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

by Mike Holman

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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!

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{ 32 comments… read them below or add one }

1 Traciatim

I think you forgot the two most obvious examples:

1) New car for 10 years, vs 1 year old for 9 years
2) New car for 10 years, vs 2 year old for 8 years

In case 1, the car is 30000, loses 20% per year. The first person buys the car for 30000, sells it for 4845, losing 25154. Buying a year later the second person buys the car for 25000 selling for essentially the same price losing 20154. The new buyer pays 24% more in depreciation. Anotehr way to look is 2515 per year, vs 2239 per year.

In case 2, the first person in in the same scenario. The second person buys the car for 20833 and sells for 4845, for a loss of 15988. The new buyer pays 57% more in depreciation costs. This equates to 2515/year vs 1998/year for the 2 year old car buyer.

I think the major flaw in this analysis however is that depreciation tends to be greatest in year one, and then tapers off for other years. This would skew the figures further in favour of being a patient 1-2 year old car buyer who waits for the great deal to come along.

2 Al

I bought a new car and have been driving it for 10 years now. It still feels like a new car because I maintain it well and drive it with care. Buying a late model car leaves doubt what the original owner did/didn’t do to it. I believe a major factor in maintenance and reliability is how it is driven and maintained, and buying new removes doubt. That being said, if you drive like a maniac, buy used; the previous owner was probably nicer to the car.

3 Four Pillars

Traciatim – I’m not sure you can compare someone who buys a new car and keeps for 10 years with someone who buys a 2 year old car and only keeps for 8 years. What do they do for the other 2 years?

I don’t agree that the first year depreciation is that much larger than other years. In dollar terms – the first year is the most using my 20% estimate but I don’t think the percentage should be higher (although I could be wrong).

The other problem is that how many people sell their car after 1 or 2 years? I suspect most of those cars have been in a major accident or have high kilometers which will skew the depreciation values for the first year or two.

Al – very true that you don’t know what the original owner did. If I knew I was only going to own a car for a couple of years I wouldn’t do much maintenance.

4 EconStudent

Four Pillars – Another factor that you did not talk about is that insurance can be a major factor. For example, my experience is that insuring a Honda Civic is 30 to 50 dollars more a month than a Toyota Corolla. That is a 360 to 600 dollars a year.

An assumption that you used is that a 2 year old car has the same functionality and performance as a new car. From my experience, this is no longer true. A 2009 Corolla has significant upgrades from a 2007 Corolla in terms of a new engine and a new frame. A 2010 Mazda3 has significant upgrades from a 2008 Mazda3 in terms of a new automatic transmission that is as efficient as a manual transmission and and a new body. As a result, the intrinsic value in terms of functionality of a new car can be higher than a 2 year old car.

From my experience, a 2007 Civic was priced the same as a new 2009 Corolla. As a result, I would say that you should definitely shop around and check out new car prices on top of old car prices.

Buying an used car from a private person lets you skip provincial sales tax. That could be a bonus buying used as well.

5 tom

But does it make sense for people to buy a used or new car on credit?

I mean you are paying interest on something that is losing value. So its like throwing money into mud.

6 Four Pillars

EconStudent – Good point about insurance differences between models – I’ll have to add that to the post. Older cars are cheaper on insurance as well especially if you don’t have collision.

You’re right that newer cars sometimes are better than older cars but that is hard to quantify. Sometimes there are big advances in safety.

7 Kelvin

You also forget that a new car comes with a warranty. Most 3-4 yr old cars are about to come off the warranty. Its true that most new cars are fairly reliable but the cost of “piece of mind” is something that we should try to quantify as well.

8 Four Pillars

Kelvin – the ‘new car’ warrantee really only lasts for 1 year. Any warrantee after that is paid for which obviously changes the equation.

As to how to quantify – that’s pretty tough. I think you can get warrantees on used cars as well?

9 nobleea

From my experience, I would say that leasing has changed the depreciation part a bit.
Leasing is essentially a linear depreciation (that’s what you pay every month). Someone who wants to sell their leased car during the lease or at the end will be looking to get about what their buyout at the time is. Most leases are based on a 50% depreciation over 4 years. Since a lot of people have leased recently, the car makers have essentially forced the depreciation to be that. Of course, there will be people who are desperate to lose the lease and might accept a little less than buyout value, or there might be those who paid for the car in cash when new and now need the cash, so are willing to take a hit off the intrinsic value to get the cash quick.

Warranties are good. Also keep in mind that new cars will always have new brakes and tires, whereas a 3 or 4 year old car might need new brakes and tires as soon as you buy it.

10 nobleea

FP:Kelvin – the new car warrantee really only lasts for 1 year. Any warrantee after that is paid for which obviously changes the equation.

THe new car warranty can be expected to last 3-5 years, depending on the make. That’s included in the new car price. If you’re comparing to a 2 yr old used car, then the new car warranty advantage is only 2 yrs, since the used car will likely still have teh manufacturer’s warranty for another 2 years.

11 Traciatim

How many people get rid of a car after 2 years? Piles and piles, go to Auto Trader and do a search for all used cars in your province that are 2008 or 2009. In New Brunswick there are 577.

As for the 8/10 year thing, I guess you would have to compare it over their buying lives rather than a single car purchase since each will probably own a few cars over their lifetime. Say 40 years, the used guy owns 5 cars and the new guy owns 4.

According to the depreciation calculator over at http://tinyurl.com/cxgad3 the first year depreciation on a 30000 new car (average) would be 6900, not 5000. They use 23% for year 1, and 15% per year after that.

Using this method and 4 vs 5 cars over a lifetime we end up with:
Person 1, new cars. Buys 4 cars at 30000, losing 24649 per car, for a total lost of 98596.

Person 2, buys 5 cars at 19635, losing 14284 per car for a total loss of 98175.

Hmmm…. so why bother buying used cars I guess…. that wasn’t the answer I was expecting. Am I missing something, or is my next car going to be new?

12 Four Pillars

Nobleea – I bought a Jeep Liberty 5 years ago and it only had a 1 year complete warrantee. There were some select parts that are guaranteed longer (powertrain etc) but if I wanted better coverage I would have had to pay for it.

Do most new cars have better warrantees than this?

Yes, leasing certainly complicates things. As I said – it’s not a simple issue! :)

13 Linda

Our 2001 came with a 4 year warranty including road side assistance. Some parts are warranted for longer. Oil changes are free for the original owner but I think that’s something the dealer adds. So far we’ve only had one instance where we had to pay anything for maintenance. The dealer did offer (really pushed is a better word) an additional warranty that would make it 7 or 8 years which we didn’t take.

14 Four Pillars

Traciatim – thanks for the link to the calc.

23% for the first year and 15% after that seems quite reasonable – my 20% number was a rough estimate.

By the way according to my 20% number the first year depreciation is $6,000 not $5k as you state.

Person 2, buys 5 cars at 19635, losing 14284 per car for a total loss of 98175.

5 times 14284 is $71420 so your initial thought was correct – the used guy comes out ahead.

15 Traciatim

Wow, that’s some good maths by me. I did the purchase price of the car rather than the depreciation cost on the second buyer . . . whoops.

16 Adam

My 2007 Jeep came with a 4 year warranty. 3 years bumper to bumper (Everything on the vehicle) and 4 years powertrain/drivetrain. I could pay extra if I wanted to extend the bumper to bumper beyond the standard included 3 years. The new Jeeps have a lifetime transferable warranty on powertrain/drivetrain. I just missed that offering by 8 months…

Maybe add to your analysis a repair cost as a flat rate per year indexed to inflation. This would kick in after 3 years from new. It may be an interesting addition. (maybe $600 per year?)

17 Four Pillars

Adam – I’ll try adding the repair cost to the estimate since it really should be there. $600 sounds good.

18 Potato

And the advances from older cars to newer ones are discrete: the 2007 Civic was a big change from 2005, but the 2009 is identical to the 2007; the 2007 Corolla is identical to the 2005, etc. The used market usually factors in a drop in price for the model change.

I’ve only had any input into the decision once when buying a used car, but we went for one that was newer with higher mileage over one that was older with lower mileage, the reasoning being that we’d rather have 1000 highway kilometers over 500 city kilometers in terms of wear & tear, though of course there’s no way of really knowing how the previous driver drove it (it’s possible they racked up 80,000 km in three years in the city).

19 Nurseb911

Hey Mike,

I just bought a new 2009 RAV4 Monday and I love it….just have to wrestle the keys away from my gf!

The reason I bought my first “new” car?

The deal was right (cost +2.5%), lease rate favourable, extended warranty and I have an opportunity through my own business to write off some of the vehicle cost. When I factor in the length of time I intend to keep the vehicle, the additional utility of travelling, towing the boat to the cottage and other items the cost/benefits worked out favourably.

I’m usually a big fan of buying slightly new/used cars and maintaining them for a long time, but as a primary vehicle this one fit the bill.

20 Four Pillars

Congrats Brad. Maybe you should save up and buy yourself one as well. :P

21 Four Pillars

http://www.thesimpledollar.com/2009/03/21/the-hows-and-whys-of-our-car-purchase-a-2009-toyota-prius/

Here is a pretty good article outlining a recent new car purchase – he was planning to buy a late model used car but found that the price difference wasn’t enough.

This has to be a temporary phenomenon – new cars won’t be that cheap forever and used cars should drop in price a bit.

They also took a good look at the mileage of the car and their usage which I talked about.

22 Adam @ Checkbook Diaries

We are going to be in the market for a “new to us” car pretty soon and will most likely opt for a previously owned vehicle. Great deals can be had right now. My dad just bought an off lease 2007 Ford Explorer with 30,000 miles on it for $11,000. It looks brand new, and rides great. The base MSRP is around $29,000. I’d say he got a great deal, and didn’t have to absorb the depreciation hit inherent in buying a brand new car. The only drawback I can see is trying to finance a used car.

23 mark sharper

I’ve found that over the years, when I am moving from one car to the next, the most bothersome and stressful part of the process is selling the damn thing. Usually, I just do a trade-in deal and hope Im not getting the short end.
This time, I have decided to make the big switch from car to bicycle. Living in NYC makes that possible for me. I know that a lot of people (judging from this post and the dozens of comments) are very savvy when it comes to buying or selling their car. I am not one of them.
Instead of dealing with advertising my car and haggling with potential buyers, and then have to deal with all the ins and outs of buying a new one (especially in such an aggressive market) I just went to bigbucksauto in Queens. I got a nice chunk of change from them and went and spent a fraction of it on a brand-new bicycle.
So, what the depreciation like on a bike? ;)

24 Gates VP

Hey Mike;

I think that you made one untenable assumptions, which is why there is so much back and forth on the topic.

A car does not depreciate by some flat annual percentage, it depreciates by use.

Age, and age-related calculations, such as your depreciation of 20%, are really just short-hands for tracking some change in value. But obviously, a 10-year old Civic with 300k is not somehow worth 20% less than the 9-year old Civic with 300k.

The big problem is that you’re not really answering your own question. Your underlying question is “what’s the cheapest way to drive?”. But driving is about putting miles on a car, it’s not about “aging” some depreciating asset. Maintenance is about mitigating the depreciation of those miles.

So if you’re not measuring both Maintenance and Miles then you can’t really paint a very good picture of your underlying cost of driving.

In Scenario 1 for example, you make the assumption that owning a car for 9 years will cost more in maintenance than owning a 3-year old car. But this assumption is far from correct. The cost of car maintenance is far less from years 0 to 2 than it is in 3 to 5. If you look at the expected life-span of car parts, they start dying off around the 45k to 60k miles mark. At an average of 10k to 15k miles per year, buying a 3-year old car typically means that you are inheriting a certain liability of care.

If you assume even mileage and quality expectations from both parties then the used car owner actually has higher maintenance. He’ll have three major repair cycles instead of two. And unless he drives the car until it needs it’s next set of repairs, he will not get full value from those fixes.

Think of it this way. Assume that you buy a car with 45k miles and sell it with 90k miles. The alternator dies at 60k miles and requires a replacement. The alternator had a lifetime of 60k miles which you paid for in full, but you only got 45k miles of driving out of it.

If you keep buying 3 year old cars (scenario 1), you have to replace 3 alternators in 9 years. One for each car. But if you buy the new car you will buy 2 alternators in those 9 years.

So at the end of the day, I just think that you’re following the wrong assumption and it’s leading to some faulty conclusions. Of course, YMMV.

25 Four Pillars

Gates – the main point of the article is to look at depreciation to try to get some feeling for the buy new/used scenarios. In all my scenarios I’m assuming similar mileage.

“What’s the cheapest way to drive”? No, that wasn’t my question – not everyone is looking to reduce their costs to the bare minimum on every activity/purchase.

Your right about the maintenance/repairs – to do a proper analysis, this should be included.

This post wasn’t supposed to be a definitive answer to whether someone should buy new or used, it was mainly me playing around with some numbers to look at (sort of) real life depreciation scenarios.

26 Allen

Gates,

Thanks for adding that dimension to the analysis. That just shows how complicated it can be in determining the best course of action to take. Total cost of expected ownership for the given periods need to factored in. I am sure those numbers can vary wildly from model to model, year to year.

27 Nadim

You ask any person who works at a dealership and they will tell you after 1 month of owning a car, you can ruin it for the next person. I would buy new unless you are buying the car from a retired person who never drove it in rush hour traffic and the car is only 5-6 years old.

I have grown up driving cars over 15 to 20 years old, and I’ve found myself to be very satisfied. Now that I’m older, I will treat myself to new

28 Portsider47

What has been forgotten is the differing interest cost of purchasing a more expensive (new) vehicle vs. purchasing one that is say 2 y.o. I think the true comparisons are:
(a) keepers – (1) buys a new vehicle and keeps it for say 8 years vs (2) buys a 2 y.o vehicle and keeps it for 8.
(b) traders – (3) buys a new vehicle every 3 years while (4) buys a 2 y.o vehicle every 3 years. I’ll let some wizard do the math on the 23% & 15% scale, but of course in the keepers example person (2) would in theory have a slightly higher repair costs since their years 7 and 8 are actually 9 & 10 for the vehicle while (1)’s comparative is their years 1 & 2 where the repairs might be under warranty or non-existent [(1)'s years 3-8 repairs would be assumed to be the same as (2)'s 1-6 years']. Similarly, in the traders example person (4) would have the higher repair costs. I think you can forget quantifying repairs, peace of mind or all the other intangibles of owning a newer vehicle and just say that if those factors are overriding for you, then go with the new car if it seems to out-weigh the math for you.

29 Jack

Good advice and disucussions. My main comment is about financing a vehicule.

I’ve owned two used vehicules so far and have only had to do regular maintenance on them which is obviously good peace of mind.
Lately, i’ve been looking at buying new simply because the cost per month for a used car just doesn’t make sense (in the long range..)
I know the interest rates might not be as high in other provinces but in Ontario, the average going interest rate to finance a used vehicule is about 8%, if you finance it over 6 years or more I believe.

A new vehicule is about 3.8% for a 6 year financing. So you end up paying a lot closer to the MSRP of the new vehicule in the long run simply because of the interest rates.

The asking price of the used vehicule is obviously less because of the depreciation but if your planing on financing for a few years, it’s usually more beneficial to go new, even though the vehicule might be more expensive to start off with.

30 Daniel

There are other variables – inflation – (or deflation),and price fluctuations. Over the last couple of years , here in the U.K., new car prices have been rising, I bought my very small car new for £5750 3 years ago, the same model is now £6999. This rise is partly due to inflation and changes in exchange rates of the U.K. pound against the Euro. Peaks and troughs in new car sales lead to over and under supply in later years in the second hand market, therefore price fluctuations. At the moment there is strong demand for small second hand cars but new cars are not selling too well and the new car dealers are running good promtions. So I should be able to get a good deal on my car and a good price on a new car.

31 wolf max

i’d say use the 23% 15% scale and adjust for repairs and insurance after 3 year point in some simple arbitrary way (or note how its nearly impossible).

i would like to see a 3 buyer comparison:

(a) keepers – (1) buys a new 30k vehicle and keeps it for say 9 years vs (2) buys same vehicle 2 years old and keeps it for 7 years vs (3) buys same vehicle 4 years old and keeps it for 5

(b) traders – where every 3 years (4) buys a new 30k vehicle vs (5) buys same vehicle 2 years old vs (6) buys same vehicle 4 years old

and possibly more scenario sets like 6 years, 12 years, and 18 years.

32 varios

What would you buy and why on this very specific case.
Money: Around $29.000

Options:
2011 Accord EX-V6: New
2008 Lexus ES350: 44,000 miles.

Not choosingby size/speed. I’m more into Efficiency/Engine and it’ll probably stay 3years with me. Big question might be Which car is better? The smart choice will be a new “regular” Accord or an Older “lil-luxury” Lexus.

Looking into what I think is good in the marked… honda, toyota, lexus, audi (not any more expensive than that) but well, dont know much about cars in general… then so hard to decide.

Comments are really welcomed, even long ones !!
Need more orientation in the Why … this or that one.

Thanks

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