The Downside of Buying a New Vehicle
2.0 Buying a New Vehicle
In the previous article we described the advantages of buying a new vehicle. In this article however, we are going to look ad the downside of buying a new vehicle.
Before we jump into the downside of buying a new vehicle, we have to cover one of the most obvious drawbacks: Overhead.
Every shiny, bright and new dealership you may be drawn to. Every flashy commercial you see on television. And every other form of advertisement that is being targeted at your subconscious. They all come out of the price tag you are paying for your new vehicle.
All business’ in the world run off of profits. Vehicle manufacturer’s and dealerships are by no means the exception. A vehicle manufacturer sells its vehicles to a dealership at roughly 25% markup to cover their costs of advertising, overhead (office buildings, R&D, employees…etc), and whatever they might have. The dealership then turns around and sells those very same vehicles at a mark up of roughly 25% to the general public, to now cover their costs (Buildings, sales associates, mechanics…etc).
Although the automotive industry is definitely not to only industry to follow this business model, it does have a generally bigger impact when you are spending $20,000, $30,000 or even more.
Besides the obvious downside of buying a new vehicle, here are a few more.
Disadvantages of Buying a New Vehicle
Depreciation of Value
Your brand new vehicle is not an investment. As soon as you register the vehicle and drive it off the lot, the resale value of what you actually paid for takes a nose dive.
In the first year of your vehicle’s life, the re-sale value drops approximately 19% – 25% compared to the full price you paid. And if the manufacturer re-designed your model the following year, expect that number to be significantly higher.
Negative Equity
Negative equity and a higher depreciation value are definitely interlinked in the downside of buying a new vehicle.
The financing terms that most banks and lenders give on a new vehicles is incredibly high: 72-96 months. The result? Your payments go down or the dealership increases the amount they can sell you, with the same monthly payments.
Again, it may seem harmless when you’re signing on the dotted line…but are you prepared to keep your vehicle for 6 – 8 years? Most people, by nature, always want the newest models and features. So when you trade in your vehicle 2-3 years down the road, the depreciation of your vehicle is much higher, then the rate at which you are paying off your loan.
So now when you head back to the dealership to purchase that new vehicle years down the road, now you have to add that negative equity to your new loan. And the cycle just continues unless you make a hefty down payment.
And that doesn’t broach the subject of how lenders emphasize interest payments in the first 12 month of your loan (see later article) or the amount you lose on trading in your vehicle (see later article).
Higher Insurance Rate
One of the biggest oversights of people purchasing a vehicle, is the added costs. Most people get tunnel vision and concentrate on two things: Sale price and monthly payments.
When budgeting for a vehicle, you have to keep in mind the added cost of fuel, maintenance and, most importantly, insurance. The downside of buying a new vehicle is that insurance is going to be always higher, especially if you claims, speeding tickets or if you are a younger in age.
2.3 Advantages of Buying a Used Vehicle –>