Dave Ramsey warns car buyers on critical move

Fall is in full swing, and at this time of year, many Americans' attention turns to buying a car.

There are several reasons for this seasonal car-buying behavior, but personal finance bestselling author Dave Ramsey urges people to think beyond conventional wisdom or risk wasting a lot of money on an automobile purchase.

"Typically, the best time to buy a new or used car is at the end of the year, between October and December," explains Autotrader.

As dealerships begin stocking the latest vehicle models, they often slash prices on older inventory to make room.

October is a standout month, with markdowns averaging between 5% and 7% off the manufacturer's suggested retail price — and some cars are discounted even more. It's also a time when insurance premiums for new purchases tend to be more favorable.

But Ramsey urges potential car buyers to avoid the new-car temptation completely. In his mind, buying a good used car beats buying a new car every time.

"Buying a used car is always the better choice financially," Ramsey wrote. "Why? Because (1) used cars are less expensive overall and (2) they don’t drop as fast in value as new cars do."

Dave Ramsey's major warning on buying a new car

Ramsey offers many reasons why buying a used car is the better choice, but he elevates one financial fact to the top of the list.

"Brand-new cars lose a huge chunk of their original value in the first couple of years (even in the first hour)," he wrote. "A used car, on the other hand, keeps more of its value over time — which means you’re not losing as much money as you do with a new vehicle."

Related: Dave Ramsey has blunt words for Americans on car buying

Ramsey is serious about saving money by avoiding spending a small fortune on a new car. He doesn't view the choice as a simple matter of wasting some money in the short term — he believes making the correct decision on car-buying has a significant impact on lifelong financial dreams.

"The choice between a new or used car could be the difference between you riding the highway to wealth or spinning your wheels in a never-ending cycle of payments," Ramsey wrote.

Dave Ramsey bluntly illustrates new car depreciation

Ramsey briefly explains how new cars depreciate in value over the short term and long term.

• Immediately after purchase: A brand-new vehicle priced at $48,000 typically drops in value by 9 to 11% as soon as it's driven off the dealership lot. That’s a reduction of roughly $4,800 in just the first few minutes of ownership.
• After one year: Twelve months later, the car’s value will have declined by at least 20% compared to its original purchase price, even if it’s been well maintained.
• After five years: Over a five-year span, the vehicle may lose approximately 60% of its initial value. That means the $48,000 car could be worth only about $19,200 — or potentially even less — depending on condition and market factors.

Dave Ramsey explains car costs, paying cash

The new car average transaction price was $49,077 in August, according to Kelley Blue Book. Ramsey reports that the average used car costs $25,151.

"That’s basically half the cost," Ramsey noted. "It’s also usually easier to negotiate a better price for a used car."

Beyond taking into account the cost of the car in general, Ramsey also highly recommends one way to pay for a used car.

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"Even more important is how you buy the car," Ramsey wrote. "And 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."

Ramsey explained that the average interest rate on a new car loan is 7.18% and 11.93% on a used car loan.

"Any time you take out a car loan, you’re forking over thousands of dollars more — just to interest," Ramsey emphasized.

Ramsey explains when to buy a new car

A good guideline to follow is to keep the combined worth of all motorized vehicles — cars, motorcycles, boats, etc. — below 50% of one's yearly household income, Ramsey advises. He says a person ought to avoid locking up a large portion of their finances in assets that rapidly lose value over time.

Ramsey suggests not buying a new car until one becomes a millionaire.

"Unless you’re a millionaire, buying a new car doesn’t make financial sense. And even then, most millionaires buy used cars!" he wrote. "In the largest study of millionaires, we found that the average millionaire drives a four-year-old car with 41,000 miles on it. And 8 out of 10 millionaire car buyers choose to not have a car payment."

"Financing new cars is how people stay broke. So, choose used and pay in cash. You want to own your car instead of it owning you."

Related: Dave Ramsey shares key insight on mortgage rates