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I can’t stress enough that our cars are not investments but liabilities. An investment is something that has potential to increase in value over time. The overwhelming majority of cars will not increase in value over time. I imagine that over 95% of cars will depreciate in value. A car is an expense and a liability. It is an asset that can be sold for cash if needed, but every year, the value of your vehicle will go down in price.
There are too many people who tell me how they are investing in a new car. They speak of the car on the same par as buying a home. It’s true that cars and homes are expensive. Both often need down-payments and loans to finance the purchase. However, a home has potential to increase in value whereas a car is guaranteed to lose value. (In fact, some estimate that a car loses 15% of its value the minute the consumer drives it off the lot) A car is a lot like a home-computer. Once you buy the newest model, it will ride on a path to become obsolete and worthless in just a few years.
Living in Los Angeles, in my particular context, makes it very difficult to not own a car. I admire people who use transportation modes other than cars who are in the same stage of life as me. For those of us who need a car, there are some important principles to follow in thinking about purchasing and being faithful owners of cars:
- Buy what you need. A few years ago, my wife and I bought a family station wagon. We anticipated owning the car for at least ten years. We knew that we would want to have kids within those ten years, so it made sense to buy a car that would serve that life-stage. Also, many people may find themselves buying a show-off-to-friends vehicle. All this will create is a vicious cycle of keeping up with the Joneses.
- Buy used. Because of the depreciation of a car is so steep, it is more financially feasible to buy used rather than buy new. I did an unscientific test comparing the purchase of a new car and several used cars of the same make and model. I compared six cars in total. The car that was five years old cost the least over a five year period. Using numbers from Edmunds.com, a 2003 Honda Accord would cost the owner $33,410 over a five year period (which includes maintenance, taxes, insurance, repairs and depreciation). A brand new 2007 Honda Accord would cost the owner $54,850 after five years. The difference in price is over $20,000. This does not include the additional money you may have to fork over for interest if you were to finance the car.
- Recognize your temperament. I am not the kind of person who can find the deals through the classified section of the newspaper. But what I can do is purchase used at a car dealership. I also think I would live with more peace purchasing a car that is still under the original warranty (3 years or 36,000 miles for most vehicles). Rather than risk buying a lemon, I’d rather pay a little more for a peace of mind.
This post is far from being a comprehensive guide to buying your next car, but I hope that some of the principles would help guide your steps when you are in the market for a new car.
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