We’ve heard it so many times.
As soon as you drive the car off the lot, it loses 25% of its value and why do you want to pay the depreciation costs?
If you purchase a used car, somebody else already paid the costs and you can get a better deal.
On the surface, the logic behind that makes a lot of sense but is it actually true that purchasing a used car is a better value than a new car?
First, let’s remember that getting the most value doesn’t necessarily mean paying the least. Sometimes it works out that way but as we’ve all found in our day-to-day lives, buying the cheapest items may not save us money in the long run.
Car as Investment?
If the car loses 25% of its value as soon as you drive it off of the lot, is that an important fact to consider?
That would only be important if you were to drive it back on to the lot the same day and try to sell it but none of us are going to do that.
We purchase cars not as investments, but as tools.
They get us where we need to go and we are holding on to our cars longer than ever. The truth is that used cars are holding their value much more efficiently than in the past so that 25%, spread over time, isn’t really as shocking as we thought.
Used cars are at an historic high. According to Why a New Car is a Better Deal than Used, from US News, the average price of a three year old car is now $19,200. Hardly a bargain basement price for something that has been used for three years.
Even if you have a Carfax report, you don’t know how well it was maintained over the course of those three years. It might have very little life left on it and you paid almost $20,000 for it. And remember, a Carfax report will only show accidents that have been reported.
You could purchase a new car, complete with warranty for a similar price.
New car loans are below 2% with some dealers offering 0% financing on new cars.
Used car loans are often higher, above 2% in many cases.
Because of the high demand of used cars, dealers are less willing to offer incentives or more competitive pricing because they know they can sell the used car in short time.
New cars may come with manufacturer’s incentives as well as competitive financing.
Cost to Repair
Repair costs continue to rise and because of that, it’s becoming increasingly less cost effective to hold a car for long periods of time while pouring thousands of dollars in to keeping it running. Much like TVs and other electronics, the better value is quickly found in buying new instead of fixing the old.
Although used cars are flying off the lots, they may not be a better value than buying new. Along with better financing, reliability, and dealer incentives, over time the new car may be the better value.
Don’t automatically get lulled into the thought that a used car is better than a new one. Do your homework and decide for yourself the best car purchase for you. There are still great deals out there, but they aren’t as automatic as they used to be.
The conventional wisdom isn’t necessarily wrong but it isn’t always right.
I have only purchased new cars because I used a cost per mile calculation based upon a life span of 100,000 miles. The used cars that I was considering at the time were always more costly. Now having driven several cars into the 130,000 mile range, I may change my calculations slightly, but the premise is the same. I better be getting a greater than 40% discount on a used car if it has 52,000 miles on it already.
Glen Craig says
Interesting way to calculate.
I like that you plan to put lots of miles on your cars. We do the same.
We are currently trying to decide what we want to do. I have a new car and he has a used one. We bought his car 2.5 years ago for around $500 and there have been no problems. So in that case, a used car is definitely better.
Thomas - Ways to Invest Money says
I believe that purchasing a used car is worth it depending on your situation. Do you know a mechanic or fix things yourself. How far do you normally drive and what is the difference in price as compared to a new car. When I look at used I think no more than 1500-2000. I have a mechanic and a brother who works on cars so getting parts from ebay or auto shop saves tons.
Glen Craig says
That’s an important point. If you are good with cars or know someone you trust that is, you can get a better idea of the value of a used car and you can take care of repairs cheaper too.
I never bought a used car, but I keep my cars a very long time. Some cars even come with maintenance included. I know my credit union discriminates with a higher rate with used cars.
Glen Craig says
I think most places have higher rates for used card than new ones. A dealership has incentives for lower rates as well as incentives to move new units that you don’t get with used cars.
And with new cars you pretty much know what it is supposed to cost the dealer and you. It’s easy to shop dealers for the best price. With a used car there are a lot more variables as each car is essentially different because of its history.
After growing up on used cars and saying for years that I would never do it, we bought 2 brand new cars in a row for all the reasons you mentioned here. We got 0% financing on both, a fabulous warranty, dealer incentives and negotiated upgrades that just couldn’t beat the used cars we were researching and considering. That said, we’ll drive what are now 7- and 8-year old cars until they fall apart, then make the appropriate decision with the time comes. Things are constantly changing.
Jenna, Adaptu Community Manager says
Unless I get a lot of money in my lifetime, I think I’m going to stick to buying used cars, or as I like to call them “new to me” cars.
Glen Craig says
You have to do what works for you. I’m not saying used cars don’t still have great value. It’s just that the chasm between used and new has narrowed in recent years. I don’t think it’s a slam-dunk decision anymore.
Jon - Free Money Wisdom says
This was an interesting and thoughtful article. It was definitely apropos for my fiancee and my current situation. We’ll be in the market for a used car soon….we’ll have to consider the variables. However, I always have bought used cars and I don’t think we’ll be straying. I always can find great deals.
Glen Craig says
If you have the time and the skill the get a great deal then used is probably a great choice for you.
Another consideration for me is I don’t have the time/patience to go shopping around for a good used car. I also don’t have the time to deal with any repairs or extra maintenance. With 3 kids I can’t be without the car long. That may sound like excuses but time is money for me.
Sorry, gonna hafta beg to differ. I used to sell Toyota’s / Scion’s for 4 years so I know what new / used cars typically sell for. I think much of the “25% off its value” hype is based on a “value” of M.S.R.P., while most new cars (except rare cars and / or new models or popular, fresh re-designs of old models) go for 8-10% off of M.S.R.P w/ normal negotiation (basically taking off the markup from Invoice) *plus* any rebates which could be another $250-$3,000 off.
As for the “the average price of a 3-year-old car is more than $19,200”, that must be including *all* types cars from cheap compact to expensive luxury sedans and / or SUV’s. Most people are going to get and / or only really need a simple compact to midsize coupe / sedan and there are plenty to be *easily* found for well less than “($19.2k)”. Just Google it.
I bought a used 1998 Honda Civic LX Sedan M/T with 115 k mi. in 2005 for $2,500 cash (its typical Trade In Value at the time) and drove it for 60 k miles and spent another $2,700 in major maintenance and repairs on it ($2.2k of it this yr w/ almost everything except alternator and shocks replaced) and I think it’ll last 5 more years w/ just a few hundred more in major maint / repairs . My mechanic friend said recently the engine internals look great (when he did the timing belt & water pump change). It’s currently work $1.2 k Fair Condition Trade In Value according to KBB. TCO = $(2.5 + 2.7 k – 1.2) k = $4 k
If I had bought a new 2005 model at the time, it would’ve conservatively cost $14 k + $1 k TTL. If I’d put the $2.5 k cash as down, I would’ve financed ~$12.5 k at a then low rate of ~5.0% for 5 yrs. which would’ve added another $1.65 k in interest. If I’d put the same 60 k miles on it, it’d now be worth $4.8 k according to KBB Fair Condition Trade In Value. Even assuming no major maintenance except $400 for tires since then, TCO = $(14 + 1 + 1.65 + 0.4 – 4.8) = $12.25 k.
$(12.25 – 4) k = $8.25 k of SAVINGS BUYING USED (AND RISING)!!! WOO-HOO!!!
Heck, I could get a whole new rebuilt engine for $2 k and STILL be THOUSANDS ahead.
Re. “time is money”, it is for everyone but break it down. For the $30-$50 / day rental even with $10 / hr. babysitting while dropping off / waiting for / picking up the your actual / rental car *maybe* 1 per ea. 1-3 yrs. That’s much less than the THOUSANDS of savings with going used.
Jeff Crews says
My family started buy new cars. However, they would 1. make sure it was a car that has a high resale value and 2. make sure they got the lowest prices possible. They have loved their cars. I recently bought a used car and was very happy about the deal. It all depends on what someone wants!
Actually, it IS very important if you lose 25% of the value overnight. Accidents happen, and if you’re in one that totals your vehicle within the first 18months of owning that new car, then the check you receive from insurance won’t cover the amount you still owe on the loan. That’s why they now have “gap insurance”, to cover that gap. It’s a very real problem and another reason why I will never buy new.
Your example of the average used car price being $20K, and mentioning that new cars are available for $20K isn’t really comparing apples to apples. Choose the make/model that you want and then compare the new price to the 3 year old price. That would be a fair comparison.
OK. Let’s take a brand new 2012 Toyota Tacoma. I was able to buy for $21,000.00, including 30k mile warranty, free oil changes, good financing, gap insurance, etc. etc. Compare to the most basic 2010 Tacoma with automatic transmission, and the USED price is $19,000.00. Now if it was supposed to lose 25% of its value as I drove it off the lot, then why is the 2010 Tacoma not $15k? I think the make of the vehicle makes a difference as well. I’ve known people who have owned the same Toyota for years with minimal maintenance costs. During the same time frame I have gone through 3-4 cars, two of which were Fords, one a Dodge, and one a Chevy. The Chevy engine held up better than the Fords and Dodge, but the creature comforts fell apart over the years (sunken seats, corroded paint, broken A/C, window motors). After owning each car for only a few years I could not resell for anything over $1,000. Meanwhile, the exact make, year, and model of the Toyota’s my friends owned could still not be bought for under $10k if the mileage was under 100k miles. As for the “fix it yourself” approach, Dodge seems to make this as difficult as possible. I couldn’t even change the battery without going through an ordeal. Don’t let me get started on the alternator – replaced with help from a friend, but it was a bitch. The water pump had to be replaced, and I couldn’t find a mechanic that would charge less than $800.00. My used Dodge Intrepid was costing me between $1000-$2000 for each repair, and in the last year that I owned it it was in the shop at least once every two months. The old cars from two decades ago are not too hard to work on if you can still find parts, but the newer cars are very difficult and expensive to work on. Over the past 10 years I have lost more money buying, fixing, dumping, and replacing with another used POS than if I had bought brand new a good vehicle and kept it well maintained from the beginning. And I didn’t buy used lemons either – I checked the carfax reports and had a mechanic look over every car I ever bought. One thing people may be forgetting as well, is that the “cash for clunkers” program took a lot of old cars off the market, and these old cars, while not as fuel efficient, tended to be easier to maintain. As for my Tacoma, I won’t have to fix it myself for several years but when the warranty expires the battery and alternator are mounted above the engine and easily accessible. Of course, for maintaining your own vehicle, trucks are easier to reach into from above or below, and my impression is that truck components tend to be more durable than the equivalent for sedans. Since trucks are expected to be used under more extreme conditions, such as hauling heavy loads or driving off-road, the same truck if mostly driven under light-duty conditions will probably last much longer than a typical sedan. If nothing else I won’t feel my truck bottom out when leaving a parking lot the way I experience when I’m in a sedan.
Ultimately, there is a piece of mind in knowing that you can buy new, make a fixed payment, never pay an unexpected repair bill, and possibly sell in 3-4 years to recover 70% of the price to buy a replacement. In fact, consider if you buy at $21k and sell as private part after 4 yrs for $14k (yes, this takes some good salesmanship, but it is possible), then after three cycles you have spent maybe $63k but recovered $42k, leaving you with a net loss of only $21k over 12 years. Now, tell me, what used car can you buy today and expect it to last 12 years with the purchase price and maintenance totaling under $21k? If you buy a clunker at $14k and sell at $6.5k every four years you actually have a net loss of $22.5k. Of course you can pay $1500 – $2000 for an extended warranty to cover your car, but after-market warranty companies have a horrible reputation for ripping off consumers. Alternatively, you can gamble on not ever having a maintenance issue ever come up, but I wouldn’t count on it. Either way, you still end up spending as much or more with the used car than with the new car unless you’re lucky or you get a car that you can work on and have the time and skill to do so.
Oh, yeah, I forgot to mention the hundreds extra a yr. I saved from not having to buy full-cov. ins. for at least the 5-yr. term of the loan.
I presume that by skipping the full-cov. ins. that you have a car replacement fund set aside just in case yours is totaled and you can’t collect from another party.
The car’s ACV was only $2.5 k when I bought it ($1.0 k now) and that’s all insurance would’ve paid on it (not Replacement Cost). Yes, I have enough in savings to cover that. I didn’t I had / have *no* insurance. I actually have not just Liability, but Uninsured / Underinsured as well (can’t control what other idiots do ;). The biggest savings come not in whether or / not to have Full Coverage, but the difference in ACV’s that that coverage what have to cover between new vs. used.
Matt Jabs says
Even if I had money coming out of my ears I would have a very hard time justifying the purchase of a brand new vehicle. Beyond that, even used vehicles costing any more than $10k are a luxury not a necessity. My opinion.
My experience has been that you’re going to either pay your dues when you sign for the car or when you’re constantly bringing the car into a shop for repairs or replacing one broken POS for another every 24 months. In some cities a car is not a necessity. Unfortunately I don’t live in one. Given that I am in sales and have to entertain clients, I can’t have them riding in a car with a musky smell, cigarette stains, or mismatched hubcaps. I’ve spent a small fortune on used cars. Now I’m giving new a try. So far my calculations are showing that I’m going to save money in the long term. I might keep my car for several years after the loan is paid and the warranty runs out, but I will probably sell right after the first $1200+ major repair, if its even worth repairing by the time that happens. That said, a car with the original owner regularly and properly maintained is likely to last a lot longer than someone else’s trash car that you pick up second-hand.
With used car prices where they are now, I’m not sure new car prices are losing as much value when you drive them off the lot as they used to. If you do your homework and buy your car from a comparison site like http://www.truecar.com, buying new may make more since as long as the recession lasts.
I think you make a good point. I think I might have also gotten a great deal on my new truck because of the gas prices rising again. That said, I think that 20 years from now historians will be referring our era as the Second Great Depression, consisting of multiple recessions lasting for about a decade. Sounds pessimistic I know, but I’m just being honest.
Alright, there seem to be many “drive them into the ground” guys on here, as well as some truck guys. I would like some feedback on “how old is too old”.
I’m in the market for an SUV. It has to be able to tow 6000 pounds, so crossovers are out. And my wife insists on a 3rd row. I’m really wanting to go with a Toyota or Nissan, but I’m just having a really hard time shelling out so much money for something with so many miles on it. Sequoias and pathfinders with 100k miles still are in the mid and high teens.
Please don’t give me the “just put oil in it and it keeps going” answer, but how many miles have you driven your japanese SUV and how much labor did you put it through?