality for 76% of Americans.
Part of the reason why so many Americans live paycheck-to-paycheck is that they fall for the lie of the “affordable payment.”
They fall for the draw of the “new and shiny” and forget about the future rewards of financial freedom.
Spending less money today means you can have more money and flexibility later.
Peace of Mind
There’s a certain peace of mind that comes with not owing money to any bank or credit card company.
That freedom comes with having your money be your own instead of having to dole it out to lenders each month.
There’s a certain relief that comes when you know that your money is yours to do what you want with.
If you’re ready to buck the paycheck-to-paycheck lifestyle and start living a life of financial freedom, check out our Debt Free in 18 Months course.
This online course will help you develop your own personal financial game plan for getting rid of your consumer debt in a short period of time.
Expensive cars are most likely not worth it if you are trying to save for other financial goals. Buying a cheap yet reliable car reduces your upfront expenses so you can save and invest the debt savings.