The truth about 0% financing on that new car
Filed under: Borrowing, Shopping
I've recently become a huge fan of financial guru Dave Ramsey. On his radio show and in his books, he distills personal finance into a set of pretty simple principles, and he cuts through a lot of the garbage. Here's a gem from his chapter on myths about debt from his amazing book The Total Money Makeover: A Proven Plan for Financial Fitness:
Myth: You can get a good deal on a new car at 0 percent interest.
Truth: A new car loses 60 percent of its value in the first four years; that isn't 0%.
I don't think anyone has ever explained the problem with buying a new car so well. Here's what you need to remember when you're shopping for a car: Buying a new car is pretty much always a bad idea. No matter how good a deal you get, you're buying a depreciating asset at the moment before it heads into its most rapid depreciation.
Plus, you're buying it before it's been out for a few years -- You know nothing about the model year's reliability or any other issues that tend to crop up after the car's been on the road for a few years.
So when is it OK to buy a new car? When you have so much money that it doesn't matter at all. Until then, stick with used cars that you can afford to buy with cash.
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Reader Comments (Page 1 of 1)
12-23-2007 @ 2:39PM
Noah said...
I beg to differ on the reliability/durability statement. One of the main reasons I purchased a new car was the warranty, something difficult to obtain and filled with caveats when purchased separately for a used car. For the next 7 years and 70,000 miles I have peace of mind and the knowledge that financially, my car will not cost more than gas/maintenance/insurance. After years of 5-15 year-old cars, I can say that this was well worth a premium. Also, these types of loans and incentives are never available on even year-old "dealership" used cars. Again, if you need to take advantage of an incentive (especially a 0% loan), a new car becomes more justifiable. Loans on used cars stink, whether it's a private bank or a credit union.
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12-27-2007 @ 4:37PM
Evan Brom said...
The same could be said about buying a computer. In 4 years they are almost 100% depreciated, yet I don't see people recommended that people buy 4 year old computers. Just like with computers a cars usefulness, reliability, comfort, prestige and relative performance, safety and efficiency greatly decrease over time. A car deprecates a great deal (60%) because most of its value is now gone after 4 years. It will simply retain its intrinsic value as transportation.
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