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Is New Car Buying a Ripoff?

March 07, 2018

As US News points out, there are a dozen or so reasons you might overpay for your new car. Buyers are often less diligent than they should be, which leads them to accept a price without negotiating or referring to the estimated market value of the vehicle. This is common among used cars, but it applies to new cars, as well.

According to Esurance, the 5-year depreciation rate of a car ranges from 30% to about 63%, meaning some cars depreciate over twice as much as others during the first 5 years. For many cars, a big portion of that depreciation can be attributed to "off-the-lot" depreciation. When you buy a brand new car, it's going to depreciate a couple thousand dollars as soon as you drive it off the dealer's lot (or soon after).

The trouble doesn't end there. There are additional reasons buying a brand new car can be a poor financial decision. Is it ever advisable, then, to do it? How do you avoid a car buying ripoff?

The Upside

While buying a new car is generally not recommended to drivers who want to save money over the long run, it does have some redeeming characteristics. The strongest one may be the peace of mind that comes with a new car. You'll be covered by a warranty for a number of years. Some would say that the quick depreciation associated with newer vehicles is justified by the warranty and the peace of mind that comes with it. However, it's unlikely that you'll need any repairs during the first few years, no matter which vehicle you choose.

Buying a new car can also be beneficial from a technological standpoint. Generally, vehicles are becoming more fuel efficient. They're also becoming more safe, at least arguably, due to features like pre-collision systems, lane departure alert and 360-degree cameras. These benefits are not to be overlooked, but do they outweigh the downsides?

Weighing the Options

You'll rarely save more money in the long run by purchasing a brand new car. But that might not be your goal. Maybe you just want to pay the smallest bills you can for the next few years. In that case, leasing might be the best option for you. You'll pay small bills and you probably won't need to take care of any repairs. Buying slightly used (3-5 years old) usually avoids repair costs, but it depends on the reliability of the vehicle and on your luck. Of course, the reduced cost of the vehicle, due to it's age, will help you with those costs.

At the end of the day, buying a new car is more of a "prestige" move than anything else. If you can afford it and it makes you happy, go ahead and get a new car. If you think you want to save as much money as possible over the long run, buy a used vehicle. Look for reliable brands like Hyundai, Toyota and BMW. As we mentioned, a brand new car will depreciate at a faster rate than a used one. In other words, the rate of depreciation slows after a few years. If you plan to change vehicles in the next few years, look for one with a low depreciation rate. The lower the depreciation rate, the better your resale value will be. Buying used is your best bet for long-term financial savings. Buying brand new isn't a ripoff, but it can be a waste of money.

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