Why I won’t Finance a New Car


Everyone loves a new car, the feel of driving it, the sound of silence as you cruise down the road, that new car smell. Lots of people I work with are buying new cars or nearly new, and taking them out on finance. One of the guys is paying just over £300 a month on finance!

To me, that is madness.

Fair enough, it’s a nice car, but I still couldn’t warrant paying that price every month for something that my current car does just as well, and that’s get me from one place to the next.

My car has actually taken me on 2, 1800 mile round trips to the French Alps, and survived the 90MPH flat out driving on the mad French motorways, the hill climbing in the Alps and the intense heat that it is not used to.

Quick story, one of the guys I work with took out a loan for £10,000 for a nearly new car, 1 year on, the car was giving a lot of engine problems, he sold it…. for £1600!!! That’s a loss of £8400, plus interest, so over £9000! WTF, that’s nearly a deposit for a house!

My Current Car

Currently, I drive a 2004 Audi A3, it’s easy on fuel, easy to insure, and the road tax for the year isn’t too expensive either, so all round, it’s cheap to run. It does what it is supposed to, and that is drive.

I could have bought a new, or nearly new car and taken out a loan, or financed it through the dealership, but, I don’t have the best credit score, so the interest would be very high for a start, plus, the rate at which it would depreciate in value is high, very high!

Lets look at the Figures – New Car on Finance

My credit score isn’t great (I am working on improving my credit score), so the interest rate I would be paying would be around the 10% mark. For the sake of this post, I am going to assume 10% is what I would have had to pay.

Lets say I bought a brand new car at a cost of £20,000, at 10% interest = £2000 interest

I would have paid £22,000 for the car, including interest.

A new car, on average, looses 19% of it’s value in the first year, so after year 1, my car would be worth £16,200, thats a loss of £3800, in 1 year, plus the £666 interest you would have paid in the first year, giving we are taking the loan over 3 years (36 months).

Initial Value: £20,000
With Interest: £22,000
Value After First Year: £16,200
Value After Loan is Paid off: £10,800

So, if you pay off the loan over the 3 years, then sell the car, or even hold on to it for a bit longer, it will end up being worth half of its initial value, possibly even less, depending on how long you keep it for.

This is why I would never buy a new car, it looses far too much of it’s value compared to a used car. I would prefer to put this money into an investment and grow it!

Here is an infographic I found.

CarDepreciationInfo

Buy New with Cash vs Invest and Buy Used

Lets say I buy a used car with cash, at a value of £3000. I will have no monthly repayments on the car, and over the time I own it, the value will not drop as much as a new cars value would. Used cars tend to have a slower depreciation rate than new cars.

Buying a used car will save me a shit load of money in the long run, and also save me paying high interest rates due to my credit score. If my credit score improves, will I buy a new car on finance? The answer is still no! I still don’t want to spend lots of money on a car, when that money could be used for better things.

If I have the cash for a new car, would I buy one out right? No, I would not, I would still prefer to buy used, and do something more productive with the cash I have left over.

Lets take the example above, buying new at £20,000.

New

Initial Value: £20,000
Value after 3 years: £10,800
Total loss: 46%
Total loss: £9200

Buy Used and Invest the Rest

Initial Value: £3000
Value after 3 years: £2000
Total Loss: 34%
Total Loss: £1000

Now, lets say I was to invest the money I had left over when buying a used car, which would be £17,000, and gained 7% per year, which is a pretty average figure.

After 3 years, my £17,000 investment would be worth £20,959.73! So I would have made back the money I spent on the car, plus an extra £959.73! (3 years is a bit short term to expect these returns, but I am just proving a point)

Depreciating Asset – Cars Aren’t Investments

Buying a new car in general is a very bad investment, and just like the majority of bad investments, it’s made based on your emotions. This is why all the car ads try to rope you in with their amazing driving experience, new features and all the other worthless shit they sell you.

The moment you drive it off the lot, it’s value drops!

Everyone thinks of a car as a symbol of their status, nice, new shiny car must mean that person is doing well, and old, worn car, must mean that person is broke, right? Well, that’s not right, that’s just what you are lead to believe.

A guy I know, millionaire many times over, drives a 1997 Ford Escort Van, its worth about £400!

So, why is a new car a bad investment? Well, it costs you money, that’s why. An investment should make you money. A new car isn’t really an investment at all in my opinion.

Cash Flow

Another reason why I would not finance a car is because I want to be careful with my cashflow, I want as little going out each month as possible, in order to be able to save as much as I can.

£300 a month for a car may not be much out of your wage, but, depositing that £300 into an investment account each month will pay off big time in the long term.

So, there you have it, that’s my rant on why I wouldn’t buy a new car, or finance a car.


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