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.
"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." "Short answer: NO.  Do NOT buy a house.  Houses are a ""luxury"" good (see Why is a house not an investment?).  Although the experience of the early 2000s seemed to convince most people otherwise, houses are not an investment.  Historically, it has usually been cheaper to rent, because owning a house has non-pecuniary benefits such as the ability to change things around to exactly the way you like them.  Consult a rent vs. buy calculator for your area to see if your area is exceptional.  I also would not rely on the mortgage interest deduction for the long term, as it seems increasingly likely the Federal government will do away with it at some point. The first thing you must do is eliminate your credit card and other debts.  Try to delay paying your lawyers and anyone else who is not charging you interest (or threatening to harm you in other ways) as long as possible.  Save enough money to maintain your current standard of living for 6 months should you lose your job, then put the rest in your 401(k). Another word of advice: learn to live with less.  Your kids do not need separate bedrooms.  Hopefully one day the time will come when you can afford a larger house, but it should not be your highest priority.  You and your kids will all be worse off in the end should you have unexpected financial difficulties and you have overextended yourself to buy a house. Now that your credit score is up, see if you can renegotiate your credit card loans or negotiate a new loan with lower interest." It very much depends on whether you want to drive around in an expensive car, or whether you want an expensive car parked on your driveway. And whether you want to buy a new car, or a used one. And whether you know a reliable garage that doesn't rip you off or not.  For example, if my wife who drives maybe 5,000 miles a year wanted a 5 series BMW, we could buy a five year old one with 120,000 miles, for about £120 per month purchase price if it lasts 6 years. 11 year old and 150,000 miles should be no problem for that kind of car. So that's quite affordable. For me, driving 25,000 miles a year, the numbers are quite different.  Fact is, if you drive around in my wider neighbourhood, you will sometimes see very expensive cars parked in front of very rundown houses. Some people find it more important to drive around in an expensive car than to live in a nice place. That's priorities. Many people can afford expensive cars if they rearrange their priorities (and I'm not saying it's a good thing).  PS. If you want to be seen in an expensive car (for example, you take your wife out), you can always rent a car for a day or two. "Here's what you do without, on the negative side, just for balance: A bill: When I last had comprehensive insurance, it cost something like 3-4% of the value of the car per annum.  (Obviously ymmv enormously but I think that's somewhere near the middle of the range and I'm not especially risky.)  So, compared to the total depreciation and running costs of the car, it's actually fairly substantial.  Over the say 10 years I might keep that car, it adds up to a fair slice of what it will take to buy a replacement. Financial crisis costs: I don't know about you, but my insurance went up something like 30% in recent years, despite the value-insured and the risk going down, said by the insurer to be due to market turmoil.  So, at least hundreds of dollars is just kind of frictional loss, and I'd rather not pay it. Wrangling with the insurer: if you have insurance and a loss, you have to persuade them to pay out, perhaps document the original conditions or the fault, perhaps argue about whether their payment is fair.  I've done this for small (non-automotive) claims, and it added up to more hassle than the incident itself.  Obviously all insurers will claim they're friendly to deal with but until you actually have a big claim you never know. Moral hazard: I know I'm solely responsible for not having my car crashed or stolen.  Somehow that just feels better. Free riders: I've seen people ""fudge"" their insurance claims so that things that shouldn't have been covered were claimed to be.  You might have too.  Buy insurance and you're paying for them. Choice: Insurers are typically going to make the decision for you about whether a claim is repairable or not, and in my experience are reluctant or refuse to just give you the cash amount of the claim. (See also, moral hazard.)  Do it yourself and you can choose whether to live with it, make a smaller or larger repair, or replace the whole vehicle with a second hand one or a brand new one, or indeed perhaps do without a vehicle. A distraction: Hopefully by the time you've been working for a while, a vehicle is not a really large fraction of your net worth.  If you lose 10% of your net worth it's not really nice but - well, you could easily have lost that off the value of your house or your retirement portfolio in recent years.  What you actually need to insure is genuinely serious risks that would seriously change your life if they were lost, such as your ability to work.  For about the same cost as insuring a $x car, you can insure against $x income every year for the rest of your life, and I think it's far more important. If I have a write-off accident but walk away I'll be perfectly happy. And, obviously, liability insurance is important, because being hit for $millions of liabilities could also have a serious impact.   Coverage for mechanical failures: If your 8yo car needs a new transmission, insurance isn't going to help, yet it may cost more than the typical minor collision.  Save the money yourself and you can manage those costs out of the same bucket. Flexibility: If you save up to replace your car, but some other crisis occurs, you can choose to put the money towards that.  If you have car insurance but you have a family medical thing it's no help. I think the bottom line is: insure against costs you couldn't cope with by yourself.  There are people who need a car but can just barely afford it, but if you're fortunate enough not to be in that case you don't really need comprehensive insurance." I think a lot of highly educated people fall victim to keeping up with the joneses. Not everyone that is in their same position comes from the same background. For example, a co-worker with an MBA from Vanderbilt may have no student loan debt because his lawyer/doctor parents paid for it, while another co-worker with an MBA from University of Phoenix may be getting crushed with loan repayments.  However, assuming that they both make the same salary, one will look to the other to set an example of what houses/cars/other things people in this salary range buy. Salary and social pressures sometimes outweigh financially sound decisions. Other than being reduced to clear as others have suggested quite a few get sold to large motor stores. You can often go in and find last years model with around delivery mileage at a very knocked down rate because most people would prefer the latest model direct from the dealer. Doing this allows dealers to clear old stock incredibly quickly so they can promote the newest model exclusively. At first guess, people have less and less disposable cash/income for a down payment which subsequently results in longer loan duration. I thought I recall reading an article not too long ago where average auto loan term was 70 something months and average new car is $30k+. That’s a lot of $$$ for a country where median household income is $50k. "Ditto other answers, but I'd add there's a lot of psychology going on in a sale. If you're paying cash, you presumably have a pretty fixed upper limit on what you can spend. But if you're getting a loan, a large increase in the price of the car may sound like just a small addition to the monthly payment. Also, these days dealers often try to roll ""extended warranties"" into the loan payment. Most people can't calculate loan amortizations in their heads -- I'm pretty good at math, and I need a calculator to work it out, assuming I remember or wrote down the formula -- a dealer can often stick a piece of paper in front of you saying ""Loan payment: $X per month"" with fine print that says that includes $50 for the extended warranty, and most people would just say, ""oh, okay""."