Should You Buy a New Car to Save Money?

Most people love buying a new car. ¬†That’s why most people are broke ūüôā

Of course there are some times when buying a new car can save you money in the long term. ¬†For example, if you are spending $100’s a month on maintenance to keep your old car on the road, or your current car is a gas guzzler, then you might be a candidate for buying another, possibly newer vehicle.

Keep in mind though, there are additional expenses when you do buy a newer vehicle.  Namely higher insurance, higher property taxes (depending on where you live), etc.

If you currently lease a car or are thinking of leasing a car: Just. Don’t. Do. It. ¬†Leasing is almost always a bad deal. ¬†I remember in business school, one of the analyses we had to do was “buy vs lease” a vehicle. ¬†Every student was given various scenarios i.e. buy and sell after 1, 2, 3 years vs lease for X years, ¬†etc. ¬†We could pick any vehicle we wanted. ¬†Every single student, after going through a myriad of scenarios came up with the same result: leasing always ends up being more expensive; even when you factor in the depreciation if you bought the car. ¬†Of course this is easier said than done. ¬†If you finance a new car (another mistake unless it is 0% APR), the monthly payments could be $400 or more! ¬†You can probably lease the same car for 3 years for $199 per month. ¬†Of course at the end of the lease you have nothing. ¬†At a recent trip to the dealer, I asked a salesman who had been working at that dealer for over 30 years about leased vehicles. ¬†He showed me a row of returned leased vehicles at the back of the dealer lot. ¬†I asked, “don’t you guys buy some of these to sell as used cars on the lot?”. ¬†His response was “No way! The leasing company/manufacturer always wants too much money for off-lease cars. ¬†We just return them and then buy the same cars back at the auction for thousands less.” ¬†It goes to show you that buying the car at the end of the lease isn’t usually a great deal. ¬†Even the car dealer, who gets a discount on that price, won’t do it!

Here is a quick scenario I ran.  Suppose you own a 2013 Jeep Wrangler Unlimited Saraha.  Sure the Wrangler is a fun vehicle but it is not the most fuel efficient at 19-20 MPG for a 6 speed manual.  Jeeps are also not known to be the most reliable so repair costs may be rising in the near future.  Fortunately in this case, Wranglers have very good resale values.  Edmunds has a neat tool to help you calculate savings assuming you are getting a more fuel efficient vehicle.

In this scenario, you replace the 2013 Wrangler 4WD with a brand new 2017 Toyota RAV4 Hybrid AWD. ¬†Now the vehicles have some different capabilities but they still each can get 5 people from point A to point B in snowy conditions… except one gets nearly double the fuel economy:

2013 Jeep Wrangler Vs. 2017 RAV4 Hybrid

2013 Jeep Wrangler Vs. 2017 RAV4 Hybrid

Here you could sell the Jeep on your own for around $25k. ¬†Then, for an additional $3,600 not including sales tax, you could buy a 2017 RAV4. ¬†You would nearly double your fuel economy saving $66 on gas each month at the current price of $2.25 /gallon. ¬†This doesn’t take into account maintenance costs which would be zero on the Toyota and who knows how much on the Jeep. ¬†It also doesn’t consider insurance, taxes, etc.

In this scenario we replace the RAV4 with an even more efficient, and less expensive compact sedan: a Toyota Corolla. You can buy a new 2017 Corolla for less than the 2013 Jeep is worth!  You would start saving $71 per month on gas from day one plus put nearly $6,200 in the bank.

2013 Jeep Wrangler Vs. 2017 Toyota Corolla

2013 Jeep Wrangler Vs. 2017 Toyota Corolla

At the time of writing, gas prices were in the low $2 range and still gave reasonable fuel savings.  Imagine if gas went back up to $4 /gallon again!  Savings would double.  I hope these scenarios get you thinking about how you can save money by getting rid of your current vehicle and getting a more economical and environmentally friendly one.  Keep in mind, if you were to downgrade your current fairly plush ride to a reliable used car, your savings would be much more significant.

Written by Jeff