As I drove my 13-year-old car into work today I heard a news report on the radio that detailed the amount of auto loan debt American’s are carrying. A recent report from TransUnion outlined all of the gory details of new car ownership. Auto loan debt per borrower increased 4.4% to $16,769 in Q4 2013. The auto loan delinquency rate increased to 1.14%. The delinquency rate is defined as the ratio of borrowers 60 days or more delinquent on their loans. Ouch! So of the 60.5 million auto loan accounts, 689,700 people are paying their bills late. The states with the biggest increase in delinquency rates were Michigan, Alaska, and Arkansas, while Oregon, New Jersey, and Delaware posted the biggest decline. I have purchased one new car in my lifetime, a 2002 Honda Odyssey. I can confidently say I will not enjoy the whiff of the new car smell anytime soon.
I believe I will never purchase a new car based on a number of factors. I found some interesting data points at Edmunds website.
Driving it off the lot – Your new car loses 11% of its value the second you leave the dealer.
First 5 years – On average your car depreciates 15-25% per year.
5 year Anniversary – Just about the time you finish paying it off, your car is now worth 37% of what you paid for it.
Considering a vehicle is most likely your second largest purchase/ expense in your budget besides a home why would you ever invest in an item with such a bad return. If you are trying to build wealth a new car may not be for you. If the depreciation data of car values isn’t enough to make you swear off purchasing a new car, how about some advice from experts, in the book “The Millionaire Next Door” Dr. Thomas J. Stanley reveals results from surveys and interview with millionaires. He finds that most millionaires don’t purchase new cars, only quality used cars, typically cars that are 2 years old from private owners and are in great condition. Millionaires have realized that in order to stay millionaires they should not pay full price for one of the fastest depreciating assets you will find. If you want to be a millionaire, act like one.
We are certainly due for upgrades at some point. I’m driving a 13-old-car and my wife an 11-year-old minivan, but we are diligent with maintenance. We have 2 children that will be of driving age with the next 13 months. Once we complete our debt repayment later this year our focus will shift to increase our savings. This may include a car fund to be spent on a quality used car. Fast forward 20 years from now and if we have all of our financial goals met, and surplus to purchase a new car with cash at that time I may change my opinion. Until then I’m sticking with my current plan.
Have you ever purchased or lease a new car and regret it? What’s your plan for future car purchases?