If you were to guess what the average new car price is nowadays, what would you guess? I guessed $25,000, since my Honda Fit is sweet for an economy car and only costs $19,600 new. Given I’m frugal, leaving a 20% upside pricing buffer seemed logical. Too bad I was way off!
According to Kelley Blue Book and the Bureau Of Labor Statistics, the average new car price in 2023 is $48,094! That is an absurd amount of money to be spent on a car.
Back in 2021, the reported estimated average transaction price for a light vehicle in the United States was $37,876. Spending more than $40,000 for a new car if your household earns less than $200,000 a year is unwise. With this type of car spending, it is unlikely you will save and invest enough to live a comfortable retirement.
The median household income is about $75,000 in 2023. As a result, after taxes, the median household is spending about 80 percent of their income on a new car. Is there any wonder why the average American retirement is so woeful?
What’s also surprising is that the average used car price has skyrocketed as well. Due to the pandemic, more people are buying used cars and taking less public transportation.
Related: Is It Possible To Use A Credit Card To Buy A Car?
The Average New Car Price Is Crazy High
Take a look below at the most popular car brands and models on the market today and their prices. The chart just gives you a sampling of various car prices. Now take the figures and add another 25% to get the average new car price in 2023.
It really seems absurd that the average new car price is $48,094 according to Kelly Blue Book. However, who am I to deny their millions of data points? It’s what so many people who read my 401k by age chart do when they aren’t on track. They go in denial.
I’ve come to accept the reason why the average new car price is so high now is because demand is so strong and the average American is so rich! Forget the great recession and the pandemic. The economy is booming and people have money to spend.
Average New Price Historical Growth Versus Inflation
Below is a chart showing the average new car price of $48,094. The average new car price was “only” $30,570 in January 2012. Even back then, the average new car price was way too high.
Starting in 2014, notice how the average new car price started increasing much faster than the rate of inflation. In 2021 and 2022, the industry saw an even bigger increase in average new car prices due to a decline in public transportation and supply shortages. Thankfully chain issues and shortages are working their way out in 2023.
Below is an older chart highlighting the average cost of a new, used, and trade-in vehicle. Notice the big jump in trade-in vehicle prices starting in 2020.
Related: What Your Car Says About Your Investing Style And Money Making Acumen
The Average Price Of Used Cars
Here’s a more amazing stat. The average price of used cars is up even more! Due to supply-chain issues, the pandemic, and greater demand, there are simply not enough cars to meet demand.
You could literally lease or buy a car for three years and come out even based on a 40% increase in used car prices.
The Average New Car Buyer Is Rich
Given everything is rational, we can also assume the average new car buyer makes around $240,000 a year, or 5X $48,000, based on a 50% discount to my 1/10th rule for car buying.
If all new car buyers followed my 1/10th rule, they’d all be making ~$480,000 a year. But, I’ve still got a long ways to go to convince people not to throw too much of their money down the toilet, despite Financial Samurai being around since 2009.
With so many people from public train janitors to 26 year old programmers to food bloggers making $250,000+ a year today, $200,000 a year in income for the average new car buyer can’t be too far off.
There’s a bull market in the stock market. Meanwhile, real estate prices have recovered to pre-crisis levels and then some in some cities like San Francisco, LA, and New York City.
Don’t Spend Too Much On A Car
To spend more than 20% of your gross salary on a car when you could be making mega bucks investing is completely irrational. Nobody I know would choose owning a new car over being able to retire years earlier.
Besides, those who don’t make $200,000 a year will simply buy a used car for less. That’s what I did for all but one of the previous cars I’ve owned. Everybody knows that a car is one of the worst financial independence inhibitors.
Therefore, it’s clear that all new car buyers are making around $200,000 a year. Used cars buyers make much less because cars depreciate very rapidly.
Average Car Depreciation Rate Of A $30K Vehicle
Take a look at the chart below. In five years, a $30,000 car is worth about $12,000 using an average depreciation rate. Therefore, one can rationally assume the average buyer of a $12,000 car is making ~$60,000 a year, very near the median household income today.
Average Auto Loan Size Is Absurd
Unfortunately, it turns out that most new car buyers are probably not making anywhere close to $190,000 a year. The reason why I know this is because the average auto loan is now over $30,000!
Holy hell. Who on Earth goes out and buys a $48,000 car and then borrows $30,000+ of it? Are consumers really that financially irresponsible? Borrowing lots of money to buy a depreciating asset is the best way to financial destruction. At least when you borrow money to buy a house, the house has a chance of appreciating long term.
The last salvation of hope for Americans is that maybe the $30,000+ loan is paid back over a very short period of time, like 1-2 years. Nope. The average term for an auto loan is 68 months (5.7 years) – the longest average term ever! In case you’re wondering, the average auto loan payment per month is $503, for a total payment of $34,204 over the 5.7 years.
The Opportunity Cost To Borrow Money To Buy A Car Is High
The $30,032 borrowed today for a car would be worth ~$50,293 in 10 years. This is based on a 5.3% annual growth rate if invested in the S&P 500 instead. If we use a 7.2% growth rate for the S&P 500, the $30,032 invested would be worth $60,140 in 10 years. Opportunity cost is truly a car buyer’s worst enemy.
Even if the borrower decided to invest his average auto loan monthly payment of $503 in the S&P 500 for 68 months, he would probably have over $40,000 invested given 68 X $503 = $34,204.
Is there any wonder why those who are frugal or follow my 1/10th rule for car buying end up much farther head financially than those with zero financial discipline? In 10 years, the $34,000 car will be worth less than $10,000 due to a ~70% depreciation schedule. The investor of the $30,000, however, could have investments worth 5-6X more!
What’s Bringing Up The Average Car Price?
It still baffles my mind that the average net car price is about $48,000. As someone who drove a $8,000 used Land Rover Discovery for 10 years and more recently, a $20,000 Honda Fit, the average new car price of $48,000 figure is hard to grasp.
Undeterred, I kept on looking for a reason for such a high average new car price when I came upon the SF Bentley dealer and their new Bentayga SUV for $235,000 MSRP, $250,000 nicely equipped.
The car sales people told me they can’t keep them in stock because demand is off the charts. It’s the same for their colleagues at the Ferrari, Lamborghini, Mercedes, BMW, and Maserati dealers.
In other words, forget about the top 1% who can barely afford a $250,000 vehicle. It’s the super rich who have gotten super richer due to the raging bull market!
The top 0.1% are converting more of their funny money into real assets before it all goes poof like the last downturn. The super rich are also seeing folks like George Michael die at 53 with mega millions. As a result, they’re telling themselves to live it up while they still can.
Money Out The Tail Pipe
So there you have it. The super rich and the middle class who don’t read Financial Samurai are spending like there’s no tomorrow. The super rich don’t care about rising interest rates. They pay in cash or lease vehicles as a business expense.
The middle class don’t care if they’re spending a lot for a new car because they don’t know any better. Eventually, the middle class will get crushed again, but for now, let the good times roll!
If you have a business, you might want to consider getting a heavy SUV or truck so you can deduct it’s cost. This is one way the typical American business owner can lower the cost of a new car.
Achieve Financial Freedom With Real Estate
Instead of spending money on the average new car price, invest in real estate instead. Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income.
The easiest way to invest in real estate is through a publicly-traded REIT, private REIT, or real estate syndication. Take a look at my two favorite real estate crowdfunding platforms. They are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREIT. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most investors, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. 18-hour cities also have potentially higher growth due to job and demographic trends.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects. My goal is to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
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The average new car price will keep going up post-pandemic due to supply bottlenecks. Inflation is likely going to last longer. Therefore, it’s important to invest to ride the inflation wave while keeping prices down.
A few facts to get the picture straight for the United States.
The indication that the average price of a new car in America is 48k is inaccurate.
The skew comes from those who follow the Democrat mantra, who purchased or leased an EV. The majority of Americans don’t purchase EVs. They purchase the entry level Kia’s, Nissan’s. Honda’s, Toyotas, and Chevys (if they purchase a car). Those vehicles range from the low 20s to the low 30s. Most new car purchases are under 28k.
The reality is that most Americans don’t buy cars. They will purchase either an SUV or a Truck. Which is why Ford created the Maverick (a cross between the two). Its sales in 2022 were nearly 52k, and its priced below 26k for ecoboost model
America purchases vehicles in 4 categories
1- Trucks and SUVs (Family & Work vehicles), vans have gone back to working class vehicles again
2- Cars to drive back and forth to work, usually suburban drivers.
3- Luxury vehicles for the wealthy, and some retirees.
4- Specialty vehicles like EVs, for the tree hugger crowd, who are willing to ignore the whole DRC-Cobalt/Child labor issue, as well as the extreme environmental issues of mining the other specific minerals (Manganese, Phosphorus, Zinc etc) relative to EV battery construction.
Never once thought about the political angle to the price of a car. Is politics, something you think about a lot?
Do you think the average call price in America is higher or lower than $48,000? Because many trucks and SUVs are priced higher.
Interesting comment from TJ Hessmon politicizing car prices.
I am that “tree-hugging” socialist Tesla driver, but I bought 4 1/2 years ago due to a combination of that, tax credits available at the time (now revived via the 2023 IRA), and knowledge that EVs have many fewer parts to break promising much less in repair costs.
Ironically, if you take Elon Musk’s politics seriously, the stereotypical Tesla driver will soon be a Texan Cybertruck driver sporting a gunrack, so BEVs will be something for everyone!
Aside from that, there’s no reason to dispute Financial Samurai’s charts reflecting the KBB statistics. Many of us drove beat-up VWs, Hondas, and Toyotas for years, so sticker shock does happen. And yes, Americans do overspend on car culture.
P.S. Most Teslas are now cobalt-free via the use of lithium iron phosphate batteries. But for ones that aren’t (like most all cellphone batts), fortunately cobalt is recyclable by the likes of Redwood Materials, going closed-loop in South Carolina soon.
Yes, the brand image of Tesla has definitely turned right. I know many people who are selling their Teslas now because they don’t like what Elon stands for.
Very sad because I am a shareholder. Check out this post: losing all your money buying stock on margin might not be the worst thing.
All N. American market vehicles are “Luxury” cars.
You’re not going to mention the chip shortage??
Thanks for mentioning. Good thing these shortages are abating in 2023.
Here’s my take. Auto market will stay tight as long as manufacturers can keep it that way. They use what chips are available for highest price vehicles they can sell, and now they can sell anything. Why use a chip in a $25k vehicle when it can go in a $55k one? MSRP + $thousands.
It’s very similar here in the UK with the average new car price at approximately £25,000 (US$ 35,000).
One of the craziest statements I have heard from someone who was borderline broke, was “a new car was all I could afford”.
So they purchased a 10K car and lost about 2K driving it off the forecourt.
But at least they could afford the payments.
They just see the monthly repayment figure, which soon adds up to the equivalent of buying a half-decent used car within just a few months.
Our current car we purchased at 3 years old and paid cash.
I hope my kids do something similar as the eldest is coming up to the driving age. Save up £1K and pay in full. Start saving for the next one.
I question this entire article since you said a Honda Fit is “sweet”.
It is pretty sweet for its class. I also think my Range Rover Sport is sweet too. Can’t wait to see what the newly redesigned 2022 model has for us.
Related: Own One Car For Dough, One Car For Show
As others have noted: Stupid packages, utterly useless and completely unreliable “technology”, plus the requirements for same promulgated by our “benevolent OverLords” have not only driven acquisition costs through the roof, but maintenance costs as well. I’m “done” with new cars, I don’t want the stupid “technology” – I don’t want to pay for it, I don’t want to maintain it, and I certainly don’t want to deal with it. I refuse to own a vehicle with a screen in the dashboard.
I’ll keep driving my 36 year old Mercedes Diesel. No microprocessors, no exploding dashboards, no touch screens, no garbage, no stupidity. Cheapest car to own/run I’ve every had!
Obg! It’s like you read my mind. I’ve been backing up without a camera for over 30 years. I just bought a 2020 Subaru Crosstrek. Can’t wait to get rid of it. I think my next car might be a 57 Chevy
Apparently, our OverLords think that Americans can’t back up safely. Unfortunately, they’re probably right as everyone has their face glued to a stupid smartphone – something else I refuse to have anything whatsoever to do with!
Nothing wrong with new technology, as long as it doesn’t interfere with driving and it works right (is it possible???). Simple is best, I agree. Bought a 2003 Toyota Tacoma standard cab 2WD in 2009 with 33K miles. Paid $7700. Has 83K now, and have never had an operational problem with it. It’s a keeper.
Exactly!!! And if something’s goes wrong I’ll fix it myself! I’ll rebuild this whole damn car if I have to… Model T still running strong 100 years later!
How do you have a model T? you can become very rich with one.
I was wondering what a chart of joy/pleasure of ownership/driving of an automobile is vs. price but could not find anything. I was thinking that an AMG Mercedes is not 5 or 8 times more pleasurable than a Mazda3 or something like that, maybe 2 or 3x but probably not more.
I read another financial guy’s blog and he was/is so proud of his old Honda CRV with a driver’s side window that doesn’t work, no air conditioning and other things.
Here is the thing. None of you know if you are going to survive until retirement. You want to drive a POS so you can retire early, have at it. I buy used cars generally and they have worked well for me. I am very mechanically inclined, so that helps a lot. Bought a new 2013 hyundai Santa Fe. It has been flawless. So, I will spend some money on things I enjoy while I am here. Oh, we live out in the middle of nowhere so no public transit. Never will be.
I’ve owned a couple of Hyundai’s in my years. I love this brand. Amazing quality in manufacturing.
“Nobody I know would choose owning a new car over being able to retire years earlier.”
Choosing to never retire helps the math. I do have a few rainy day funds but don’t ever see myself not working.
I remember going to bar trivia pre-pandemic, and there was a question about average car cost. Everyone else in my group wanted to say 20-25k, but I stuck to my guns with an answer of 35k, because I knew the high value vehicles would bring that figure up a bit. My point is that even though for most people, cars are a purely rational thing, they are not for some people. Logic should apply to HOW you pay for it (interest, budget), but not necessarily WHAT you buy. People buy plenty of things they enjoy– RVs, boats, pools, vacations, etc. Think I’m in the minority here (seeing a lot of frugal/puritan types), but I think you should buy what lets you live your best life so long as it works with your other financial plans.
How true that is. Went into cardiac arrest at 41yo (42 now). And while I’d love to think we will all be around until we are 83, it just isn’t so. Life is short.
Nothing more pathetic in my book than someone that skimps and scrounges their whole life to die with 5 mil in their bank account. Love don’t cost a thing (if you believe that), But all the other cool stuff in this world sure does. So yep, my advice is don’t be frugal sometimes.
Moral of the story. Balance in all things is good.
May I ask the reason for going into cardiac arrest at 41? Glad you are OK.
I’m 44 now and am trying to stay in shape, but it is a struggle.
I’ve always found the used car versus new car a tough one. I initially bought used cars. I had a used Subaru that I got for just under $10,000. It had 90,000 miles on it at the time. The engine went out after a few years and it was worth about $5,000 at the time so I pulled the trigger and spent a large part of the value to replace it. The engine went out again after a month and the shop said they would work with me. Ended up paying about the same cost for the second engine. I spent about $10,000 that year on the vehicle and ended up paying more for that car by the end of its’ life then I would have if it was purchased new and the repairs were covered on the warranty. I had a similar issue with a Toyota Camry where the seller lied about flood damage and the door fell off, I spent a ton on that car fixing it. There was a used Plymouth Voyager where the A/C went out after the first week. We did better on that car but fix-its persisted. I spent $6,000 on fixing a 2005 Toyota Sienna in the past two months because things kept falling apart. Why would I spend more on a car than it was worth? It broke three separate times and each time there were different issues. Cars are a crap shot, I’ve bought two new cars in my life and I financed them for cheaper than the used ones. The Toyota was 0% financing. I’m going to drive the new 2015 Toyota Sienna into the ground, the 2014 Ford Focus maybe not. I’ve been through a double-clutch every 20,000 miles because Ford designed the 2014 poorly and I may not want to put up with that lingering issue. That said, all repairs were free under the warranty. It has been easier for me to budget a new car that doesn’t hit me with surprise fix-it costs than the rough luck I’ve had with used cars. I’ve also looked at some of the depreciation schedules on used versus new cars. Look at a three year old Rav4 versus a new one $20,280 at our dealership for a 2018 with 42,985 miles on it or buy a new 2021 Rav4 for $26,000 to $27,000. This is effectively $2,000 of depreciation a year. The $6,000 in savings can get eaten up fast with things like a timing belt and new tires. Not everyone has great luck or has an uncle who sells them a cheap used vehicle every few years. There are a lot of decisions people make when buying a vehicle and used vehicles have by far exceeded the 1/10th rule for people.
In 2009 I bought a barely 3 year old Porsche Cayman S for 35k$, all cash. God, times have changed.
How in the world do u supposedly make $250,000 a year? Especially being retired? We’re you born with a silver spoon or did you achieve this outrageous amount of alleged income on your own? Because I would love to figure out a way to make half that and I’d work if I had to but would love to make that retired as you somehow do!! What’s your secret?
Took a while. See these posts:
The Secret To Your Success: 10 Years Of Unwavering Commitment
The First Million Might Be The Easiest
How To Build Passive Income For Financial Independence
Paying cash = appetite control.
Helps you say no to all the add ons and be happy with what you have.
Cash brings a sense of pride when you realize many people driving around status symbols are actually just driving the banks car.
Financing removes you from the actual cost/value balance and makes your financial thinking about cars fluffy and irrational.
Even though several have argued that it is better to finance at 1-2% and invest rather than pay cash, I cannot help but wonder
(1) did you still get the same car you would have bought with cash and
(2) how many people actually invest that entire sum of $ instead of get a new itch and spend it elsewhere (I know I would)? Seems like a risky business.
My thought is that the best ROI is paying cash because that creates the most likely scenario that you will buy reasonably, avoid the trap of expensive luxuries, negotiate aggressively, and not overspend.
I think you are right. When you pay cash rather than finance, it is easier to compare to your salary, and judge whether it is worth it. I have to work long and hard to save 45K. I’m not blowing it on a car.
Borrowing is not bad all the time, say 1.49% I got from BMWFS for a CPO car. $30k cash or borrow the $30k and put your $30k in a saving account, investment of some sort? Current saving account at least 3%, you’ll be making money borrowing for a car. Wouldn’t buying cash makes the depreciation value worst???
Goodness gracious, this guy is so snarky and egotistic. Pretty pointless article imo, because obviously more expensive cars are being made over the years, making the average price go up. Of course the average is going to rise, given the hyper cars that are out there cost dozens of times more than the typical commuter car. Median statistics would be actually helpful to analyze, if possible. This article doesn’t teach anyone anything, but instead just shames people for buying new cars. Sounds like the author is just jealous or something lol.
The average car price is going up because more people are buying SUV’s.
A lot of us are also irrational buyers. Look no further than the explosion in Jeep sales. Their models rank at the bottom of almost every class, but that hasn’t translated to worse sales. Jeep Wranglers for example have poor rides, poor handling, poor fuel economy, a lot of road noise, are hard to get in and out of, and are generally unreliable…but people love them. It’s fantastic to witness
Where did you get the figures that an Accord and Camry are $26,000 fully loaded? An Accord starts at $23k. You’re literally 10’s of thousands of dollars off.
I don’t understand. Tens of thousands of dollars off? And are you saying there is only one price for a fully loaded Honda accord in all of America?
He’s right. in terms of “fully loaded” you’re about $10,000 off (maybe a little less). Just bought a tricked-out midsize (Hyundai Sonata). I looked at stacked versions of the Camry, Accord, and Mazda. I looked at several dealers for each. the average cost for a fully-loaded Accord and Camry were above $35,000. Your other points remain and are spot-on, but even a fairly “average” car like this can easily be in the high $30s.
Gotcha. I was looking at a Honda Accord Sport for $26,000 in 2019. It looks sweet. But I see it can go higher. But the difference is not 10s of thousands of dollars off. That means at least $20,000 off.
Agreed. And you’re right, that some nice deals *can* be had, if you’re careful, and willing to wait. I just bought a well-equipped 2019 Sonata for $18,500 (MSRP was $27,200) because they are getting rid of the remainders of the model year. An equivalent Accord I looked at was $34,500, and they weren’t willing to move much, so I guess it does kind of depend.
While literally you are not “10s” of thousands of dollars off, even being off by a single $10k is substantial – based on your stated Accord Sport price of $26k, $10k is nearly 40% of that. It is hard for the reader to consider you a financial expert when you have a questionable grasp of the basic facts here, especially given how easy it easy to go to an automaker’s website and build & price a vehicle to see what the MSRP is. I literally just did this for a new Accord and, by optioning it out, was able to get the MSRP above $40k. So while you are not “10s” of thousands off, it might be wise for you to spend more time researching facts versus arguing with posters who are disagree with your conclusions, especially when said posters are correct :)
For sure. I’m not a Honda Accord Sport pricing expert. I just look online and ask the dealer. Looks like you can get one for $27K – $32K in 2020.
Hope folks don’t miss the main point of this post.
Also, remember… I’m just an unemployed stay at home dad who likes cars. Folks have to think critically and with an open mind.
There is no honda accord that “looks sweet”.
Three key drivers of this phenomenon:
1) Historically low interest rates. When you can borrow at 1-2% you are not paying much for the money, and if you can instead put your cash in the market and earn 5-7%, you almost end up getting a car for free (almost)
2) The previous ‘Great Recession’ stopped a lot of cars from being replaced when their owners would have liked to. The result is a pent up need that drives new car sales
3) These numbers are averages, when in reality we are thinking about medians. Those $500,000 supercars of the 0.1% really drive up the average sale price, but don’t tell us anything about what most people are paying for a car. To get a handle on that you need to look at the median price, which, oddly enough, is all but impossible to find.
You are forgetting that there is a tax from between 6%-10% on the vehicle, then fees that could range from $600 – $4000 depending on dealerships and states. Add a warranty into that and you’re looking at $34,000 financed on $28,000 car. Slap on 3.99 for 72 months and people jump on it.
I think you are incorrect on all 3 counts.
1. Most people that borrow and get a low interest rate do not turn around and invest that money. Though I wish they did.
2. Americans in general love new cars, it’s astounding. The great recession was not a significant driver in that.
3. The average car price is more than 40k now. Not because of supercars, but because of Americans preferences for large suv’s and trucks, as well as manufacturers concentrating on building what is best for their bottom line (notice that ford builds exactly one car now)
One car? Which car is that?
so is it time to buy into car sellers and loan providers?
To be fair.. i just bout a Honda Clarity for $32K…but I’m getting $9K back in tax breaks state and federal cause it’s a Plug-In hybrid… that means I’m really only paying $23K. I don’t think these EV rebates are factored into the equation.
So you make enough money for a non refundable tax break?? Then you don’t need s tax break. I’m tired of finding tax subsidies for the wealthy. Enjoy your new toy!
What $34,000 is the average car price? Crazy! I bought a used Subaru Cross Trek for around $23k and that was SO MUCH to me. I finally paid it off and I’m riding that thing until it dies.
PS. Again, can’t believe $34k is the average….
I find it crazy how much things have changed in recent years in terms or car ownership (or leasing) over here in the UK. The most noticeable thing is the difference in the type of cars young people are driving these days compared to when I was in my early 20’s (about 10 years ago) – it’s now the rule rather than exception to see young people driving around in new or almost new premium cars. Range Rovers, Mercedes, BMW. Very expensive cars which, not wanting to be too judgemental but lets be honest, the majority of will be on lease deals. Kids still living at home with their parents and driving about in £30k cars it’s nuts. My first car was 10 years old when I bought it with about 60,000 on the clock and cost me £500 total in cash. That was commonplace then. Now it’s common place to drop £300 – £500 a month on a new car and the dealerships make it so easy to do. The worlds gone mad.
I wouldn’t spend much on a car myself. That said, getting an auto loan is not automatically stupid. Current rate at my credit union is 1.79% . Why put down cash when you could keep your liquidity at low cost? If nothing else you could invest the money in bonds and pocket the difference.
If a car cost 50k. And I have 50k in cash, I’d still lease it for 3-5 years. If my I retest is 4% and I take the rest of my money and invest it, I’ll get a return of 8% which will be used to pay off my car and interest with an extra 4% to spare.
So when it comes to buying or financing, financing is the way to go.
Return of 8% is far from guaranteed. And is taxable. You’re interest on a car loan is after-tax money being paid to the creditor. If financing was the obvious way to go, people would borrow money just to invest it. And that is rarely the smart move.
Why not get a reliable car for under 10k and suck up your pride?
People absolutely borrow money if they think they can get a higher return than the interest rate. It’s called buying on margin in the stock world and is in general I’ll-advised. It’s a method the economy has to mitigate over enthusiastic banks, or improperly low prime lending rates.
When I bought my last car I could have gotten $2k cash back (~5%), or (get this) 0% interest for 84 months (7 yrs). I used to think it was financially irresponsible to carry an auto loan till I had to figure out if I should pay off a car or pay down a home loan in 2010 at 7%. The financial institutions are providing strange instruments, and smart people can leverage them. In 7 years, an average of $20k invested at 4% (which is a crappy return) will yield $5.6k which is much better than the 2k for doing a quick payoff, and gives me the option of paying down my mortgage if it makes sense (a problem that is more complicated with the new tax structure). Leveraging your assets is absolutely the right thing to do – you should take your home loan to pad your investment principal if your investments will on-average do better than your mortgage rate, adjusted for inflation. (I.e. don’t pay off your house early if you are disciplined enough to invest your extra money.) If one of those assets is 40k in an auto loan that you can invest and pay off at 0%, you should. (On a side note, my analysis is probably not the type of thing financial samurai is usually using to make arguments, and probably the majority of people are buying on loan because they can’t afford it another way. But for people with more than 150k in a 401k, instantly paying the auto loan with other funds is an option but it’s still probably better to use timed payments, especially if the banks will give you 0%.)
Just found this, and I have a couple quick notes.
– Some of us lack a family support structure / mechanic skills / etc. For folks in that situation, it’s advisable to spend a little more over the length of a loan to get something in better condition / less miles / more dependable. It only takes a relatively minor incident to burn one’s savings on a repair-and-rental situation.
– All too often, a car is needed in order to even attempt to gain financial independence. Especially if you’re in an area in which public transit is garbage, like the vast majority of the mid-west. Alas, that usually means getting something that doesn’t make sense financially, because no one is going to write a loan for a 1995 Jeep Cherokee Sport.
– A great alternative right now, if you have a manageable commute (<50 miles round trip) is to grab a used mid-tier electric car. I bought a 2013 Nissan Leaf in 2016 for $8,500. It had 27K miles on it, but it really doesn't matter. In terms of fuel costs, it's the equivalent of paying $0.29 per gallon for gas, it doesn't need oil changes or basically any other maintenance outside of tires, wiper blades and a cabin air filter every 2 years… I don't even have a quick charger- I plug it in via a standard 3-prong outlet, and it's like plugging your phone in at night.
Yeah? Well, buy a new Nissan Versa for around $14,000.