Should You Buy a New Car?

Should You Buy a New Car?

 

 

By BRETT ARENDS
 
Looking for a car or truck?
 
Conventional wisdom says that the smart move is to buy used. Purchasing a brand-new vehicle, it goes, is a big waste of money.
 
After all, a new car loses a fifth of its value the moment you drive it off the lot. That new-car smell, as they say, is one of the most expensive things you can buy.
 
There's just one problem. It's not quite so easy.
 
Edmunds.com, the auto-shopping website, now maintains an intriguing list of cars, SUVs and trucks where you could end up paying less per month for a brand-new model than if you bought a typical one-year-old used one—assuming you are buying the vehicle with a loan.
 
 
The main reason for this bizarre turn of events: what's happening to interest rates.
 
"Most of this is the financing," says Edmunds analyst Jessica Caldwell.
 
Loan rates have collapsed on new-vehicle purchases, thanks to the plunge in interest rates across the economy. Rates on typical car loans have just hit a new record low.
 
The average rate on an auto loan fell to just 4.16% last month, Edmunds reports. That's down a third of a percentage point just from November and more than half a percentage point from a year ago. Those looking for a luxury car are especially likely to get a good deal: Average financing rates for the top seven luxury models have fallen to just 2.9%.
 
Overall, 15.4% of auto loans—nearly one in six—charge no interest at all. Government-backed General Motors is in the forefront: More than half its loans are at 0% interest. More quantitative easing?
 
Such low rates apply only to loans on new cars. By contrast, says Ms. Caldwell, the typical rates on used cars, while also lower than they used to be, remain 8% or higher.
 
Cheaper loans aren't the only thing going on. The gap between the sticker price on used vehicles and that on new ones, which used to be so wide, has also been sliding for a couple of years. The reasons are already well known: The 2009 "cash for clunkers" program took nearly 700,000 used cars off the market. The collapse in new car sales and leases since the financial crisis hit means there are fewer being traded in. And manufacturers, beleaguered by the slump in sales, are offering some strong incentives on new sales these days.
 
Put these things together—cheaper loans on new cars, higher sticker prices for used ones—and you get the upside-down phenomenon of paying les per month for some new cars than for last year's model.
 
If there's a general rule you can take away, it's a reminder of an old one: The real price of a purchase isn't just what's on the sticker. It's the full amount it's going to cost in actual cash flows over its lifetime.
 
Of course, the way to save the maximum amount of money on a car is not to own one altogether—if you can. Your correspondent lives in a city. Our household owns no vehicles at all. If we need wheels, we rent. There is so much competition between rental agencies now that we can usually get a great deal.
 
When people tell me that living in the city must be so expensive, I point out that we save many thousands a year on the cars we don't have to own.
 
Just think: No car payments. No insurance. No gasoline. No repairs. And no hassle or worries. I do not devote a single moment of my life to worrying about parking spots, salt on the roads, gas prices or a curious knocking sound under the hood when shifting into third. Priceless.
 
Write to Brett Arends at brett.arends@wsj.com

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