The Real Cost of Buying a New Car

The average car payment is $500 per month. Most people live with a car payment their whole lives, and besides housing, it’s their largest expense.

Our used cars in front of our used house

A Multi-Millionaire or a New-Car Owner?

If you invested $500 per month from age 25 to age 65 in a mutual fund averaging 12 percent (the eighty-year stock market average), you would have over $5 million, says Dave Ramsey, best-selling personal finance author and host of the Dave Ramsey radio show. That is why Ramsey thinks that “taking on a car payment is one of the dumbest things people do to destroy their chances of building wealth.”

I have just finished reading Ramsey’s Total Money Makeover and I was inspired. I love how he spells out a plan of attack for getting out of debt and then saving money for the future.

Buying a new car or leasing a new car seems pretty normal these days, but since Ramsey is passionate that new cars are a bad deal, I thought it could be a good topic for discussion.

But Who Can Buy Cars with Cash?

So how do you buy a car if you don’t finance it? You could put $500 in a piggy bank for just ten months and you would have enough for a $5000 used car, says Ramsey. Or 20 months for a $10,000 used car (which happens to be the kind of car I drive). You can read more about my car in this article I wrote at Parentables: How I Saved $11,000 on My New Car (and You Can Too).

My 2003 Honda Pilot

Granted, Dave Ramsey is an anti-debt zealot. But even though he is now a multi-millionaire and he clearly loves cars, he refuses to buy a new car. If you’ve read The Millionaire Next Door, you’ll know that the average millionaire drives a second-hand car.

Ramsey thinks it’s because people who are smart with money are not going to buy something that loses over half its value in the first four years. That is almost $100 per week in lost value, and to understand the concept, Ramsey suggests we open our window on the way to work once a week and throw out a $100 bill. So even if you are not paying interest in a car loan, the new car deal is still costing you dearly.

What about Leasing?

I looked into leasing the last time we needed a car, because I didn’t really get if it was a good deal or not. Consumer Reports and Smart Money magazine think that leasing a car is the worst way to get a car, and Ramsey shows us why.

Leasing is the car industry’s largest money-maker because, even though you are technically renting the car, the dealer is also charging you interest. So your monthly lease payment not only covers the loss of the car’s value as you drive it, Ramsey explains, but it includes hefty interest that you pay for that new-car smell. “The auto industry lobbyists are so powerful that the law does not require full lender disclosure,” according to Ramsey, but he estimates that the average interest rate is 14%.

Then there are the charges for going over the allotted mileage and the penalties for “excessive wear and tear,” which they supposedly get you for every time.

You Can Still Have Fun with Cars

Mark with a small fleet of his cars

There’s something with men and cars. From the age of one, my son Mark has been obsessed, and his little brother is equally fascinated. J.D. Roth of Get Rich Slowly is very open about his obsession with Mini Coopers. Ramsey still loves cars but he pays cash, and he buys (expensive) used cars.

I agree that if something gives you great pleasure, you should either make room in the budget or save up (not go into debt). My husband drives an Audi TT, a darling little sportscar, which he got for a great price used from eBay. It was eight years old when he bought it, but in great condition, and it continues to make him happy.

So I’m not saying that love of material things is bad. But there are smart ways we can satisfy our desires.

And after all this talk, I can see the writing on the wall. One day we will have more (I hope a lot more) money, but if we’re smart, we’ll still be buying used cars. Oh well, that’s OK. I’m one of those weird people who doesn’t even like the new car smell.

For more on how to save money on cars, there is Dave Ramsey’s video Drive Free, Retire Rich. Or if you are thinking of saving even more money by bypassing the car completely, J.D. Roth recommends How to Live Well Without Owning a Car.

So what about you? Do you love new cars? Do you think you could be swayed into buying a used one if you could get rich slowly? Let us know in the comments!

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18 comments

  • Car for rent in Brisbane from Alpha Car Finance January 20, 2014, 2:40 am

    I don’t have a car and it worries me not. I can always hire or lease a car (cheaper option) when I really need one on rare occasions.

  • kevin d. June 29, 2013, 11:16 am

    I tried the used car route Dave R. mentions and it cost me $12000 in a year trying to keep the car running. Dave never talks about this. , Used cars CONSTANTLY break! I bought a new car with a payment I can afford, no surprises, a fixed monthly payment, bumper to bumper warranty, no headaches!

    • Amy June 29, 2013, 3:21 pm

      Hi Kevin,

      I’m so sorry to hear about your luck with your used car. It sounds like it was a real lemon. My husband and I drive used cars and have not found them to be difficult. I’m glad you found a solution that works for you.

      Amy

  • CelloMom January 12, 2012, 2:41 pm

    Does it make sense to trade in your gas guzzler for a newer, more gas-frugal model?
    ONLY to decrease your carbon footprint! Don’t do it to save money on the gas, that’s still way too cheap; I did the math http://bit.ly/tnznAf and was surprised.

  • Car Loans December 22, 2011, 6:10 am

    Debt can be a fruitful option if you manage it properly. It is essential to note that availing a car loan can help you buy your car instantly. You are not required to wait for 10 or 20 months. Your car need will be fulfilled when you need it the most .

    A car is something that is a necessity in our country. New or old- both have its pros and cons.
    It’s true that a new car depreciates easily and there is a high chance of up-side down loan. If you buy a new, there is low maintenance as compared to pre-owned cars. When it comes to loans, used and new almost become same. It doesn’t make difference if you buy a new car at lower interest rates or a used car for high rates.So in the end, it all depends on you.

  • Nick Klaus September 12, 2011, 3:47 pm

    For some people, there’s a real draw in owning a new car. I just wanted *a* car. I paid cash for mine, and bought it via ebay: it’s a little risky, but if you’ve got the time to be proactive and if you do your homework, you can get a good deal on a car. I purchased mine (an ’01 Jetta) for below wholesale. This winter, I’m planning on selling it for about $1000 more than I paid for it. That’s negative depreciation for you.

    • Amy September 13, 2011, 1:33 pm

      Hi Nick,

      I agree that cars mean different things to different people. It is possible to change mindsets, however, so all is not lost if you really love the new car smell.

      I’m impressed that you got such a good deal on eBay!

      Thanks for writing in,
      Amy

  • heather September 11, 2011, 9:01 pm

    I am a die hard Ramsey lover! I read his book 2 years ago and will never think of money the same way again. I’m so grateful for his teachings and principles. I recommend everyone RUN to the nearest book store and buy this book!

    • Amy September 13, 2011, 1:32 pm

      Hi Heather,
      I’m so glad to hear that you like Ramsey too! I’d love to hear more about your experiences, if you are interested in sharing with us.
      Amy

  • Doug Carden September 9, 2011, 9:38 pm

    Many people advise against buying a used car that was a leased car because in most cases (supposedly) the drivers don’t take care of the car (with oil changes, etc.)

    Also, if you are going to buy a new car, don’t buy one at the end of its model year as the new ones are arriving. The dealers offer discounts to move them out, but if you trade in the car in two or three years, you lose more than your original savings. The best time to buy a new car is in the dead of winter when buyer interest is low and dealers are eager for customers.

    I love the thrill of owning a brand new car. To me it is worth the extra money, which, as others have pointed out, doesn’t seem that much if you keep the car a long time.

    • Amy September 9, 2011, 9:51 pm

      Dear Doug,

      Thanks for the tips about buying previously-leased cars and when to buy a new car.

      If you have no debt and are doing well on savings, buying a new car might just be one of those pleasures you want to prioritize. But I think it’s important to thoroughly compare costs beforehand, and really decide if that’s where you want your hard-earned money to go.

      Thanks for writing in!
      Amy

  • Michelle September 9, 2011, 7:18 pm

    I bought a brand new car a couple of year ago. I really regret it and now I just plan on driving this car to the ground.

    • Amy September 9, 2011, 8:45 pm

      Hi Michelle,

      Oh I’m sorry you’re feeling bad about it. Driving it for a good long time sounds like a good plan for getting your money’s worth.

      Another option, which several people featured in Ramsey’s book have done, is selling the car and buying a lesser expensive used car in cash. This frees up your income to put it towards debt reduction or savings.

      Either way, I’m sure you’ll be fine!

      Take care and thanks for writing in,
      Amy

  • Jen @ Jen Spends September 9, 2011, 2:15 pm

    I’ve heard a lot about Dave Ramsey’s book and have been thinking about checking it out. Glad to know you liked it! I have never purchased a new car. I might if I really had the money at my disposal, but nice pre-owned cars have worked just fine for me. We were fortunate that my husband had an inheritance that he was able to use to buy his first car with cash. Once we were both working, we paid for everything with cash, including replacing our roof. We had enough saved up to buy my current car outright, but we chose to finance it instead ($223/month). I’m so glad we made that decision, because our son ended up being a lot more expensive than we had expected! We also had other expensive surprises along the way, and without that savings I would have had to go back to work. Once we pay off my car it will be time to finance another car for my husband, but I think we can get away with a cheaper option for him. I would love to be able to just write checks for everything again, but that’s just not going to be a reality for us for a while, and I’m okay with that. Even living on a bare-bones budget, we do not have extra money left over to stuff away right now.

    • Amy September 9, 2011, 2:21 pm

      Hi Jen,

      It sounds like you are doing very well and that you have had some ups and downs with money, but are handling them with grace.

      I agree that $500 per month is a lot to sack away. Perhaps a family could sell one car, and get by with one while saving up the payments they used to make on the old car. In a pretty short amount of time, they’d probably have enough for an inexpensive used car — with no more payments. And there are certainly good deals to be found online and through friends/colleagues.

      I totally recommend Total Money Makeover by Dave Ramsey!

      Thanks for coming by,
      Amy

  • Tragic Sandwich September 9, 2011, 1:54 pm

    I bought my car new and kept driving it when I paid it off. I’m still driving it today, and have no plans to replace it–and next month I’ll have owned it for 10 years.

    I have no problem with buying a new car, but if I do, I want to buy a new car that I’m going to drive for a long time.

    • Amy September 9, 2011, 2:00 pm

      Hi TS,

      I like it — your plan sounds like a happy medium between buying a new car and a used one. Your car is certainly used now — but only by you.

      Thanks for writing in,
      Amy