Q24: Is that car worth the money?

A new car looks lovely but it spends most of its time rusting in the driveway.

There’s nothing like that new car smell. The odometer reads less than 500km, the leather seats are firm, the windows are clear and the carpets are clean. The paintwork is magnificent. A new car makes you feel special, and so it should, given the price.

But is a new car a good purchase? At TMQ we’ve run some numbers that might make you change how you think about the new car feeling.

The value of your new car fades with each passing year.

A modest new car is going to cost around $30,000. Of course you can spend way more than that, but you can get a decent vehicle for this price. If you borrow the money for it you’ll be paying around 8.10% for an unsecured loan (I checked a few web sites for different loan rates and this one was around the median). Most car loans are for a five year term. So we’ve set our parameters. Let’s check the maths.

The repayments on the loan come in at around “only” $610 per month. That’s a bargain to drive a shiny new car! But is it? Remember that’s $610 every month, even when you want to go on holiday or buy some Christmas gifts or need some extra money for an emergency. It’s a $610 drag on your bank balance that you cannot avoid. Even when your car is sitting in the driveway doing nothing, which is what it does most of the time, you’re $610 down every month.

By the time you’ve paid the loan off you will have repaid $36,583 for your $30,000 car. Your 8.10% loan has cost you nearly 22% of the purchase price. Of course you will have to pay for insurance, registration, fuel, some servicing, tyres and any other costs like parking and speeding tickets. Having a car can really punch a hole in your finances.

And let’s not forget the hidden cost: depreciation. Your precious new car begins to lose value as soon as you leave the showroom. In its first year your beautiful vehicle can lose up to 20% of its purchase price and then the downhill slide continues. By the time you have repaid your loan your (now 5 year old) car is out of date, not so shiny and may have a few scratches and dents. It’s probably worth about half of its original price. Ouch!

The blue line is what you pay. The yellow line is what it’s worth.

To look at the transaction in total, you’ve paid $36,500 plus running costs for a car that’s now worth less than $15,000. That new car smell is starting to really stink.

What can you do?

You don’t have to get caught in this trap. There are a number of ways you can still get a nice car without paying too much. Here’s a few options:

Buy a demonstrator car. It might have a few more kilometres on the clock but it’s just like a new one, still smells good and can cost a lot less.

Buy a car in the run-out sale. When new models are released last year’s model becomes cheaper. You can still buy it new but the dealer will drop the price, sometimes substantially, to get the car off the lot.

Buy a used car. As long as it’s not too old and has been well looked after you can let someone else pay the depreciation and pick up a bargain. Some dealers will sell almost-new staff cars for big discounts.

Let’s talk opportunity cost

One final point. If you can afford the repayments on a car but you choose to invest that money instead of spending it, the mathematics of compound interest start to work in your favour, rather than against you. If you were to put $610 a month into an investment that earned 6.00%, after five years you’d have $42,540. That’s gotta be better than a $15,000 used car.

2 comments

  1. Sound advice, but besides the feel-good factor, a car provides a transportation service, hence the cost of the alternative (Uber, car rental) should be factored in too.

    Like

    1. I agree with that, Luca. And the good thing about those alternatives is that you are not paying the depreciation expense.

      Like

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