Why do people buy new cars they can not afford?
There are many reasons for buying new versus used vehicles. Price is not the only factor.  This is an individual decision. Although interesting to examine from a macro perspective, each vehicle purchase is made by an individual, weighing many factors that vary in importance by that individual, based upon their specific needs and values. I have purchased both new and used cars, and I have weighted each of these factors as part of each decision (and the relative weightings have varied based upon my individual situation). Read Freakonomics to gain a better understanding of the reasons why you cannot find a good used car. The summary is the imbalance of knowledge between the buyer and seller, and the lack of trust. Although much of economics assumes perfect market information, margin (profit) comes from uncertainty, or an imbalance of knowledge.  Buying a used car requires a certain amount of faith in people, and you cannot always trust the trading partner to be honest. Price - The price, or more precisely, the value proposition of the vehicle is a large concern for many of us (larger than we might prefer that it be). Selection - A buyer has the largest selection of vehicles when they shop for a new vehicle. Finding the color, features, and upgrades that you want on your vehicle can be much harder, even impossible, for the used buyer. And once you have found the exact vehicle you want, now you have to determine whether the vehicle has problems, and can be purchased at your price. Preference - A buyer may simply prefer to have a vehicle that looks new, smells new, is clean, and does not have all the imperfections that even a gently used vehicle would exhibit. This may include issues of pride, image, and status, where the buyer may have strong emotional or psychological needs to statisfy through ownership of a particular vehicle with particular features. Reviews - New vehicles have mountains of information available to buyers, who can read about safety and reliability ratings, learn about problems from the trade press, and even price shop and compare between brands and models. Contrasted with the minimal information available to used vehicle shoppers. Unbalanced Knowledge - The seller of a used car has much greater knowledge of the vehicle, and thus much greater power in the negotiation process. Buying a used car is going to cost you more money than the value of the car, unless the seller has poor knowledge of the market. And since many used cars are sold by dealers (who have often taken advantage of the less knowledgeable sellers in their transaction), you are unlikely to purchase the vehicle at a good price. Fear/Risk - Many people want transportation, and buying a used car comes with risk. And that risk includes both the direct cost of repairs, and the inconvenience of both the repair and the loss of work that accompanies problems. Knowing that the car has not been abused, that there are no hidden or lurking problems waiting to leave you stranded is valuable. Placing a price on the risk of a used car is hard, especially for those who only want a reliable vehicle to drive. Placing an estimate on the risk cost of a used car is one area where the seller has a distinct advantage. Warranties - New vehicles come with substantial warranties, and this is another aspect of the Fear/Risk point above. A new vehicle does not have unknown risk associated with the purchase, and also comes with peace of mind through a manufacturer warranty. You can purchase a used car warranty, but they are expensive, and often come with (different) problems. Finance Terms - A buyer can purchase a new vehicle with lower financing rate than a used vehicle. And you get nothing of value from the additional finance charges, so the difference between a new and used car also includes higher finance costs. Own versus Rent - You are assuming that people actually want to 'own' their cars. And I would suggest that people want to 'own' their car until it begins to present problems (repair and maintenance issues), and then they want a new vehicle to replace it. But renting or leasing a vehicle is an even more expensive, and less flexible means to obtain transportation. Expense Allocation - A vehicle is an expense. As the owner of a vehicle, you are willing to pay for that expense, to fill your need for transportation. Paying for the product as you use the product makes sense, and financing is one way to align the payment with the consumption of the product, and to pay for the expense of the vehicle as you enjoy the benefit of the vehicle. Capital Allocation - A buyer may need a vehicle (either to commute to work, school, doctor, or for work or business), but either lack the capital or be unwilling to commit the capital to the vehicle purchase. Vehicle financing is one area banks have been willing to lend, so buying a new vehicle may free capital to use to pay down other debts (credit cards, loans). The buyer may not have savings, but be able to obtain financing to solve that need. Remember, people need transportation. And they are willing to pay to fill their need. But they also have varying needs for all of the above factors, and each of those factors may offer value to different individuals. If everyone bought used cars, who would buy the new cars so that everyone else could buy them used? Rental car companies? Your rant expresses a misunderstanding of fundamental economics (as demand for used cars increases, so will prices) but economics is off-topic here, so let me explain why I bought a new car—that I am now in the 10th year of driving. When I bought the car I currently drive, I was single, I was working full-time, and I was going to school full-time. I bought a 2007 Toyota Corolla for about $16,500 cash out the door. I wanted a reliable car that was clean and attractive enough that I wouldn't be embarrassed in it if I took a girl out for dinner. I could have bought a much more expensive car, but I wanted to be real about myself and not give the wrong impression about my views on money. I've done all the maintenance, and the car is still very nice even after 105K miles. It will handle at least that many more miles barring any crashes. Could I have purchased a nice used car for less? Certainly, but because it was the last model year before a redesign, the dealer was clearly motivated to give me a good deal, so I didn't lose too much driving it off the lot. There are a lot of reasons why people buy new cars. I didn't want to look like a chump when out on a date. Real-estate agents often like to make a good impression as they are driving clients to see new homes. Some people can simply afford it and don't want to worry about what abuse a prior owner may have done. I don't feel defensive about my decision to buy a new car those years ago. The other car I've purchased in the last 10 years was a four year old used car, and it certainly does a good job for my wife who doesn't put too many miles on it. I will not rule out buying another new car in the future either. Some times the difference in price isn't significant enough that used is always the best choice. "Two reasons: Many people make lots of financial decisions (and other kinds of decisions) without actually running any numbers to see what is best (or even possible).  They just go with their gut and buy things they feel like buying, without making a thoroughgoing attempt to assess the impact on their finances.  I share your bafflement at this, but it is true. A sobering example that has stuck with me can be found in this Los Angeles Times story from a few years ago, which describes a family spending $1000 more than their income every month, while defaulting on their mortgage and dipping into their 7-year-old daughter's savings account to cover the bills --- but still spending $275 a month on ""beauty products and services"" and $200 a month on pet expenses. Even to the extent that people do take finances into account, finances are not the only thing they take into account.  For many people, driving a car that is new, looks nice and fresh, has the latest features, etc., is something they are willing to pay money for.  Your question ""why don't people view a car solely as a means of transportation"" is not a financial question but a psychological one.  The answer to ""why do people buy new cars"" is ""because people do not view cars solely as a means of transportation"". I recently bought a used car, and while looking around at different ones I visited a car lot.  When the dealer heard which car I was interested in, he said, ""So, I guess you're looking for a transportation car.""  I thought to myself, ""Duh.  Is there any other kind?""  But the fact that someone can say something like that indicates that there are many people who are looking for something other than a ""transportation car""." I had a 2000 Chevy Cavalier until late 2011. It worked well, but was very definitely at the end of its life. This was a low-end car, certainly, but I dispute your claim that cars last 20 - 25 years. Consumer Reports apparently says the average life expectancy of a new vehicle is around 8 years or 150,000 miles. When it came time to replace my Cavalier, I was significantly concerned about car safety and about the ability to handle Canadian winters (-40 temperatures, lots of snow). I chose a Subaru Forester as a good match for me. I could have bought one second-hand, but I wasn't willing to get one as old as five years. Car manufacturers constantly improve safety and features over that time period. The Forester is massively more capable of handling Canadian winters than the Cavalier was. If I was buying a Forester now, I'd want the EyeSight Driver Assist System which Subaru added a couple of years after my model year. The newer models score slightly higher in crash tests, too. That would limit me to 2014 or later models, and I'd be concerned someone selling a 2014 or 2015 knew something I didn't, knew they had purchased a lemon. I didn't need financing for my vehicle. On the other hand, I could have invested the money I saved, so if all I wanted was something to get me from point A to point B, my choice does not make much financial sense. But Canadian winters are brutal and car safety is massively important to me. I'm well aware that I paid considerably for this, and I'm comfortable with my decision. The car you dream of might not be available in your local used car market.  Or if it is, there might be something wrong with it. Here are some reasons that a person might want to buy a new car.  Basically, if you have a picture in your mind of what your next car should look like, it is easier to shop for a new car: New cars are getting better.  Here are some reasons that a person might want a newer generation car rather than an older generation car: Cars wear out.  Here are some reasons a person shopping for a car might pass on a used car: In other words, there are good reasons to want a car that is either brand new, exactly two years old, or 3 - 5 years old.  The brand new car might be better than the old car ever was. Many reasons So in general you are paying more for peace of mind when you buy a new car. You expect everything to be working and if not you can take it back to the dealer to have them fix it for free. "I would answer your question very simply: marketing works. ""If you don't have a new F-150, you are not a real man.""  for men, and ""If you don't have a new Honda Pilot your kids are in danger."" for woman.  One observation that reinforces this are the amount of new(er) Buicks on the road.  Five years ago, they were pretty rare, now there are many.  Their marketing strategy of ""We don't suck so much anymore"", seems to have worked.  I don't get it. Last year, Consumer Reports reported that 84.5% of new cars are financed with an average payment of $457 over 65 months.   I like your analysis, but lets say instead of following this path, Brad and Jenn, put $250 a month away in a cookie jar (to cover repairs and car replacement), and $664 (457*2-250) in a mutual fund.  After doing this for 30 years, they will have 1.5 million.  Driving a new car is precluding many from being wealthy. It is hard to jump aboard the ""income inequality"" bandwagon when you see with brand new iphones and cars." Most people today (and maybe regardless of era) are irrational and don't properly valuate many of their purchases, nor are they emotionally equipped to do the math properly, including projection into the future and applying probabilities. This compounds.  Imagine that each individual is bound to others by a rubber band and can stretch in a certain direction.  The more your neighbors stretch, the more you are both motivated to stretch and able to stretch.  These are crudely analogous to consumer wants as well as allowed consumer debt.  The banks are also within this network of rubber bands and much of their balance sheet is based on how far they've stretched on the aggregate of all connected bands (counting others debts as their credit because it will presumably be repaid), and every so often enough people's feet slip that a lot of rubber bands snap back.  This is a bubble bursting. If you don't know how to fix your own car or have time to take car parts off of a car at a junk yard, the average amount of money per month you spend on repairing an old car will be greater than the amount of money you spend per month on a new car payment. This is because car repair shops are charging $85 per hour for labor for car repairs. Many parts that wear out on a car are difficult to replace because of their location on the engine. The classic example is piston rings.
It is almost never going to be more economical to buy a new car versus repairing your current car. If you want a new car, that is justification enough. "I don't think you're missing anything on the math side as far as the payments.  Likewise, it may seem everyone's driving a nicer car, but I'm going to predict that's based on area and a few other factors (for instance, my used car feels like riches in a college town).  The behavior of why people would pay money, especially with high interest debt, for something is a little different. To explain the behavior behind people who purchase luxury cars: for some people, a car is a purchase that they value, similar to a person valuing the clothes they wear, the house they live in, or the equipment they buy and either borrowing or paying full price on an expensive car is worth it to them.  We can call it a status symbol dismissively and criticize the financial waste without realizing, ""Wait, this is something they value"" like a rare book collector likes rare books (would a rare book collector pass on borrowing money if it meant a once-in-a-lifetime rare book purchase opportunity?). Have you ever felt, ""Wow this is cool/awesome/amazing"" with something?  Basically, that's how many of them feel toward these cars.  As much as I'd love to say they're only doing it for status (because I'm not a car person), that's actually somewhat de-humanizing and the more I've met people like this, the more I've realized this is their ""thing"" and to them it's totally worth it (even with all the debt).  I have no doubt that there's a percentage of them who truly may be misled - maybe they don't realize the full cost of borrowing money or leasing.  Still, for those who don't care the full cost, that's because it's their thing.  We can all agree that it's still not wise to do financially (borrow on a luxury vehicle), and it won't change that some people will do it." "How can people afford luxury cars? The same way they can afford anything: by finding it cheaply, saving for it, or adjusting their priorities. Company cars - either paid for by the company, or as part of a bonus/compensation/salary sacrifice scheme. I have friends who drive luxury cars, but they pay £200/month - not much more than, for example, finance on a used Honda People who have paid off their mortgage. There are people who spend a decade pouring every cent they have into a mortgage. Once paid off, they have £500-1500 a month ""spare"" People who have different priorities to you. I'm not bothered about big houses and holidays, but I love cars: I'd rather spend an extra £100/month on my car and have a holiday every 2 years, not every year People who only run one car in the family: if you're running two cars at £200/month, then discover one of you can work from home, you could have one £400 car and still be saving money on running costs. People who don't have (or want) children. Children are expensive, if they aren't part of your plans then you can save a lot of money for luxuries." "Evaluating the total cost of operation and warranty period are indeed important considerations, but the article is specifically about buyers making an expensive car ""feel"" more affordable to their budget by having smaller payments over a longer term.   &gt;“Stretching out loan terms to secure a monthly payment they’re comfortable with is becoming buyers’ go-to way to get the cars they want, equipped the way they want them,” said Jessica Caldwell, Edmunds executive director of industry analysis." +1 They are over priced to begin with - More specifically they are expensive to create exclusivity, which raises their value to people who value that kind of thing. Perhaps folks who buy those cars aren't buying them for value or quality or performance, but are buying them for the badge and the intangible factors.  I frequently hear about rich people who earned their millions driving around in cars Consumer Reports rank highly, so it isn't because they are so much better than a mid priced car. A car for $140,000 is either equipped for the A-Team or is a status symbol.  The status symbol notion is very expensive, but fades very quickly, hence the mighty depreciation. Most people buy insurance because it is legally required to own a car or to have a mortgage. People want to own homes and to have personal transportation enough that they are willing to pay for required insurance costs. There are a lot of great explanations here as to why insurance is important and I don't want to detract from those at all. However, if we're being honest, most people are not sophisticated enough to measure and hedge their various financial risks. They just want to own an home and to drive a car. That's because the wealthy are paid for every engine stroke, and they know the car is almost out of fuel, and is heading for a cliff.  So they are making plans to bail while collecting as many resources from the car's operation before it's inevitable crash. Nothing's generating a whole lot of interest right now.  But more liquid and stable is better (cash or cash-like). But a related question:  Why a new car?  You can knock thousands of dollars off of the price of a comparable vehicle by buying one that's one or two years old.  Your new vehicle loses thousands of dollars in value the moment it goes off the lot. I believe one of the main reasons cars -- luxury or otherwise -- depreciate so quickly is that many auto accidents can cause serious engine/frame damage but are easily cosmetically repaired.  If you smash up the car but get the body fixed, and you don't go through insurance, it will be indistinguishable from the same car that hasn't been in a crash. A loan that does not begin with at least a 20% deposit and run through a term of no longer than 48 months is the world's way of telling you that you can't afford this vehicle.   Consumer-driven cars are rapidly depreciating assets. Attenuating the loan to 70 months or longer means that payments will likely not keep up with depreciation, thus trapping the buyer in an upside down loan for the entire term. Their argument is that if prices start dropping, people won't buy stuff because they think the prices will keep going down? Aside from the fact that if prices go down, the cost to produce things also goes down, this is patently untrue. Look at gas. When prices are down, do people drive less because they think prices will keep going down? Car dealers as well as boat dealers, RV dealers, maybe farm vehicle dealers and other asset types make deals with banks and finance companies to they can make loans to buyers. They may be paying the interest to the finance companies so they can offer a 0% loan to the retail customer for all or part of the loan term.  Neither the finance company nor the dealer wants to make such loans to people who are likely to default. Such customers will not be offered this kind of financing. But remember too that these loans are secured by the asset - the car - which is also insured. But the dealer or the finance company holds that asset as collateral that they can seize to repay the loan. So the finance company gets paid off and the dealer keeps the profit he made selling the car. So these loans are designed to ensure the dealer nor the finance company looses much. These are called asset finance loans because there is always an asset (the car) to use as collateral. "The purpose of the emergency fund is to enable you to pay for unplanned necessary expenses without going into debt.  You know that cars don't last forever and eventually need to be replaced. Ideally, you would have a ""car replacement fund"" which you contribute to a little every month. (Essentially, it is a car payment to yourself.)  Then when it comes time to get a replacement car, you have money set aside for this purpose and know exactly how much you can spend.  However, in your case it seems that you don't have enough money in your car replacement fund for the car that you want.  There are a few different causes that might have led to this situation: Due to unforeseen circumstances, you need a replacement car before you thought you would need it.  You find that your planning was not quite right, and you weren't saving as much as you need.  You are trying to buy a more expensive car than you need.  If a replacement car is a necessity, two of these are emergencies, one is not.  If you don't have enough cash set aside for a car, it is certainly better to spend your emergency fund and pay cash than to borrow money to buy the car. Only you can decide if the car you are looking at is appropriate for you, or if you should be looking at a less expensive car. After you purchase the car, build your emergency fund back up first, then start saving for your next car." When you purchase a mortgage, you have to prove the source of your down payment.  Primarily this is so that the mortgage lender knows that there are no other outstanding liens against the property.  If you show that some or part of your down payment was a gift, there is no fraud, but it may affect your qualification for the mortgage. Consult a lawyer in your area to determine if there is a legal way to gift the money that is not taxed.  If all else fails you could just pay the tax.  Also, you should research whether your gift is above the floor of taxable gifts. This is all very basic and general advice, that works for most, but not all.  You are unique with your own special needs and desires.  Good luck! P.S.: not exactly related to your question, but when you get more familiar with investing and utilizing your money, find more ways to save more. For example, change phone plan, cut the cable, home made food in bulk, etc.