As a middle-class professional, I used to view buying new cars as a practical necessity. As long as I kept them for 5-10 years and avoided anything extravagant, it felt like a reasonable expense. But times have changed. Today, buying a new car has become a luxury for rich people.

Rapidly rising car prices and interest rates have pushed new vehicles out of reach for many Americans. The people who get hurt the most are those who have not yet realized this. It is not uncommon for car payments to exceed $1,000 per month. It’s time we recognize that buying a new car can be an existential threat to your financial wellbeing.

Negative Equity

A questionable practice that has become commonplace among car dealers is applying negative equity to new car loans. It works out great for dealers because so many people are financially illiterate. They have no idea what negative equity is.

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When someone owes more on an item than it is worth, they are said to be “upside down" on the loan. The amount that the loan balance exceeds an item’s worth is referred to as negative equity.

The toxic mixture of high car prices, high interest rates, and rapid vehicle depreciation causes many car owners to be upside down on their loans. Unwitting consumers who trade-in relatively new vehicles end up having negative equity applied to their new car loan. This increases the balance and duration of the loan. Do that a few times and you will find yourself in a hole so deep you may never get out.

A Better Way

So what is the alternative? Buy used. As mentioned, new vehicles depreciate rapidly over the course of the first few years. Let somebody else take the hit. Look for gently used vehicles about 3 years old that have been driven approximately 15,000 miles per year.

It’s that simple. Don’t buy new vehicles. Recognize that times have changed. Buying new cars used to be part and parcel of being middle class. Not anymore. New cars are a luxury for rich people. Or, an extravagance for the uninformed. 

Don’t let yourself be tempted into buying something you will regret. Buying a new vehicle every few years is the best way to get poor quick.

Live beneath your means and save. It may not be sexy, but it’s the surest way to financial security.

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