For many, buying a new car is exciting, but all too often it involves taking on a lot of debt and a monthly car payment. A car also depreciates, or begins to lose value, the moment you drive it off the lot. Meanwhile, you will continue to pay on a loan that is based on the original purchase price, something the car will never be worth again.
In 2014 the average price of a new car, according to the National Automobile Dealers Association, was a little over $32,000, and a typical interest rate on a 60-month car loan is around 5%. Let’s say you’ve saved up $7,000 for a down payment; at 5% your monthly payment for a $25,000 loan would be $472.
In 5 years you will end up paying over $35,000 for a vehicle that will lose value every year. According to CARFAX, a car loses up to 60% of its value during that same 5 years. So after 60 months you have a car worth $12,800 – that’s a $23,200 difference than the price you paid.
A new ride can be pretty sweet, but is it really that sweet? There is another way to buy a new car, save a lot of money, and ensure a hedge against depreciation. It just takes some creative thinking and a good dose of patience.
Here is what you do: take the $7,000 you have for the down payment and buy a quality used car for that amount. Then, each month, take the $472 you were prepared to pay on the car loan and instead of sending it to a finance company, send it to yourself. Put it in a high interest savings account where it will grow in value over 60 months. In fact, in fewer than 5 years you will have enough money to pay cash for a new car, even factoring in inflation.