Dave Ramsey: 5 Reasons Why Buying a Used Car Is the Better Financial Choice
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Crystal Mayer
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Gary Dudak
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Financialexpert Dave Ramsey frequently discusses tried-and-true ways to save money and build wealth. While you may have heard about his 7 Baby Steps or his debt snowball method, you may not be familiar with his stance on buying a car. Ramsey has repeatedly stated that unless you are a millionaire, a used car is usually the better option. He cites several reasons for this belief, including that they are more cost-effective.
He noted on Ramsey Solutions that even with respondents in the largest study of millionaires, the “average millionaire drives a four-year-old car with 41,000 miles on it.” Additionally, he explained, “8 out of 10 millionaire car buyers choose to not have a car payment.”
His main reason for this advice is that financing a new car requires you to pay thousands of dollars in interest for a thing that depreciates significantly the moment you drive it off the lot. If you are considering buying a car this year, consider these five reasons why buying a used car is the better choice financially, according to Ramsey.
More Cost-Effective
The most obvious reason to choose used over new is that it is more cost-effective. Ramsey explained, “The price tag difference between a new car and an even slightly used one is huge.” He added, “The average transaction price for a new car is $47,244, while the average used car is listed for $25,151.”
Ramsey strongly advocates only buying a car that you can afford, meaning that you can pay cash for it. With used cars being half the price of new cars, it is usually a more affordable route.
Better Deal
Ramsey also noted that you may be able to get a better deal on a used car compared to a new one. He suggests leveraging the fact that you are paying in cash and that you can walk away at any point. He also recommends doing your homework and shopping around before you commit to a vehicle.
In How to Negotiate the Best Price on a Car, he said, “You need to be willing to walk away if the price isn’t right — and it’s hard to walk away when you’re emotionally invested in a specific car. I personally think you should walk away at least once. It’s a good skill to practice. There will always be more cars.”
You Can Pay in Cash
If you follow Ramsey’s teachings then you know he is a huge proponent of paying in cash for items large and small. He said, “The best way to buy a car is with cash (as in, without a car loan). We know, we know. That might sound crazy, especially if you’ve always had a car payment. But a car loan is the most expensive way to buy a car!”
You can save thousands of dollars by foregoing financing, but that may mean having to save up even for a used car. He encourages setting a budget and noted, “Saving up for the car you want takes patience. But if you’re intentional about it, you can get a decent car faster than you think.”
They Don’t Depreciate as Quickly
Another big selling point for used cars is that they do not depreciate as fast as new cars. New cars lose value the minute you drive them away from the dealer. According to Ramsey’s findings, a new car can lose as much as 9-11% of its value as soon as you drive it off the lot. By the end of five years, the vehicle may have depreciated 60%.
If you are financing, you are paying interest on an item that is worth significantly less than it was when you purchased it. This can even lead to an upside-down car loan, which can be devastating.
Insurance Is Less
Used cars not only cost less compared to new cars, but they are also generally less expensive to insure. Ramsey said, “A lot of car buyers forget to factor car insurance into the equation and then suffer from sticker shock when they see their new premium.”
This is primarily due to the fact that new cars cost more to repair or replace. The best-selling author advocates shopping around to find the best price and making sure to get your used car inspected before you sign on the dotted line.
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