…New Cars are Out of Reach for Most Americans

Here’s a news flash according to AutoGuide.com, “The Average American can’t Afford a New Car” Really?  No kidding.  Have you seen the cost of a new car?

The typical new vehicle is now more expensive than ever, averaging $30,550 in 2012, according to TrueCar.com data, and heading up again as makers cut back on the incentives that helped make their cars more affordable during the recession when they were desperate for sales.

According to the 2013 Car Affordability Study by Interest.com, only in Washington, D.C., could the typical household swing the payments, the median income there is a stunning $86,680 a year.

At the other extreme, Tampa was at the bottom of the 25 large cities included in the study, with a median household income of $43,832.What this Interest.com report really indicates I think is that most people are spending way too much money on their cars.

If you have read many of the articles here you will recall that I am constantly “preaching” about saving up the money to make purchases and trying to avoid financing things if at all possible.  The goal is to become and live debt free.

I understand that most people are not willing to forgo the new car and that’s OK I suppose, if you are able to pay for it without sacrificing anything else.  The study by Interest.com used the common 20-4-10 rule of thumb to figure out how much car each median income could afford.  If you are not familiar with the 20-4-10 rule, I’ll go over it real quick…

20-4-10 – Simply put means you should put down a minimum 20% down payment, the loan should not be for longer than 4 years & principal, interest and insurance should not be higher than 10% of your income.

For most people buying a car is one of the biggest purchases, after your home that you’ll make.  And don’t forget, a car is a depreciating asset.  Meaning today you purchase a car for $20k and by the evening it will be worth $16k. After 5 years it won’t even be half of that.

Another good rule of thumb is to limit the cost of the new car to less than 50% of your annual income.  That still seems like a lot to me.  But if you just have to have a new car, there’s no way around it.

With the ever increasing cost of new cars, in addition to the ever increasing cost of everything else, it is now more important than ever to be financially responsible, have a budget and manage your money wisely.

I would contend that there are more reasons to not purchase a new car, especially in these economic times and instead do some research and purchase a used car.  …you might even be able to pay cash for it and not have a car payment at all!  Here’s a list of what I think are the deciding factors in passing up that new car purchase and buying something used.

1. Depreciation — This is a big one.  As I mentioned earlier, you lose thousands of dollars of value in a new car the moment you drive out of the dealer’s lot. Think about the average price of a new car for a moment, $30,550 in 2012. That car could now be worth around $15,000. Who would you rather be the original buyer, who lost $15k or the second buyer who saves that much? Depreciation is why you can buy a  2008 Porsche for the price of a 2013 Toyota.
2. Dealer Fees — You’ve heard about the $500 rust-proofing that you didn’t need but there are other ridiculous fees that you can’t avoid when you buy a new car at a dealer….  Shipping charges, dealer preparation, destination fees, pinstriping or any other crazy fees they can think up.
3. Reliability — This is the best kept secret with used cars.  Depending on how old of a used car you are looking at, there may still be some of the factory warrantee left; most cars nowadays have at least a 100k mile warrantee.  If you make sure the used car you are buying was maintained at the dealer during its warrantee period, you can be assured that if there were any recalls or severe problems with that particular model, it has been taken care of.
4. Cost — This goes along with the depreciation I know, but if you are willing to do some research and find out what cars have a history of the least problems as they get long in miles, it is possible to find a great car, but with a lot of miles on it.  Most people are going to be afraid of a car with over 100k miles, but if you find the right car you can expect another 100k miles or more out of that car.  These cars usually cost considerably less than their low mileage counterparts. So much so that it is possible to save up the money to buy the car and avoid financing all together!

New cars look and smell great, but how much is that new car smell worth to you? You might have to make more of an effort and spend a little more time on research, but from the initial price to the long-term costs, you’ll feel like a genius for buying a used car that’s in good condition.

…and you can buy that “new car smell” and spray it in your financially responsible used car and pretend it’s new.