Buying A New Car or Used Car? Things To Think About

by Mike Holman

One of the prevailing wisdoms floating around the internet is that your best value when buying a car is to get one that is only 2 or 3 years old.  The idea is that you avoid some of the heaviest depreciation years in the beginning but the car should still have a number of good years left with minimal repairs.

I’ve been doing some thinking about this topic recently when I’ve been riding on public transit and have come up with the following thoughts which made me realize that this issue is far more complicated than just buying a late model car to get the best deal.

corvette

I’m not going to try to come up with a list of things you have to do to save money on your next car – there are many different situations out there and the fact is that a lot of people don’t necessarily want to save as much as possible on cars – they just want to get the best value for the money they are willing to spend – not everybody is flat broke.  The important thing is to consider these factors and include them in your calculations if you think they apply to you.

Car depreciation amounts per year

I did a bit of research on this and came up with a general rule that a car will depreciate about 20% per year.  Now, I’ve seen some ridiculous depreciation estimates like 30-40% as soon as you drive it off the lot.  All I can say is that if you know someone who is willing to sell their car for a huge discount after driving it off the lot then buy it.  Has anyone ever sold their car on the day they bought it?

This is just a rough estimate and given how poor new car sales have been, it’s not surprising that I’ve heard anecdotal stories that the difference in price between new cars and late model cars isn’t that large.  This is not a sustainable scenario however so I’ll stick with the 20% number for my examples.

How long do you keep the car?

I think the length of ownership is often more important than the age of the car when you buy it.  If someone buys a car that is only a few years old and keeps it for a short period of time and keeps buying more cars of the same age – do they pay less depreciation than someone who buys a new car and keeps it for the entire time?

I did a few calculations and I have to admit the results surprised me – I thought that a new car buyer who kept the car a long time would pay less (or the same) depreciation than someone who bought lightly used cars but didn’t keep them very long.  In fact, I was wrong.

Scenario I

  • Depreciation rate is 20% per year.
  • New car is $30,000.
  • New car buyer keeps the car for 9 years.
  • Used car buyer buys the car when 3 years old and sells at 6 years old – he does this 3 times.
  • New car buyer pays $3486 more in depreciation (16% more).

This scenario doesn’t include potential repair costs which should be higher for the new car buyer – but it’s a moot point since the new car buyer has already lost the competition in the depreciation category.

Scenario II

  • Depreciation rate is 20% per year.
  • New car is $30,000.
  • New car buyer keeps the car for 10 years.
  • Used car buyer buys the car when 2 years old and sells at 4 years old – he does this 5 times.
  • Used car buyer pays $7781 more in depreciation (29% more).

Ok, that’s the result I was looking for – of course this scenario is a bit silly.  I doubt there are very many people who buy 2 year old cars and only keep them for 2 years.  This scenario would need an estimate for repair costs as well since the new car buyer would have more of them in the end.

Scenario III

  • Depreciation rate is 20% per year.
  • New car is $30,000.
  • “Buy and hold” new car buyer keeps the car for 9 years.
  • “Market timer” new car buyer keeps the car for 3 years and then buys another new car.  He does this 3 times in total.
  • “Market timer” pays $18,000 more in depreciation (70% more).

I’d be remiss in my blogger duties if I didn’t point out the extremely obvious comparison of two new car buyers – one keeps the car for a long time whereas the other keeps trading it in every 3 years.  Well guess what?  The guy who keeps the car for a long time pays way less depreciation.  Of course his repair bills will be higher but it’s hard to believe that they will exceed that amount of depreciation difference.

Reliability of the car

This is part luck and part design – you can research which cars are more reliable and buy one of those.  You will probably pay more for that car than one that is less reliable so it could be a trade off.  I don’t have any good advice here except to say that I hate paying for car repairs to the point where I might actually be better off just buying new cars and only keeping for 5-6 years just to avoid the aggravation of it all.

Gasoline costs

This cost is hard to analyze using a rule of thumb because it is so variable.  The price of gas alone is quite variable and of course some people drive very little – others will put many miles on their each year.  Some people do mostly highway driving whereas others will do more city driving which will result in poorer gas mileage.

That said, if you use the car a lot then you should factor in the gas costs into your analysis – but only if you have the option of buying different cars which get very different mileage.  If you are a soccer mom and have to decide between 2 similar minivans, then don’t worry about the gas costs since the difference probably isn’t worth worrying about.  If you are deciding between a Mini and a truck AND you are going to use it a lot, then you better factor in the gas when determining the cost of ownership.

In my ‘buy and hold’ example above – the total depreciation over 9 years was $26,000.  If you spend $240 per month in gas – then guess what you will spend over 9 years?….yup – $26,000.  $240 is a lot of gas for one month but some people do it.  Even if you only spend $100 per month – after 9 years, your gas total is almost $11k.  If you have the opportunity to save 30% or more of that amount then you should factor that into your analysis.

Size and style

Larger vehicles tend to be more expensive – are you buying a larger car by choice or situation (ie large family)?  If it is by choice then you should try to compare your large car options with possible smaller (and cheaper) car possibilities.  If you have already decided on the larger car then there is no point in this part of the analysis but it doesn’t hurt to know how much your choices are going to cost.

Luxury models are the same thing – obviously if you are shopping for an expensive BMW then comparing the cost to a Honda Civic is pointless but maybe you can look at other similar cars and see if there are better values available.  There is a difference between falling in love with a magazine picture and actually test driving her on the road.  And yes, I’m still talking about cars here!!  Keep your mind open…and out of the gutter!

Photo credit.

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