Why Do Dave Ramsey and Suze Orman Say You Should Avoid Buying a New Car?
If you've ever sought advice on managing your money, chances are you've encountered the names Dave Ramsey and Suze Orman. Both are titans in the personal finance world, and they share a remarkably consistent, and often controversial, stance on a major purchase: buying a new car. Their advice is clear and unwavering: avoid it. But why? What's so inherently wrong with the shiny, new vehicle rolling off the dealership lot? Let's dive into the detailed reasoning behind their strong recommendations.
The Root of the Problem: Depreciation
The single biggest reason Dave Ramsey and Suze Orman steer people away from new cars is depreciation. This is the decrease in a car's value over time due to wear and tear, age, and market demand. And for new cars, it's brutal and incredibly fast.
- Immediate Value Plunge: As soon as you drive a new car off the dealer's lot, it loses a significant portion of its value. Experts estimate this can be anywhere from 10% to 20% within the first year alone. Think about it: the car is no longer "new" once it's been registered and driven by a consumer.
- Rapid Decline in the First Few Years: The steepest depreciation typically occurs in the first three to five years of a car's life. This means you're essentially paying a premium for a depreciating asset that is losing value at an alarming rate.
- Equity Eaters: Ramsey and Orman often refer to this as "equity eaters." If you take out a loan for a new car, you can quickly find yourself owing more on the loan than the car is actually worth. This is a dangerous financial position to be in, especially if the car is totaled or stolen, as your insurance payout might not cover your loan balance.
The Financial Avalanche: Interest and Fees
Beyond depreciation, the financial implications of buying a new car extend far beyond the sticker price:
- Loan Interest: For most Americans, buying a new car involves taking out an auto loan. Interest on these loans can add thousands of dollars to the total cost of the vehicle over the life of the loan. Ramsey, in particular, is vehemently against debt of any kind, and an auto loan is a prime example of debt that can be avoided.
- Higher Insurance Premiums: New cars generally cost more to insure than used cars. Insurance companies factor in the replacement cost of the vehicle, and with a new car, that cost is significantly higher.
- Dealer Fees and Markups: Dealerships often add various fees, such as "documentation fees," "preparation fees," and other charges that can inflate the final price of the car. While some negotiation is possible, these can still add up.
- Taxes and Registration: You'll pay sales tax on the full purchase price of a new car, which can be a substantial amount depending on your state's tax rates. Registration fees are also typically higher for newer, more expensive vehicles.
The "Why Not Buy Used?" Argument
The logical counterpoint to avoiding new cars is to embrace the used car market. This is where Ramsey and Orman find immense financial wisdom for their followers.
- Let Someone Else Take the Depreciation Hit: When you buy a car that is a few years old (say, 3-5 years old), the previous owner has already absorbed the bulk of the depreciation. You're essentially getting a car that has already lost a significant chunk of its value, making it a much more affordable purchase.
- Lower Purchase Price: Consequently, used cars come with a considerably lower purchase price, which means less money borrowed, less interest paid, and lower sales tax.
- Reliable Options Available: The myth that used cars are unreliable is largely outdated. With proper inspection and maintenance, many cars that are 3-5 years old are still in excellent condition and have plenty of life left. Reputable dealerships and private sellers often have well-maintained vehicles.
- Certified Pre-Owned (CPO) Programs: Many manufacturers offer Certified Pre-Owned programs for used vehicles. These cars undergo rigorous inspections and often come with extended warranties, providing peace of mind similar to buying new, but at a used car price.
"A car is a depreciating asset. It loses value the moment you buy it. Don't get into debt for something that loses value." - Dave Ramsey
"The biggest mistake people make is buying a new car. They lose tens of thousands of dollars the minute they drive off the lot. You should always buy a car that's at least two years old." - Suze Orman
Ramsey's "Cash is King" Approach
Dave Ramsey's philosophy is rooted in being debt-free. His "Baby Steps" program emphasizes paying off debt and building wealth. For him, buying a new car with a loan is a direct contradiction to this core principle. His advice is to save up and pay cash for a reliable used car. This eliminates interest payments entirely and ensures you're never upside down on a car loan.
Orman's Focus on Smart Spending and Avoiding Lifestyle Creep
Suze Orman also champions smart financial decisions. She often highlights how extravagant purchases like new cars can lead to "lifestyle creep" – a gradual increase in spending that becomes harder to rein in. She advocates for buying a car that meets your needs without unnecessary extravagance, and a used car almost always fits this bill. She stresses the importance of buying a car outright or with a very small down payment and a short loan term, and again, a used car makes this far more achievable.
The Bottom Line
While the allure of a brand-new car with that "new car smell" is undeniable, Dave Ramsey and Suze Orman present a compelling financial case against it. Their argument boils down to minimizing financial loss. By avoiding the steep depreciation and high costs associated with new cars, and opting for a well-maintained used vehicle, you can save tens of thousands of dollars over time. This saved money can then be allocated to more productive financial goals, such as paying off debt, building an emergency fund, investing, or saving for retirement – goals that actually build wealth rather than erode it.
Frequently Asked Questions (FAQ)
How much value does a new car lose immediately?
A new car can lose between 10% and 20% of its value the moment it's driven off the dealership lot and registered. This loss continues rapidly in the first few years of ownership.
Why is depreciation such a big deal for car buyers?
Depreciation is a big deal because it means you're paying a premium for a depreciating asset that is losing value at an accelerated rate. If you finance a new car, you can quickly end up owing more on the loan than the car is worth, putting you in a financially precarious situation.
Are all used cars a good deal compared to new ones?
While most used cars are a better financial decision than new ones due to lower depreciation, it's still crucial to buy a reliable used car. Thorough inspections and research are necessary to ensure you're not buying a vehicle with hidden problems.
What's the ideal age for a used car to buy, according to financial experts?
Many financial experts, including those who advise against new car purchases, suggest looking for cars that are 3-5 years old. At this age, the steepest depreciation has already occurred, but the car likely still has significant life and modern features.
