Buying a dependable used car with above-average mileage is the budget-smart move -- remember, a car is a very expensive depreciating asset. And yet, more than 17 million new cars were purchased in each of the past five years.
Bought, as in financed. Experian reports that more than eight in 10 new cars are bought with loans, with the average loan more than $32,000. That's about the same as the average debt of a student who borrowed to get a bachelor's degree from a private college in 2018. Yet while a student loan typically pays off many times over in higher lifetime earnings, a car declines in value.
Maybe economists should be wringing their hands over auto debt more and student debt less. Consider:
--The average $550 monthly payment for a new car loan is the size of a mortgage in plenty of U.S. cities. New car loans stretch for nearly six years, often falling behind depreciation. Edmunds.com says one in three people who traded in a car to buy a new one, even after trade-in value, still owed money on the old car loan. Sadly, auto lenders are fine with that; they'll roll your unpaid balance into a new loan. Average negative equity rolled into a new loan was $5,000 in late 2019, Edmunds says.
Operating costs are high, too. Big, fuel-inefficient pickup trucks and SUVs dominate sales. In 2018, about 5.3 million cars were sold, compared to 11.6 million pickups and SUVs.
According to government data, average fuel economy for all cars on the road (not just new ones) was 27 miles per gallon. For pickups and SUVs, 19.7 mpg. The average car logs 11,200 miles a year. In late December, AAA reported an average cost of $2.56 per gallon. That works out to an annual fuel cost of about $1,060 for a car and $1,460 for the pickup truck or SUV.
On top of the environmental cost of fuel inefficiency, that $400-a-year differential is consequential. A large chunk of American households say they do not have $400 in cash to cover an unexpected expense.
And it's $400 a year or, on a car you drive for 10 years, $5,280. Keep that $5,280 growing for another 20 years, and you would have more than $14,000 for retirement. Not because you drove less, but because you drove more efficiently.
--New is costly. According to Edmunds, the gap between the average cost of a new car and a 3-year-old car was $14,450 in the fall of 2019. (The used-car market is flooded with 3-year-old cars coming off lease.)
Even if we make the generous assumption that no loan was involved in the transaction, $14,450 can become a big windfall. At 5% annualized return, it would be worth nearly $50,000 in 25 years. For a two-car household, that's a six-figure gain. And the reality is most households borrow to pay for a car.