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Is it Dumb to Buy a New Car?

Saying that buying a new car is dumb may be a little harsh. Buying a new car has its good points and bad. Let’s have a look at both.

Reasons to Buy a New Car

  • Bad/no credit…Often specialty lenders will only offer loans to bad credit/no credit customers if they purchase a new car. Even then, the list is a bit limited. The cars that will be approved need to be somewhat inexpensive. This is meant to help a lender lessen the risk of these borrowers defaulting on their loans.
  • Lowest possible APR…New cars qualify for the lowest interest rates possible. The exact rate that you will be offered will depend on your creditworthiness.
  • Longest loan terms…New cars qualify for the longest loan terms. Buying a new car will leave you with the chance to have the lowest possible rate and the longest loan term which equates to the lowest possible monthly payment. Again, the exact length of your loan will depend on your creditworthiness.

Reasons to Avoid Buying a New Car

  • Depreciation…All new cars lose value steadily from the day they are purchased until somewhere around the fifth year of their life. By the time a car is five years old it has lost an average of 45 percent of its value. You will find that your loan balance will not go down fast enough to keep pace with your car’s depreciation. For a time you will have negative equity in any new car you buy.
  • Total interest paid…Long loan terms and high original loan balances mean more total interest paid. The average cost of a new car is right around $30,000. If you get a loan for that amount at the current average used car rate of 3.9 percent for 72 months, you will pay $3,695.27 in total interest and be upside-down on the loan for nearly 24 months. Granted, you can find a new car for less than thirty grand, but you get the idea.
  • Not sure what you are getting…Yes, you can rest assured that you will most likely be getting a good car if you buy new, but that is not always true. The biggest issue with a new car is recalls. There have also been great examples of new car disasters…the Edsel and Yugo are a couple.

While it may not be the worst thing in the world, buying a new car doesn’t make sense for everyone. For the majority of people, buying a certified used car makes more sense. These cars have gone through a 100-150 point inspection. Any discrepancies found during the inspection have been repaired. Additionally, all of these vehicles have less than 100,000 miles and are less than seven years old. They also qualify for an extended warranty because for the certification process. A certified used car combines frugality and peace of mind.

About the Author

The author has many years of experience in automotive finance and insurance. However, each consumer's situation is unique. It is best to contact a finance specialist for further assistance.
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