Cost vs. value: Why I bought a new car

March 29th, 2006 - 129 Comments

In college, I drove a rickety-ass minivan that my parents let me use. Here’s how bad it was: It shook so badly that when I drove it on the freeway, I always drove in the right lane so that when it broke down–not if–I could simply pull over gracefully. When I took it to get a smog check, which of course it failed, I just put my head in my hands. The funniest thing is that one day my dad went to get new tires for the van and he came back with whitewall tires. I don’t know if any of us are old enough to know what whitewall tires are, so here’s a picture from Steelthundercc.com:

from steelthundercc.whitewall.jpg
The damn van looked like a pimp’s hoopty ride. Dear god. I made my dad take them back so quickly.

I always found it odd that almost every personal-finance pundit recommends buying a used car instead of a new car. (Here’s a list of links submitted by readers where you can see) Why is there such universal agreement? Apparently, among the reasons they list, cars depreciate quickly, they’re built better than ever, used cars have lower insurance, etc — so every young person should buy used.

I disagree. Now, used cars can be a good way to go. But to apply a broad rule that “used is the best” is idiotic. While used cars are a good purchase for some people, new cars are a great choice for others. Here’s why I chose to buy a new car.

I was in my last year of college with lots of business meetings that I would rather not have missed because my stupid 12-year-old van broke down. In November, I started looking for a car to buy. This was intentional: You can get amazing deals at the end of the year when dealers want to beat their quotas. First, I test-drove a few cars and researched them, narrowing it down to a Honda Accord or a Mercedes C230. (Both were 4-door models because Indian people hate coupes. Seriously.)

Now I want to take a second to explain how I decided between the two. The Mercedes was sporty and cool and kinda affordable (if a little bit of a stretch for me). But I decided against it for a few reasons: Service is absurdly expensive and I would just be angry every time I had to get stuff done at a dealer, plus insurance is more, etc. But the real reason I didn’t want to get the Mercedes is, where do you go from there? You can’t get a Geo Prism after driving a Mercedes for a few years. So I decided it would be stupid to get a Mercedes as a 22-year-old. Plus, cars are important to me, but not that important.

I decided to get a Honda Accord. Now I had to choose between new or used.

Why I chose a new car instead of a used car: value (not just cost)

Sure, a new car costs more. But over the long-term, not that much more. And the value–not just monetarily–is much higher. Here are a few things I debated before choosing:

  • Reliability. Above all, I didn’t want to get a car that would break down. I have enough stuff going on in my life and I want to avoid car-repair issues (time, $) as much as possible. I was willing to pay slightly more for this certainty.
  • A decently-nice-to-pretty-nice car. Buying a car takes an enormous amount of time. I planned to have this car for many years and I didn’t want another piece of crap. As a result, this baseline requirement reduced the disparity between new and used prices. In other words, I wouldn’t save a ton of money getting a used car because I wanted a pretty good car, regardless. Quick note: This is admittedly a little bit of vanity. But I’ve written time and time again about spending on things you love. I love driving and I do it a lot; it’s not strictly functional for me. I even sprang for the V6 model. Plus, there are other ways to minimize your total cost, which I’ll get to in a minute.
  • New-car smell. Good god, is there a better smell on earth? This wasn’t really a requirement but I just wanted to mention how much I love it. This, and the smell of Payless Shoe Source. Find me at the mall, walking in and out of Payless over and over.
  • How much cash I’d have to put down. This is important. If you don’t have any cash (or very little), a used car is more attractive because the down payment (i.e., money you have to pay immediately) is typically lower. And if you put $0 down, the interest charges on a new car will be much more. In my case, I had cash available to put down.
  • Interest rate. This becomes more important over a longer-term loan.
  • Resale value. At first, I was resistant to this idea. After all, I would probably just drive whatever car I got into the ground instead of selling it. Well, fine, it was pointed out to me, but at least calculate what would happen if you sold it in 5 or 10 years. A lot of people point out that “You might have an accident, so the resale value will be totally shot!!” I find that pretty dumb. Yes, it’s good to also know what would happen (financially speaking) in that case, but having a total accident is such an edge case that I think it’d be foolish to plan an entire purchase around it. If you’re that worried about getting in an accident, maybe you should put away your cellphone AND COSMETICS WHILE DRIVING. Also, you have insurance. Anyway, having a car with good resale value can considerably decrease your total cost of ownership.
  • Insurance. The insurance rates for a new and used car can be pretty different. Even if they’re only slightly different (say, $50/month), that can add up over a few years.
  • Gas. Everybody loves to debate the minutiae of gas prices, but the actual differences were, financially speaking, insignificant for me. I didn’t pay attention to this. (For example, see why hybrid cars don’t save you money.)

Here’s the deal: Buying a crappy used car will save you up-front money, but it may cost you a lot more over the long-term. If you decide to buy a pretty good used car, in my opinion you might as well spend a little more to mitigate the risks of car repair, etc. That’s the risk/reward perspective.

Another perspective, cost vs. value, influenced me more. Buying a new car seems scary because they numbers are so high ($20,000!). But that’s what financing is for–especially at extremely low rates like 2-4%. You can put down as much money as you’re comfortable with. But the biggest factor in my purchase was the total-value concept: You can get a new car for a relatively low cost over the long term by doing a few sensible things.

Now, most of the pundits who talk about buying new vs. used seem to assume that people are completely stupid and will do things like pick a bad car that looks sexy but is poor choice financially (e.g., a Dodge Neon vs. a Honda Accord), spend a lot on the initial purchase price, not shop around for competitive insurance, not take good care of the car, and sell it when they see something shinier.

If you do these things, then yes, you are a moron.

But if you actually think about this, one of the biggest purchases you’ll ever make, you can save a lot of money. So do some commonsense things that will make you much happier over the long term:

  • Christ, pick a good car. There are some cars that are objectively bad decisions that nobody should ever buy. Yet sometimes they’re shiny and popular and we buy them. Take the VW Jetta, which got popular during high school and everyone wanted one. I know of exactly 1 person who’s happy with his Jetta, and I still scratch my head that he’s had such good luck with TWO Jettas. The rest hate them. Why would you buy this? Pick cars that are reliable and have a decently high resale value. This doesn’t mean you have to pick a boring car, but it does eliminate about 80% of cars right off the bat.
  • Negotiate mercilessly with dealers. I have never seen so many people make bad purchase decisions as when they get in a car dealer’s office. If you’re not a hardball negotiator, take someone with you who is. Better yet, don’t even go to the dealer! I bought my car for $2,000 under invoice by spending a month researching and planning. When I decided to buy, I had 17 car dealers bidding against each other to get my business (by fax/email, while I reclined and watched Laguna Beach) and I only went in one dealer’s office: the winning one. Also, I started negotiations at the end of the calendar year, when dealers are salivating to beat their quotas. Your saliva is my salvation! (I highly recommend http://www.fightingchance.com to get more info on this technique. The $35 I spent saved me thousands.) Also, your interest rate matters, and this is why having good credit score matters–if you have multiple sources of good credit, your interest rate will be lower.
  • Don’t do stupid things like getting an upside-down loan. An upside-down loan is when you owe more on the car than it’s worth. I know a girl who bought a new Lexus, but decided she didn’t like it 5 months later and traded it in for something else. She now has an upside-down loan and a distinct lack of common sense. Treat your car like a stock and plan to hold it for a long, long time. This is hard because we’re judged on how new our car is. But with each year you drive your car payment-free, you’re saving tons of money.
  • Your car’s price is vastly dependent on its condition. Go to http://www.kbb.com and experiment with pricing. Try the same car in Excellent, Good, Fair, and Poor conditions. You’ll see what I mean.

Ok, so I decided to get a new car. Let’s assume my car cost $20,000 ($25k sticker price, negotiated). If I can pay it off in 5 years, and drive it for 3 years afterwards, I can sell my car for about $10,000. (Extrapolate data from KBB and realize that it’s a bit hand-wavy.) That’s about $1,250/year. And it only gets better as you drive the car longer with no payments. In other words, you save more in non-payments than the car depreciates.

Now, some caveats: First, don’t forget insurance, registration, repair, etc. But remember that a used car has all these things, too–just in different amounts. (In my case, insurance for a 5-yr-old used car would save me about $100 every 6 months…not very compelling.) With a used car, the risk goes up (likelihood of repair increases, resale value decreases). The question is whether the reward of lower payments is worth it. Second, this doesn’t work with all cars. If you’re buying a Dodge Neon, your resale value is going to suck and you’re going to be angry every day of your life.

I expect this post will generate a lot of debate, and that’s cool. Here’s the bottom line: I don’t like when pundits say that buying a used car is the only way to go. It’s not. Buying a new car can be a smart choice if you pick the right car, negotiate extremely well, and stay disciplined about shopping for insurance, maintaining your car, etc. (It doesn’t have to be a purely numbers-oriented decision. I love my car–it’s fun to drive and if I had 10x the money, I would still get it.) Because buying a car is such a big purchase, I’m fine spending a little more money and time up front to mitigate risk and get a great car that will last for a long time. And by being sensible about how long you drive your car for (longer is better), you can get a new car for a great value.

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129 Comments

 

Comments

  1. Oh come on.

    If you just wanted a new car, and thought it was worth blowing some extra money on it, be confident enough to say so. It’s OK – everyone has things they like to spend more money than they should on because it makes them feel good and enjoy it.

    Except for the argument that the financing is so cheap on new cars vs used cars that if you’re not putting anything down you can actually pay less for a new car (although I think if you can’t put any money down you should be thinking strongly about how sensible it is to buy an expensive car either way), your post essentially points out all the ways the new cars are more expensive. Most importantly, you seem to be comparing the choice of buying one car new, and some other type of car used, which cloud the arguments when it comes to depreciation, reliability, insurance (collision and theft, anyway).

    If you compare the total cost to that Honda you bought, and the exact same model that was just a year or so old, over the life of the car (from purchase to sale), you have to admit that (unless you finance the whole thing) the costs for the used car will be lower.

    yes, you give up the (potentially toxic) fumes from the plastics in the new car, but you don’t have to pretend that you were saving yourself money by buying used.

    Finally, I think your dad was aahead of the times – white walls are SO coming back.

  2. Of course it’s not just about saving money! I like cars and if money weren’t an issue, of course I’d prefer a new car. But I’m just pointing out that the pundits don’t have a universal lock on saying “used is better.”

    I’ll pass your compliment to my dad, too.

  3. You could have avoided all the ‘negatives’ of a used car, and gotten almost all the ‘positives’ of a new car (aside from smell), by buying a 3 or 4 year old Accord.

    Which would NOT be significantly more likely to break down in the next 5 years than a 2006 model would be.

    And you would have saved 6 grand or so.

    Although really you can destory my argument by saying ‘spend money on things you love’. But in this case, admit it — most people don’t love cars (and is a 2006 really any better/lovable than a 2002?) — they love the status and the cool factor which goes with driving them. Which is what you spent that extra 6 grand on.

    You wasted money man. We all do it sometimes. Lesson learned: Even Ramit is human!

    Oh yeah, and I agree it doesn’t ALWAYS make financial sense to go used — if you’re a professional racecar driver, the marginal performance improvements of a brand new model become very financially important. But I don’t think your audience is professional race car drivers.

  4. In my opinion, if you’re going to buy a new car, you need to sell it and buy a new one in the next five years. It’s absolutely pointless to buy new and run it into the ground. Either buying old and killing the car is better, or buying new and selling it is better.

  5. Let’s not forget the non-monetary value of peace of mind.

    The first car I bought for my wife, I bought used. And when it broke down, the mental anguish I went through more than outweighed the cost savings.

    If you buy new, choose the right car, negotiate hard, and run it into the ground, you may be losing money out of your pocket relative to buying used, but you might also be happier.

    On the other hand, I have a friend who is mechanically inclined who always buys what he affectionately terms “beaters.”

    He buys an old POS for about $500 bucks, fixes it up (minimal cost since he puts in his own labor), drives it for a couple of years, and usually ends up selling it for more than he bought it.

    What’s really going on is that he’s paying in time instead of money, but he’s willing to do so because he enjoys working on his cars.

  6. i love this post.

    in high school i drove a 1987 oldsmobile ’88 royale (don’t ask me why the model name was a year beyond the model year). it was a terrible car and almost caused my death at the corner of el camino and san antonio rd. (as an aside, i think driving a crappy car when you’re young is vitally important for personal development).

    i entirely agree with your point about buying a GOOD new car as opposed to a used car. my friend recently purchased a used lexus is400. his reasoning: ‘it’s a much nicer car than a new honda accord or civic for the same ballpark price’. the result? he’s had the car in the shop for more days than he’s driven it. while this is, of course, a special case, it is not uncommon either.

    to be honest, i think almost anyone who is looking at getting a car and is in any way undecided should just head down to their local honda dealership and purchase a civic or accord. they’re the most dependable things you can imagine, they’re affordable, and they’re well-made. you can guarantee only one of those three with a used car.

    i sound like a honda ad.

  7. I don’t agree that new cars are a better value, but I do agree that you should not spend a lot of money on something you don’t like.

    BTW…Is there some reason why indians hate coupes, or is it genetic?

  8. I bought a new car instead of a used car for one reason and one reason only: because I wanted to. I wanted a vehicle that was mine from day one to day $the_last. I really wanted a MINI Cooper, and that’s what I got. I threw cost efficiency out the window and went with my heart. (Of course, MINIs are very good for the money, so it wasn’t a purely stupid decision either.)

  9. I still morn that we couldn’t negotiate two new cars together.

    That said, I LOVE my mazda, which was brand new and cute, but best of all, has a ridiculously high reliability rating. As in it was rated #1 by Consumer Reports. Why people will spend 80K on a Jaguar that they know will break down in a year is beyond me, I would pay thousands more to buy a car I knew was going to run forever.

    That said, when I was researching new and used cars, I discovered that the price on used work horses like civics and mazdas, that you know are going to run forever, don’t decrease that much after a few years of driving (I was so not going to buy a car that was born in the 90s). That’s because people know they are going to run forever, and thus a few years of prior driving doesn’t diminish their value.

    That’s why I bought new, I wasn’t going to save that much going used.

    No regrets (or debt) 16 months later.

  10. Although you mentioned being a hardball negotiator as part of your buying process, what happened to being a hardball investigator?

    A good used car with low mileage, perhaps only 1-3 years old, will still sell for thousands less, and have a warranty + much of the reliability of a new car. Researching vehicle history and carefully examining a car on the lot can be fruitful.

    I feel this update was written with a “brand new” vs. “ridiculously old” mentality, and didn’t benefit from an analysis of the shades of gray.

    My two cents! Thanks!

  11. When the pundits say “used car” I don’t think that they mean another peace of clunker that’s bound to fall apart.

    When they say “used”, they simply mean a car that has been driven for a little bit. They mean a car that has less than 20-30k miles on it. They mean a car that has had no accidents and has had a good maintenance record.

    If I could save $2,000 or more on a car just because somebody decided to drive it for 1,000 miles and sell it, I will take the offer.

  12. There is a difference between a 12 year old used car and a 2-4 year old used car. Typically cars lose 10-30% of their value in the trip from the dealer’s lot to your driveway at home. Although buying used can make sense if you are prepared to own the car for an extended period of time (more than 5 years) I personally think that 2 year old cars provide much better value.

  13. While I agree (to a point) with your assertion that one can’t make a blanket statement that used cars are best for every person/situation, I have an issue with some of your logic.

    Primarily, I don’t know upon what data you base your assumption that a new car is necessarily more reliable. In fact, I think that many times a new car can be LESS reliable than a decent, 1-3 year old used car.

    It would seem that many manufacturing defects will manifest themselves in the first 5-10k miles. In addition each new year would seem to introduce new bells and whistles (i.e. things that can go wrong). One manufacturer who has definitely experienced lower quality scores caused by increased complexity is Mercedes.

    So, in summary, while I agree that new_car != better_for_everyone, one can also not assume that new_car == more_trouble_free.

  14. Nice try, but I’m still not convinced. Jonathan makes a good point. Your scenario compares apples and oranges. A 12-year-old beater versus a new car? When I buy used, I look for a car that is a few years old, has low mileage for its age, and is in good condition. Everyone mentions safety as being a reason to buy new. Used car buyers care just as much, if not more, about safety as new buyers. That’s why I choose reliable and safe, over flashy. You are trying to justify spending thousands of dollars more to have that plastic new car smell for a few months, and even better if it comes in the form of a Mercedes. Let’s be real here. You are willing to throw money out the window to be seen in a fancy new car, and that’s your choice. But we all know that when you do the math, a cheaper used car is the responsible choice. If you really held onto your car for at least 8 years, as you mentioned, it might be worth it in the long run. But most people trade their cars in before then, and continue to make monthly payments FOREVER.

  15. Coming from a family of long time car dealers I have a few opinions on this subject. One thing to keep in mind is that your points about picking a good car, negotiating price and staying out of bad loan situations are applicable in both new and used car purchases…which can further increase the value of a quality used car.

    One major problem I have with your analysis is your assumptions concerning the value of your vehicle when you decide to sell.

    You said “let’s assume my car cost $20,000 ($25k sticker price, negotiated). If I can pay it off in 5 years, and drive it for 3 years afterwards, I can sell my car for about $10,000.”

    A few counter-arguments here… When buying a new car, most people assume they will drive the car for 5-8 years. This hardly ever happens. Ego and increased affluence are the primary reasons. People have a hard time staying in their 6 year old post-college Honda when start making good money. Also, you forget that things happen to cars over the years…things that can vastly increase your desire for a different car. Most accidents don’t total cars, they just cause reoccurring problems. True, this can happen to any car new or used, however it’s alot more painful in year 1 of your 5 year loan than 3 years after you paid cash for a used car.

    The assumption that your car will retain 50% of its value after 8 year is just wrong. Consumers typically over value their trade ins. This is not a car dealer conspiricacy, simply the demands of the market meeting the experience of people who evaluate used vehicles on a daily basis. Fully loaded used vehicles in pristine condition with low miles have a hard time getting 50% of their original value after 8 years Even less for common cars that are not fully loaded. An average car in average conditioned costing 25k new would more likely trade for 4-7k after 8 years.

    Furthermore, California is one of the few states that use Kelly Blue Book. Most of the country uses NADA Guides, which are a more accurate analysis of current market conditions. NADA values are typically 750 – 2000 less than KBB. If, during the 8-year life span of your car, you decide to move to a region that uses NADA you will be laughed at for quoting KBB values at the dealership.

    Even though I have access to a variety of new cars at dealer cost including service, I still bought a 4-year-old used Honda. While Ramit may be the exception, I have seen the purchase cycle of the average consumer. It’s not pretty, typically starts with good intentions and typically ends with the consumer feeling like they got a raw deal.

  16. Ram, your losing credibility with post like these. There is no way that buying a car new is better financially on average than buying a 1 to 4 year old car. First year depreciation is too big.

  17. I have two vehicles that were purchased new, and I wish I hadn’t. $700/month car payments have just about killed me. At the time it was “just a little more” than I paying before, so it didn’t seem like a big deal, but a “little bit” every month for 4 or 5 years really adds up.

    The best deal I ever got on a car was a Ford Escort that had 8,800 miles on it, was 1 year old, and had been flooded. It cost me $8000 and I put 80,000 miles on it and never had any breakdowns. (Just new tires, twice)

  18. I’ve always had used cars for the last 12 years. I’ve probably broken down on the road 2-3 in that time. With maybe one exception, each time was due to my failure to buy new tires. The tread actually wore off. Not safe.

    If I had maintained the tires I doubt I would have ever broken down. Do used cars have more problems? It depends. I had a used Honda that was 8 years old when I got it. I drove it without incident until it had 213k miles.

    After buying and selling all the cars I’ve ever had, I’m probably in the hole…. for a total of 3,000$. Not bad for 12 years of driving.

    IMO, you’re wrong on this one, but if it’s important to have a new car, go for it.

  19. 1999 Ford Escort I bought new for around $14K new. It’s 2006 and I’m still driving that car. :)

    It’s been paid off for a long while now. If I sold it now I’d only get like $2K for it. So there is no incentive to sell it. I will just drive it until it is completely destroyed.

    I am saving a ton of money. A lot of people I know have changed their cars out 3-4 times since 1999, and all they’re doing is throwing away money.

    So yes, buying a car new is a wise choice IF you’re going to stick with it past the payoff so that you see a few uninterrupted years of free driving. :)

    A good way to think about either a used or new car is to think about the total cost and divide that across the number of years you plan to drive it.

    In my case, I’ve had my car 7 years, so that breaks down to roughly $2000/year. As I continue driving it, that cost will go down even more.

    10 year marker – $1400

    15 year marker – $933.

    I don’t know anyone who drives the same car for 15 years. Perhaps that says something about the debt burden of the average person in the U.S.?

    Drive it into the ground is what I say.

  20. 1999 Ford Escort I bought new for around $14K new. It’s 2006 and I’m still driving that car. :)

    It’s been paid off for a long while now. If I sold it now I’d only get like $2K for it. So there is no incentive to sell it. I will just drive it until it is completely destroyed.

    I am saving a ton of money. A lot of people I know have changed their cars out 3-4 times since 1999, and all they’re doing is throwing away money.

    So yes, buying a car new is a wise choice IF you’re going to stick with it past the payoff so that you see a few uninterrupted years of free driving. :)

    A good way to think about either a used or new car is to think about the total cost and divide that across the number of years you plan to drive it.

    In my case, I’ve had my car 7 years, so that breaks down to roughly $2000/year. As I continue driving it, that cost will go down even more.

    10 year marker – $1400

    15 year marker – $933.

    I don’t know anyone who drives the same car for 15 years. Perhaps that says something about the debt burden of the average person in the U.S.?

    Drive it into the ground is what I say.

  21. As someone who has just been through a year and half long ordeal with the most anal car guy on the planet, I have this to say:

    1. Before buying ANY car, you need to read atleast 6 months worth of Consumer Reports. Not every beater is a junkbucket and not every new shiny red thing rides like a dream, but you don’t know what’s what if you don’t do the research. If the minivan you drove was a 90′s-era Chevy Astro, you should know that the IIHS has declared them unsafe at any speed.
    2. Even if you love cars, a car is not an investment. A car, like a computer, is a tool.
    3. Never buy a car that’s been in an accident because you don’t know if anything has been jarred or cracked on the inside.
    4. If buying a used car look for low milage vehicles driven by someone’s grandparent and do an ebay search in remote areas first because the descriptions are likely to be the most pathetic because the sellers feel guilty about the costs you’ll incur picking it up.
    5. Never buy a new car if you are uncomfortable going into debt over a car and can not pay for the thing in cash.

    The anal car guy in question drove two 60′s era ‘stang hotrods in highschool, drove a 1990 Geo prizm (basically a Corolla) through college and his first job and now drives a ’96 Tracer (an Escort). His cars have gotten less cool over the years, but that just makes him seem cooler.

  22. Got a 2003 Honda Civic right as the 2004s came out (~late Sept. 2003). Dealer wanted to sell the 2003s he had, cut a good deal. Paid up front the cost of the car to the dealer, no financing. Still driving that same car and it is in great shape.

    Oh, BTW it’s a stick. Gotta love a manual!

  23. I’ll piggyback on the first comment by Tom – it’s the only one I read. You aren’t making a fair comparison. Of course, the jalopy mini van has a lot of down side compared to a new car, but you should be comparing a new Accord to a barely old Accord. The only reason repairs and maintenance would be any different is that the used car is or two years older than the new car. The difference wouldn’t be financially significant. I would have liked to hear you give a more objective review of the differences between used and new – personal feelings aside. Back up your arguments with some more data. When you say that differences in gas mileage wouldn’t be significant, give us some data that shows how big or small that delta would be between a Hummer and your Honda.

    It seems like you’re posts have been aiming to stir up discussion lately, rather than providing informative personal finance articles. What happened to the IRA article you’ve been promising us for some time now?

  24. As everyone has pointed out so far, hands down it only makes financial sense to get a used car over a new car of the same or better reliability (upgrade with the money you are saving).

    Please don’t cloud the discussion with things like “you’ve got to spend money on things you love”, because that has no relevance to a value comparison. If you want to talk about other measuring sticks like total satisfaction or personal preferences, then be honest and say so.

    As for me, I’d rather not deal with the paranoia of owning a brand new car and the mental anguish of causing the first scratch in the paint.

    2 year old cars are the perfect age to start looking for values, as they are usually still under warrenty if anything major is wrong.

  25. I definitely see your point here. And I’ll agree that for some people a new car is the way to go. However, it’s the way to go if you’re able to scoff at saving $100 a month in insurance. For me, an extra $100 a month would break me. I wouldn’t be able to save a cent, I’d end up living solely hand to mouth, and if something ever went wrong, I’d be screwed.

    Much as I usually love the advice on this site, this is one instance where it won’t help me any. I’m definitely in the “used cars are for me” group.

  26. SPark, i think he said 100 every 6 months.

  27. The choice doesn’t have to be between brand new car and old beater.

    A reasonable alternative is to buy a year-old used car… it’s already taken the huge first year depreciation but has the reliability benefits that come with buying new. Just make sure you know the car’s provenance (avoid buying a rental car which probably wasn’t well treated or well serviced, for instance).

  28. I had to delurk to comment on this discussion, since I will be buying a “real car” in the next few months. I don’t think many people understand the psychological trauma of driving a car for years, that can break down at any time! That factor alone can outweight many of the “financial positives” of a used car. Is there a price on peace of mind?

    My first inclination is to get a new car, because I have been so scarred by driving a junk heap for the last 6 years – throught grad schools. I am slowly [very slowly] coming around to [maybe] getting something like a certified used – for me, I must have a great warantee.

  29. Glad you enjoyed the ‘new car smell’, Ramit, but it might not have been so good for you:

    Check it out.

  30. If you buy a new car, get gap insurance. Why? Because they lose so much value. During college I talked to a lot of people who bought a new car, totaled it within 2 or 3 years, and then their insurance company pays about $4,000 to $6,000 under what they owe on it (because it isn’t worth even close to what they still owe, gap insurance covers the “gap”). Granted, you don’t plan a purchase around an unlikely event, but it showed me that a new car loses its value quickly. Also, expecting $10,000 for an 8 year old car is an extreme assumption. Would you pay $10,000 for a 1998 Honda Accord? Factor in that it would have at least 80,000 miles on it (probably more since most people drive around 15k to 20k miles a year) and the odds drop even more. $10,000 for a car with 120k or 160k miles on it? It could be a Bentley and I’d pass.

    The reasons for a new car are difficult to justify financially. As people have said, the same model, 2 or 3 years old, is just as reliable, might still be under warranty, and is cheaper. The insurance is cheaper. And you can pay it off quicker, reducing the amount of interest you will incur (which may even out with lower rate you’d get on a new car, have to look into it more). Also, you can negotiate the price of a used car, and usually easier too because some tool traded it in for a new one, and got next to nothing for it, so the dealer has more of a spread to work with.

    I’d like to see some numbers and actual data before I’d agree a new car makes sense financially.

  31. I post a comment this afternoon, and suddenly there are 27 others. This has obviously touched on some nerves.

    Lets face it – from the discussion here it’s clear that cars are different things to different people. To some they are merely transportation. Others view it as security. Others think of cars as toys to be played with. Others (unfortunately) view it as part of their identity (certainly the auto ads speak to these kinds of people).

    There can be a bunch of valid opinions about this topic, depending what category you fall into. I scoff at the people who are willing to (in my opinion) spend too much for a car that is new – whatever car that is. To those who are terrified that they might have a car that breaks down – well, I grew up in a family with terribly unreliable cars, and there are certainly worse things than having to call AAA and rent a car for a few days.

    But I don’t get to share the excitement or feeling of pride that someone who really loves cars gets from having that new car smell or being excited about the trip to the store. And since I don’t experience the fear of a break down, I don’t get the peace of mind that others get from new cars.

    This is more than just picking a mutual fund. It’s part of our life and lifestyle. As long as everyone can understand the issues, we shouldn’t (and I need to remind myself of this) judge people for making other decisions about what they value if it’s different than what I do.

  32. I’m guessing I’m in a minority here, but I’m the sole income earner for our family (me+wife+3 kids under 6). Let’s just say that a new car is *not* an option for us at the moment. We brought our used Honda 18 months ago for $1500. It’s done 30,000km with no maintenance except regular mandatory warrant of fitness.

    We’d keep it for years if it wasn’t too small (2 door!). I fail to see how a new car could EVER ake more financial sense than that.

    $1000 a year has been the rule of thumb we’ve lived by for years. Unless you can drive *your* Honda for 20 years mine is always going to be better value ;)

  33. I’m fairly certain Ramit didn’t get a 06 Accord, since he probably doesn’t have access to time travel.

    and is there a difference between the 06 and 02 model? big fat yes. 98-02 models are different than 03+ models

    anyway, some of you are missing his point. he didn’t write about his crappy old van so he can compare it. he’s talking about the value vs cost (title of post) of new car and used car.. and of course, value is quite subjective at times.

    That said, I don’t think I can agree with some of his points too. As mentioned, I can understand what he’s talking about, buying used is not the only or best choice — but again as mentioned, first year depreciation is also quite ridiculous at times (among other reasons).

    At the end like most of the post so far, I still think that in most situation, a use car is probably a better choice (financially) for most people. Of course the numbers on new car sales in the US doesn’t really reflect that mentality.

  34. This is a classic asymmetric information problem…New car buyers are willing to pay a higher premium for the certainty that their car is fresh from the factory and hasn’t experienced any problems.

    While many of the comments above are arguing that “i’ve bought a used car and it has run perfectly,” all this evidence is purely anecdotal.

    From a hard numbers perspective, a used car won’t last as long as a new car. Intuitively, since a used car has a lower initial price, yet shorter lifespan, and a new car has a higher price, but longer lifespan, there should be a point where these two costs converge.

    At the point at which these two costs converge, it’s okay to get the new car.

    With the increasing reliability of cars, used cars have only gotten more expensive. The old adage “cars lose 1/2 their value as soon as you drive them off the lot” simply doesn’t hold true anymore.

    Given this, if one researches the market enough, and in the current climate of dealers doing almost anything to sell a car, there definitely exists a market where buying a used car makes sense.

  35. I think one key issue that most people overlook when suggesting that you should buy used is that depreciation varies a lot from model to model. For example, last time I bought a car I was looking at the Honda CR-V and the Ford Explorer. For the Explorer, used makes sense because they lose value quickly. There is a big price difference between a new Explorer and one that is 3 years-old. I decided on the CR-V, and quickly found that the price difference between new and 3-4 year old CR-V is relatively small (in some cases less than 10%), and so I chose to buy a new car.

    Car models and brands that have a reputation for being well-built will depreciate much more slowly, leaving very little advantage to buying a used model.

  36. I love my Jettas. I’ve had two in the last 20 years with a Ford Bronco in between. I bought both of them used and drove the snot out of them. I put around 175,000 miles on each. Someday I may buckle down and get a new car; but for my lifestyle and cash flow, a two or three year old car seems to hit the sweet spot.

  37. This post was wonderful and I completely agree, my mom does too since she’s the one handling all my financial stuff. I got a new civic 06 this year instead of an old car. Not the smartest move to purchase a car when it first is out, but I knew what I was doing :)

    Long run new cars is better deal. I’m sure many people will learn alot from this post.

    Also white color cars tend to sell at higher price then other colors; if you plan on selling it in the future, that is always nice to know i think :)

  38. Lots of comments… wow… in just 24 hours…. seeing how this is such a debate, I thought it interesting to see an article that went along the same lines on CNNMoney:

    http://money.cnn.com/2006/03/28/Autos/tipsandadvice/monthly_squeeze/index.htm

    This talks more about the “idiots” though, with upside down loans and such.

  39. Interesting perspective. I think you can do okay with a new car, in either of two scenarios. You keep it forever (10 years plus) or you finish your brutal negotiations in the dealer’s leasing manager’s office. Cars with very high residual values (what they are projected to be worth at the end of a lease period) can cost less per month to use than what you would have to charge yourself in depreciation over the same time period (car’s price new minus what you can sell it for, divided by number of months owned.)

    Obviously you will need to make sure that the lease includes enough miles so you don’t get stuck with a big over mileage charge at the end of the lease, but you might be surprised at the ecomics of a 2-3 year lease that lets you keep driving the latest (under warranty) technology for about the same price per month as the true cost of owning a car for 5 years or so, maybe even longer.

    So what do I do? Well, I like 3 year old luxury pimpmobiles (Infiniti Q45′s, etc.) that depreicate about 50% in the first year. I pick them up just off lease, drive them 10 years, then sell them myself. Cost per month is dirt, and they have the latest technology that most of us will see in a car for at least the first 5 years that I own them.

    Cheers,
    D

  40. So what do you do if by either your stupidity or otherwise, you do end up in an upside down situation, like $9000 upside down, what can you do to fix that.

    It’s a 2004 Dodge Intrepid with 60,000 miles and I owe Like $15,500 and it books for about $6,000. I know the easy answer is to stick it out and pay off the car, but I want to know some other ways to get rid of this thing.

    I have recently bought a house, so I have no equity and I can’t just sell it and buy something else.

  41. I love how this guy purports to “teach you how to be rich” but then has to make a big point to make himself feel better about his irrational decision. Awesome.

  42. Grats on your new car, Ramit. I respect your choice to go for the new car. As others have mentioned above, some people feel better with new stuff and are willing to spend more.

    Also mentioned above, I’d agree on the point that depreciation of the first few years is too great, unless you were going for a ‘new’ generation car (like the new eclipses or BMWs). Otherwise, you could get the same generation car (same motor, same body) a year or two older for much less used.

    I feel that the arguments presented above pretty much encompass both sides.. so I’d just like to say that I am surprised that as an advocate of saving and living frugally, you would voluntarily take up a new _liability_ (re: car loan) on a depreciating asset…

    I don’t think at this stage I would buy a new car b/c a few years from now I know I’d want a different one… so much new stuff comes out. It’s almost sad seeing people who have outstanding loans that are worth MORE than the current private party resell value of a car…

  43. I think you’d be tough pressed to prove your argument strictly on a financial basis.

    Removing fashion, taste, gratification, and joy of driving and giving and reducing them on finance, an I don’t think your argument on this one holds water.

    1. Reliability Issue. If you compare junker per nice new car, and sure that helps. But compare the same model year today and two years from now.

    Any care with reliability issues after two years used, is not a car you would want to purchase new. Under any circumstances.

    2. The lower interest rate still doesn’t compensate for the premium of a new car no matter how low your rates are.

    3. Opportunity Cost. Assuming you can afford to finance either, what are you losing if you would have invested that premium?

    4. Buying used allows you to purchase outside your typical range. Wanna buy a lexus?

    A 2003 used will run you $24K or a ’05 IS300 for $27K.

    Compare an identical make and model, and you cannot quantify the premum of new.

  44. Do you people do anything for fun? I mean he’s telling you he enjoys his car and that adds value to the new car v. used car. Everytime I hop into my NEW car i get a big fat smile on my face. My last car i bought new for $15,000 in ’94, drove it for 10 years, spent a total of $350 in non-routine maintenance on the car and sold it for $2,600. 18 months ago I bought new again, $30k all in after tax, tag and title for a car that stickers for $32k. I have it financed at 2.79% interest and it’ll be paid off in another 18 months. I’ll probably drive it a total of 8 to 10 years or until it starts to have troubles.

    I’m all for making prudent financial decisions but at the same time, there has to be room for enjoyment and fun. If you can mitigate as much of the negatives of owning a new car as possible by good research, negotiating, financing, and holding long term and still get the added benefit of a new car, then go for it.

    I’m looking at the post above mine and it shows a difference of just over $3k for 2 years difference in the same make and model. I’d rather pay $3k more today and own this car for years 1-10 than pay $3k less and own it for years 3-10. I think i’m going to run a little spreadsheet w/ some real values and see the difference in buying a 3rd year vehicle vs. new.

  45. i’m an automotive investment advisor of sorts so your post was of great interest to me. here are my two cents…

    first i tend to avoid sweeping generalizations for just this reason – words like ‘better’ are red flags when it comes to decisions, particularly when specifics are not modelled into the equation. there are few cases in which a new car is ‘cheaper’ than a used equivalent, but there are cases in which new makes a lot of sense…

    first i’d offer the cost of bringing a used car to the level of safety of a new one – i tally the cost of fresh tires, brakes, shocks, wipers of OEM quality or better when looking at a car – if its more than a year or two old it’s likely to need these things right away if not the items you’ve purchased are already worn and will need replacing that much sooner. (if you don’t think a two year old car can benefit from new shocks replace them and then see if you don’t agree) and lets not discount the safety advances made if we’re talking a current generation car vs. a last gen car or a car with ESP/ABS and one without.

    second consider those cases where the car has strong resale value. i see such cars as smart new car purchases where cars that depreciate more heavily make strong used car purchases. (E.g. everyone thinks honda and toyota when looking for a used sedan but the cars are overvalued as a result). also a used 5 series can make more sense than a used 3 series because of the demographic of the average first and second hand buyers, resale values etc.

    then there’s those cases in which the manufacturer includes maintenance – not that it will offset the premium of a new car on its own but each factor adds up.

    i recently attended a class at a national BMW convention titled ‘buy, sell or hold?’ and one of the audience members brought up a good point. if you’re someone who doesn’t like a lot of options (and i’d argue many cars are best in their simplest, lightest, shortest geared, smallest wheel and engined form) you can get a new car for the same price as a loaded up used one.

    i always say the ‘cheapest’ car is the one you’ll be happiest keeping for years and the least reluctant to put money into. putting money into a car regardless of its age hurts less when the thing brings you pleasure when you drive it or satisfaction when you’re associated with it.

    if you are buying new buy the freshest you can find – buying a leftover model when the new ones arrive may save you a few bucks now but the car’s already devalued a year’s worth so you don’t come out ahead, the dealer does. cars (and brake fluid, coolant, rubber components) depreciate by time and mileage and running changes can make pronounced differences in the way a car drives or ages. i’m thinking here of the 05 Coopers vs. the 04s, the 03 3 series vs. earlier, the 01.5 A4 etc.

    finally a word of caution – in my experience on both sides of the service counter many certified cars aren’t really checked over – dealers like certification because it costs them a fraction of what they can command as a premium. like any used car where it was driven and how and who touched it for service will impact the next owners satisfaction more than the original one… p.s. the last gen Civic is not up to Honda’s usual due to designed in cost cutting of the suspension and steering. buyer beware!

  46. Ramit,

    You make a compelling and unexpected argument…but there are some things you don’t consider.

    First, “new” is not synonamous with “trouble free.” Lemons exist. An argument can be made that a two year old car has been ‘shaken down” and problems revealed.

    Many will argue that a two year old Corolla or Accord is much more reliable than a new car of another brand, and in some cases I’d agree.

    And, you are assuming all and everyone has followed your excellent advice regarding credit. Not always true. for many people the credit cost of a new vehicle is outrageous, in addition to the other issues involved.

    Next, the new v used argument can often be dependent upon a myriad of factors outside your evaluation. Here’s one: location.

    I.e.: In some states auto insurance is expensive and/or mandatory and/or controlled by wierd schemes like No Fault Auto. You quote a $200 annual difference between new and used coverage, but it can easily be many times that in other situations. That makes the auto insurance cost of a new car *more* expensive than the actual cost of ownership! That –by the way– is why I do not drive a new car.

    I have a friend who did the math (did it his way, I’ll admit) and decided that a fleet of three very used cars was the idea solution. Low cost, low maintenence, minimal insurance (only on the moving car) and drive the best one at any time.

    That is extreme, requires significant investments of time (and a yard full of old cars…), and wouldn’t work for me, but it shows that solutions to this dilemna are very personal and unique.

    Me? I buy good used cars at the best possible prices, invest in maintence, use minimal insurance and usually sell the vehicle for MORE than I pay after I’m done. I have roadside services that I use about three times a year, but that give me the same peace of mind others obtain by buying new. I never pay more for a used car than the typical downpayment for your hypothetical $25k new car, and I have a very inexpensive back-up utility vehicle that can serve as a replacment in case of emergency.

    Thanks for opening up this “foregone conclusion” issue to discussion.

    J

  47. While Ramit’s purchase choice is obviously right *for him*, when the discussion expands to what’s right from an economic standpoint, we seem to be forgetting about the distinction between capital and operating costs.

    Operating costs for an auto are the maintenance and fuel costs. Capital costs are the purchase price.

    If an SUV cost just $12,000, then the fuel price increases of the past 18 months would seriously change its cost of use.

    However, since an SUV costs $40,000, the capital costs trump the operating costs, and people continue to buy and drive them.

    I have never seen a study of this price elasticity, however.

  48. Ramit – you are out of your mind. Thought I had stumbled onto something good here, but interest rates, payments, credit score?? you got it all wrong. The financial people who tell you that used cars are the way to go, will tell you that, because they pay cash. No payments, no debt. Buy a good condition 2-4 year old vehicle, and pay cash. A new car on average will lose 60% of its value in the first 4 years, meaning you’ll be below 10k by the time you’re done making payments. Thats besides the fact that you’re paying interest during those years. You month of research (and what happend to that time is money thing) would have been much better spent in the classified ads and ebay than talking to dealers.

    just admit that you bought the car because you wanted it, not because it was somehow financially sound.

  49. Dude, chill out and enjoy your new car. Congratulations! Don’t get freaked out on justifying an emotional act as a financial one.

  50. Over the past few years, cars are only getting marginally better, so unlike computers there is really no point in being on the cutting edge.

    As mentioned several times already, the premium paid for a new car over one just a few years old cannot be justified on financial terms.

    That being said, irrational new car buyers like yourself subsidize used car buyers like myself. So thanks!

    P.S. pickups are a usually better choice anyway unless you have kids

  51. You can get the quality of a new car and the value of a used car by buying a 10,000-mile used car. You pay about 70 percent of the cost of the same new car. With the Internet, it’s crazy not to do this.

  52. I’ve managed to save up roughly $74408 in my bank account, but I’m not sure if I should buy a house or not. Do you think the market is stable or do you think that home prices will decrease by a lot?

  53. I just bought a new car and I love it!

  54. Great thread, I just bought a car. It came down to a brand new Toyota Corolla vs. a used BMW 325i (2003 with 30K miles on it).

    From a financial point of view, the Corolla made more sense as these cars are inexpensive, ridiculously reliable (I have two friends that have owned their Corolla’s for 3 years and so far, ZERO problems), have good resale value.

    However I came from an inherited BMW 535i that I drove for 15 years. That’s right, 15 years (so for the person above who asked who drives their car for 15 years, the answer is me, right here lol). Let me tell you about BMW’s, driving them is something else. When they call them “The Ultimate Driving Machine”, they really are. So I’ve driven one for 15 years, it’s the only car I’ve ever driven and I loved driving it. Driving other brands of cars, I can tell there is a huge difference (my brother had an AMG Mercedes Benz and I preferred my BMW).

    I chose the finance option, with Toyota was 3.9% financing and with BMW it was 2.9%. Between that and the taxes, the finance payments for either car would gave been about the same (BMW was $15 more per month) over 4 years.

    I plan to drive this car for at least 10 years. My 535i, I drove it like a complete maniac when I was younger, didn’t maintain it and put in the low end gas. If I took care of it I think I could have easily made it to 20 years. This time around I’m going to be very regular with the maintanence, use the good fuel and as I’m older now (32), I don’t drive as much like a maniac anymore.

    The point is, even if the BMW was more expensive, I would have gone for the BMW. Why? I decided awhile back that rather than cheaping out on a lot of things, I’d rather own less things and get what I truly love. So I own an Apple Macintosh even though they’re more expensive (it appears this is no longer the case) because it makes me love my computer experience.

    I know I would have never been happy with the Corolla. And that’s the thing. When my peers bought cars they bought what made financial sense, but then they weren’t happy with their car so they spent a lot of time reading magazines, and putting money into modifying their cars to the point where all the time and effort spent, they could have got the car they wanted in the first place.

    Or another example. I’m a guitar player. Bought a cheaper Mexican made Fender guitar and “saved” myself $500. Well, I was so unhappy with it that I thought hmmm, I’ll mod it and upgrade some parts and get it professionally set up and maybe I’ll like it more. So I ended up spending about $400 on it and sold it for a $500 loss and buying a USA made Fender guitar. So total loss $900 and all the time I could have been playing the better guitar. Penny wise pound foolish. Never again. I’m picking up my BMW after work today and imo even though on the balance sheet it doesn’t make sense, for my life it makes sense.

    One of my favorite books is “The Magus” by John Fowles. There’s a line where it says, “We are rich and we are intelligent and we mean to live rich intelligent lives.” Or William Morris’ quote, “Have nothing that you do not know to be useful, or believe to be beautiful.” That’s the life I have chosen to live, and getting the Corolla would have been incongruent with the life I have chosen to live.

  55. this post is about looking neato in a new car. but it’s not teaching anyone to be rich.

  56. I am suprised that you did not comment upon the safety factor. I read recently an article talking about just one of the safet factors on new cars saying that it saves some large number of lives every year. While I am sure that some of that was hype I do believe that (of course there are exceptions ) newer cars are safer than older cars. Factor that in and you have to consider if the “additional cost” of a new car if there is any, needs to be weighed against the benifit to you and your family of the additional safety. I have always been a good used car person thinking it was saving me and while it may have I have reached the point in my life where the additional safety is probably worth it to me. Upon reflection though it seems that if the additional safety is worth the difference in cost now when I am older and, at least in insurance companies opinion a safer driver then it seems the “additional safety factor” would have been even more valuable to a younger (more years of life/ life disabled at risk) and higher risk driver. So maybe I was wrong all along or maybe no matter how simple a decision seems to be on the surface it is never so simple.

  57. After a half dozen bad old asian cars and all the costly breakdown agravation, I proudly bought (the moment I could afford it) a brand new north american. It spent 29 of its first 55 days of usage at the dealership. The moment I would get it on the road, smth else would break. Getting to the last fixes for the glitches with the most intermittant symptoms took six years (the length of my extended warranty). It is now all paid for and warranteeless and I hate it so much I can’t wait for smth major to break down so I can (at long last) get rid of it. Meanwhile, my buddy bough a 2 year old asian, drove it 2 years and sold it for 1k less than purchase price. I plan to do the same for my next car.

  58. I am 100% in agreement with Ramit, buy new, run the numbers and the difference is minimal. Anyone who doesnt factor in repair costs for a car out of warranty is mad. They can run to thousands for broken gear boxes and so on.

    Personally i lease cars which is probably the no.1 crime in Ramit’s book…but here’s why: Who wants to own a big depreciating lump of metal? I have an Accord also, bought new in 2004, costs $200 a month with a tiny downpayment. The cost is totally predictable, i will never spend a cent more than $200 on it. At the end of the lease i should have enough equity for another downpayment and i just continue on at $200. No repairs, nice new car, never breaks down, never gives me a headache.

    A couple of points on Ramit’s comments: I think you have to figure the cost of someone (or you) trashing your car. It happens to millions of people every year and the value of their car is massively compromized. You own it, someone crashes in to it, sure the insurance company pays the repair but resale value is shot. Lease a car and someone crashes in to it, insurance pays for the repair and you wipe your hands of the car at the end of the lease.

    Final point, anyone sinking lots of hard cash in to cars (unless you’ve money to burn) is crazy. Finance or lease a car and put the cash in to something that appreciates – stocks or real estate. Cars end up in a crusher and are only worth their weight in scrap!

  59. I don’t understand why the rush? I guess your in the states, here in Canada, while I had my license very early, I made a vow for public transportaion. On very few days of the month, I made a small budget for a taxi, for those special important occations…

    To me, its not only about cars, you either do the right thing, in FULL, or DON’T do it at all. So, I stayed with no TV for three years, to save for a huge A** TV, and by that time, I got a brand new LCD! now, I am saving electricity, had I got the old bulk…

    A car for me, must be 400H, and I don’t agree with this non-sense about hybrid cars, regular cars, are like second hand smoking, and if you live in the suburbs, your killing all those plants which you like on your way… If you live in a metro region, your wasting too much gas for nothing… So its either the proper way, or the high way!

  60. ramit, mindbogglingly brilliant (or finally someone who thinks like me!).

  61. I agree with a few things here. Of course if you don’t have much money on hand it you basically don’t have a choice. Either you buy new and good, or crappy and old. It would depend on your financial situation based on your long term income outlook.

    But what about buying a nearly new car. Something that has only been used for a year or so. You could save more than 10% off the cost of buying it brand spanking new, and still get the benefits of a reliable new car. Also, you could find more in depth reviews of the cars from people who had them.

  62. I bought my sister’s 1989 Civic from her for $1K, put in another $1K to bring it up to spec and have driven it for the last 5 years. I put 400+ miles/week on it and at 238K+ miles it still gets 35mpg & costs $325/year to insure. Other than tires, oil & gas I haven’t had to put another dime into it.

  63. It’s best to buy a used car, esp. one that has just passed the warranty limits. The previous owner(s) have sunk all their cash in getting it routinely serviced (to maintain the warranty) and the vehicle has depreciated significantly in the meantime.

    Ofcourse, you will check the service records before buying!

  64. I recently read something I found interesting. Even if you buy a new car with cash, or 0% interest, you are still paying for that hefty new-car depreciation costs. It is generally smarter to buy a car that is a few years old instead.

    But hey, if you have the money and want a brand spanking new car, then go for it. Just know that you’re paying much more to have it brand new.

  65. Really nice post…but I believe there are other factors that come into play before deciding the new Vs old car decision…

    Someone like me who would really like to drive a old BMW/Lexus rather than a new camry/accord ( not that I have anything against these gr8 cars….just my personal preference and also I do care for the brand value)…one can get a really nice BMW for 20K – reallly haggled a lot for it – down from the offering price of 24K for a 2001/02 model….use it for a 3-4 years and it would fetch a decent resale value as well and then move on to a better car.. ( it does get boring to stick to the same car for long..)

    Also one more option is going in for a “Preowned Certified”…that could save atleast 10K on a luxury car, great deals on financing and also warranty for atleast couple of years…

    Also it seems I am an exception for the “Indian don’t like Coupes”….and being in Los Angeles for last few years have defi added to my passion for trendy cars…

  66. You are not going to to keep your new car for as long as you think you are. especially not 10 years. unless you want to pass it down within the family. Why? because unless you are a total failure in your career (which doesn’t look like it) you will become rich and buy your mercedes far sooner then you had planned.

  67. Guess people outgrow their cars sooner than they think they will…The first car after you start making some $$$ is most probably going to be new…Yea, I like the new car smell too!! The next upgrade has an 80% chance that it is a used car with extended warranty, low mileage, excellent maintenance….Now, after kids, a decent suburbia home, a business that is doing well, I want to definitely own a brand new trendy car. Its a lifecycle in itself…

  68. I have bought 1 car in my 27 years, a 1999 Toyota Corolla. DH is 29 and bought 2000 Ford Focus. We paid $10k for my corolla and $14k for the focus brand spanking new.

    Now the Focus by NADA values and KBB with less miles is worth less my Corolla. Is there are reason for this? Yes. American cars are pieces of CRAP! So you spend a lot fixing them even new. No wonder they depreciate so fast! My car still fetchs $3-4k after 7 almost 8 years. Um, so what is my cost? Absolutely minimal. Toyotas and Hondas don’t depreciate enough to make it worth buying used 1-2 years old. But Fords and other pieces of crap do so I’d buy used.

    And we make a lot of money, over $150k/year, have a nice home with 20% DP, and can easily afford new cars to “match” our incomes. But we haven’t done it, no need to. They fit our lifestyle now.

    Of course in about 2 years they will be replaced by new cars when we get pregnant. A baby with a 2 door hatchbook doesn’t work, the corolla might be okay, but I’d like a few extra inches in the back. Personally I see us getting a station wagon and a minivan.

    Why for only 1 child? Because I see our parents moving nearby to help with kids, so we’ll constantly have more people around. At that point it’ll probably be new because we’ll want the newer safety features and we’ll buy either a toyota or a honda.

    We probably should run the corolla into the ground it will have little maintanence, but the ford isn’t worth it. The coolant is already leaking and not working, we’ve replaced the fuel pump, the fuel gauge, the key chamber, the windshields, brakes and rotors @30k miles, struts at 50k miles, spark plugs misfired to the tranny had to be completely recleaned, the rear wheel welded down, um and you wonder why it’s a piece of crap?

    Just shows you should buy quality. And my corolla, no problems, I barely had to replace the brake pads at 70k. So yeah I’ll pay a premium for a new Honda/Toyota but no way would I even buy a used ford.

  69. Wow. We truly have some ‘expert’ auto purchasers here. But they do make good points. My personal preference towards new cars is to buy either off lease or 1-3 year old trade-ins and get the extended warranty. Oh, and ALWAYS check Consumer Reports, and NEVER get anything but the three most reliable cars. As a general rule, you can’t go wrong with Hondas or Toyotas, and Japanese are built much better than domestics. ‘Face’ based society FTW!

  70. Three years ago I was looking to get a new car. The old one was starting to show signs that it was on the way out so I called my brother ‘cause he deals in used cars wholesale. I’d always gotten my cars from Dave and drove them into the ground. When I told him that I wanted a newer used car in good condition he told me to just buy a new car. His position was that the money that people were getting for late model used cars was “insane”. To your list of reasons for buying a new car he included that you never really know how the prior owner treated the car, unless you know the owner of course, which wouldn’t be the case for me.

    I looked at the Honda Accord, Toyota Camry, and Mazda 6 at the end of the model year and was all set to buy the Honda Accord with all the bells and whistles when I decided to use the money to pay down the mortgage instead.

    Well good things come to those that wait! In April of the following year I get a call from Dave telling me that his girlfriend, who worked at the Mercedes dealership just called him about five 2003 C230s sitting on the lot in April of 2004 that the management just wanted to cut their losses on a get rid of. At this point in time these are almost used cars with less than 100 miles on them.

    To cut a long story short, I bought a C230 sedan, with the sports package, for only a grand more then I would have spent on the Honda Accord, a few thousand dollars BELOW invoice! (It’s also a stick, which I like, but I’m sure that helped me whack the dealership on the price).

    The Mercedes really isn’t me, and wasn’t on my original list of cars, but I bought it for less than some people were trying to get at Cars.com for the same vehicle, used, and while the back seat doesn’t fold down, it is one fun car to drive!

    I just lucked out, but, if you take a long term approach (expect to maybe spend a couple of years looking), you might be able to take a more methodical approach and create your own “luck” by going to the dealerships in February and see what they have left on the lot and convince them to take a loss so they can get a newer car on the lot. This will probably not work for very popular cards like the Accord or Camry, but I could see it happening with a Mazda 6 or as was my case, a C230.

    I haven’t tried this myself, but it certainly seems like a strategy.

  71. I’ve done the analysis myself and agree with most of your points, especially when you factor in the used cost more to maintain on average (even for hondas and toyotas). Only factor you forgot was the opportunity cost of money if you have it invested somewhere else. I’m comparing new accord to used one and the delta is about $8000K, then if you compound the incremental delta less the resale values over life of the car for me it ended up being its close to $11K.

  72. Ramit — Great post, really. As an owner of a performance auto shop, the debate can go both ways. It truly depends on you, more than anything else.

    Currently I drive a 1991 Honda Prelude. It has 190k miles. It runs like the day it rolled off the assembly line. That said, myself and my employees know how to take care of this car. When I bought it for $310 in the spring of ’05, it was a piece. But with time and effort it is worth nearly 5,000 (no, you wont find that on KBB, but it’s custom (not in the crappy pimp-my-ride style either)).

    For my next car I am completely set on a 2001 Honda Prelude. If they released a brand new 2008 Prelude next year, I would not buy it. But I do not need to.

    On the other hand of the story, many people do not have the resources I do. MOST people actually. Fixing cars is amazingly expensive. And I can say first hand that a used car is a used car is a used car.

    Statistically speaking if you sell a car within the first year of buying it — something is wrong with it.

    Honda/Toyota/whomever can only guarantee so much on their “certified used”. A used car is a used car is a used car. For many people a used car is a wise choice.

    But some people may choose the used route. Unless you are into cars, or into a $75-150 an hour shop bill (my employee’s get $100 an hour), it is a hard decision. Buying a used car may pay off. But statically it doesn’t. Statistics that speak for more than just the $ value. You have to consider more. Like the hours spent driving the rental car, the grieve of sitting on the side of the road waiting for a tow truck/friend/whomever.

    Again, I discourage neither side. Brand new cars are spiffy. Used-new cars are wonderful too. And in some people’s cases, used-used cars (my prelude has a sad little story), are just as fabulous. I just ask that everyone who is considering buying a car — consider more than the numbers. I’m sure Ramit is only asking the same. Consider the emotion, the stress, the time… do not let money be your sole guide. (But!!! If you cannot afford a brand new 50k Mustang do not buy one!)

    Thanks again.

  73. I think if you compare apples to apples, then yes, buying used is always cheaper, with the exception being Collectables and Antiques, where obviously the value increases beyond the purchase price, and will never be cheaper to buy used.

    But if You buy a car brand spanking new, unless it is a model’s introductory year, I can by that same car used, for less. I can get the same low financing that you can, I can put down the same down payment as you, and I can own it for the same term, and it will always cost me less than you. Always.

    Now if you buy say a Crossfire or Solstice, keep it for 25 years until it is a bonafide antique car, and I want to buy that car 26 years from now, I am going to pay way more than you paid for it new. And in 2032 dollars to boot!

    So there are no absolutes. You can pay much more for a used car than it cost new. But in the average consumer market for commuter/recreational vehicles the same vehicle new or used will be cheaper used, always. Most vehicles are 20% cheaper as soon as they are driven off a dealer’s lot. And that car is just as reliable as your new one, only it’s 4/5ths the price, same model year.

    What did a model T sell for new? Around $300? What do you think you are going to pay for one that drives today?

    So if you hang on to a car long enough, and keep it in good shape, it can well exceed the original purchase price. Take care of a car it should get a 500,000 miles or more.

    The other thing buying used offers the driver is the opportunity to drive and enjoy an automobile that they just cannot afford to drive new.

    I mean there are a slew of great Prosches in the 30,000-50,000 range. There re a lot of really nice new cars in the 30-50k range, but none of them drive like a 10 year old 911 Carerra or Targa, I mean as an example.

    And while you may think a 10 year old Porsche 911, you’d be surprised at just how many have such low mileage.
    Still the depreciation hits them pretty hard. I mean a Honda anything losing 50% of it’s sticker price isn’t all that much money, but a 128-178,000 dollar car losing 50% or 75% of it’s sticker price is well, a value a lot more of us can actually afford.

    And if you love to drive, you’d much rather be in a 911 than a Honda 2000, if you could pay less for the Porsche 911 than the 2007 Honda 2000.

    Sorry. Yes, you can make an arguement that there is value in buying a new car that is retained past the term of financing. But no you can’t do better than used, if you use the same common sense you used to keep the costs of a new car down and apply it to the same used car, how can you pay less buying new?

    It’s only when a person buys a used car without having it looked at by a good mechanic, or they spend more money to get more car than they can afford.

    But the reason people say you always do better buying used is everyone knows the reference is to the same thing.

    A 2006 Honda Civic Si as compared to a 1999, 2000, 2001, 2002, 2003, 2004, 2005 Honda Civic Si as a for instance. It wouldn’t be between a used 2002 Mercedes SLK 250 and a new 2007 Honda Civic Si.

    But nice try. Enjoy your new car for many years to come by the way!

  74. “Used” doesn’t have to mean “5 years old.” I’m a big fan of 1+ years old used cars just to avoid the drive-it-off-the-lot fee, while still keeping the bulk of the value of the life of the car.

  75. @ Chris

    In some cases 1 year old cars sell for a few hundred less that the current year. Sometimes they sell at the same price.

    As far as the new vs. used debate goes, that’s something different to the topic of this post – cost vs. value.

    Some tips from my experience (I recently bought new):
    - *do not pay more than invoice.* Sure the dealers will cry about it, but one of them will cave – regardless of how hot the car is, and how fast they fly off yards.
    - “I have money/finance and can buy a car today” is a very powerful tool you can use to help them arrive at your price. If they do not be prepared to find a dealer that will accommodate.
    - once bought, don’t waste money on dealer add-ons (paint protection and other junk). You can get a good body shop with access to much higher quality paint protectant product than the dealer will use – go over your car for much cheaper.
    - enjoy your new car :) I’m sure you worked hard for it.

  76. Just having the basic understanding of how a car works. If you are going to make such a big financial decision on something you should at least be able to look under the hood of your car and make be able to make some simple diagnostics. Not saying you have to be a mechanic but being to just identify problems has the potential to save you thousands of dollars over the course of your driving career.

    My car history:

    6 Units of auto shop at community college = $72

    1988 Toyota Corolla = $800

    After 2 years of driving the above car, the amount spent on parts (did the work myself) = $150

    Insurance (basic liablity) for the toyota = $25 a month

    Number of days broken down on side of the road = 0

    Total Cost to Operate (minus petrol) for 2 years = $1572

    New cars most definitely don’t insure reliability. Just like a used car doesn’t indicate unreliability.

    My 2 cents…..

    Ryan

  77. I love this guy! I am a used car salesman. I love the idea this guy has that if you are a bad negotiator, that you should bring a hardball negotiator with you. Yippee! I play good cop, bad cop six days a week. How many days per week do you play, and more importantly how many days a week does your hardball negotiator play the game. If the the negotiator is a “closer” in a sales department, this advice may stand up, but otherwise you could find yourself in serious jeopardy when it comes time to trade your new or used car in.
    What makes a car sale go upside down is not generally the price of the vehicle, it is the additional items that you become convinced to buy and finance into the loan.

    I.E. All cars are presently released from their manufacturer with an 8 year undercoat. Why pay upwards of $1000 to double the already existant coat of undercoating? PS… the undercoat treatment cost me about $50 and maybe half an hour to apply at $35/hr for the technician.

    The best way to make sure you get a great car deal is to never buy a car. Cars are a constantly depreciating asset. They do lose value with every mile, with every day, and with every little mark they obtain in the course of speeding you through life.

    The only control you exercise when at a car dealership, is the control of your preferences. When a typical dealership has access to 800 plus cars, you will find what you want, and you will create an emotional attachment.

    Here are two questions you can ask:

    What is the buy rate from the lending institution on my loan?

    What is the Actual Cost of Vehicle (ACV) for my trade? How much are you crediting from the purchase of the new car, and how much are you applying to the loan above the price of the new vehicle?

  78. I agree with Ramit in his idea that used cars aren’t always the only or best bet. It varies by model and brand significantly. Some models depreciate greatly and others have a very high resale value. I also bought a new vehicle recently and ran the math and it did not in any way make sense to buy used even though I wanted to on a number of models. New models have safety features such as side-impact/curtain airbags and vehicle stability control that aren’t available on older models.

    I was looking at toyota tacomas and an excellent condition 1-3 year old used fully loaded crew cab TRD with 25-35k miles was running a minimum of $25k with most in the $27k range. They also booked out for that and had shorter original warranties. I was able to buy a new improved model that was vastly superior with enhanced safety features, gas mileage, comfort, and other features for just under $30k at invoice price with a 60k mile warranty. The tacomas depreciate very little and at 10 months on a loan I am nearing the point at which I’m even with the trade-in value….that’s not resale value but trade-in. I also rant the math on civics and accords and it was the same deal. They fetch way too much on the used market to justify buying a 1-3 year old one

    I’m all for saving money but driving an unsafe econo car from the 80′s or early 90′s won’t save you any money if they lack many safety features and you wind up hurt or dead.

  79. Hi Ramit – just found your website tonight and enjoyed reading your posts, especially this one and all the comments. The thing that strikes me most is that people are missing possibly the two bigger ‘meta’ lessons here. The first is (as you’ve mentioned elsewhere on your blog): It’s okay to spend money on things that make you happy. What’s the rate of return on a trip to Europe? Horrible, right? But a $ is a $ is a $ so if someone is really trying to become rich they would never rationally make that trip. So why can’t a car or any other purchase contain the same element of ‘I want it and it makes me happy’? At a lower level, the route you take to work, the length of your commute, proximity of a good repair shop, short-term cash reserves, etc. are all rational factors that might affect how you feel about a new vs. used car in terms of both reliability overall AND the likelihood that a given repair will become necessary. I have a ’99 Toyota Camry that has been super reliable and other than oil changes only needed new tires and one new battery over 6 years. But then this past spring it finally needed a new timing belt and related items – $2,400!!!! Hmmm, that eye-popping number got me thinking about a different vehicle simply because I am personally averse to spending that kind of unexpected money on my car.

    The second thing I think you are trying to relate to people is how vitally important is it that a person be able to calculate their own financial scenarios for their OWN needs. What you’ve done is taken into account your current finances, financial goals, and both your short- and long-term outlook on what kind of car experience you want. Then you’ve crunched the numbers to arrive at a satisfying result for you, not just blindly accepting what ‘the pundits’ instruct. Any financial advice should cause us to think and then validate against our own situations. A person could certainly do worse than follow most of the general precepts you find about how to save money (“10% in your 401K”, “Don’t pay off a low interest loan with money you could invest at a higher rate”, etc.) but if you don’t understand WHY that advice makes sense then you could end up making ‘good’ decisions that are ‘bad’ for you. Cars and houses are like stocks and bonds – if we own them we interact with them almost daily and it’s unfair to expect them to behave like purely financial instruments devoid of emotion. Just like trips and nice dinners and concerts they bring enjoyment that can justify ‘irrational’ spending. Simply understand that, understand your finances, do the math, know the tradeoffs, and be happy.

  80. Love your website!

    To me, I’d never consider a used car because of one reason: I don’t trust the seller. Yes, there are many people who take care of their cars, regular maintenance and stuff. But there are many others don’t do these things. I just don’t trust anyone whom I’ve never met~

  81. I am doing a research on cost vs. value, and found your article, I definately agree with your views as in “Treat your car like a stock and plan to hold it for a long, long time. This is hard because we’re judged on how new our car is. But with each year you drive your car payment-free, you’re saving tons of money”. “And it only gets better as you drive the car longer with no payments. In other words, you save more in non-payments than the car depreciates”. and I have seen live examples of it, all what it needs is just not to run after new models every time the shape of your car is changed to a newer one, as you need a portable bank to cope with this nowadays, as care manufacturers are intentionaly doing this to keep selling their new models, not as before when Mercedes used to keep the same body shape for 10 years unchanged. you will only touch the benefit from buying a new car, if you drive it from 5 to 10 years, then you know how much you have saved then, in my own experience I have lost a lot on changing cars for new looks, and I have only discovered how I was doing the wrong thing when I was given a company brand new car in 2001 which I still have to date, when I think how it has served me quite well, I wished I did the same with my personal one long ago.

  82. Yes a used car can cost about 30-70% less than new car would, in my opinion the new car is worth the extra money because you are the only one that has driven the car plus no serious maintenance for at 100,000 miles, i know i have lost a lot of money on my new car but hey it is worth the extra cost, a piece mind is worth more than a price to me, even though a used cars sells about 15 million a year in the united states one one of the two million new car buyers in the us each year who rather not have to worry about serious maintenance for atleast 100,000 miles, it is just great to have no worry.

  83. Everyone’s got an opinion on this I suppose, but I’d just like to say that my (and my wife’s) used cars were our second best financial decision since being out of college a couple of years ago (our home purchase being #1).

    We paid a grand total of 4,000 cash for a 96 blazer and a 98 buick (each one previous owner, of which both were in their 60′s or higher). Three years and over 100,000 miles combined later, and only roughly $500 worth of repairs, I am satisfied by not having a car payment and not needing full coverage insurance. In fact, if one was totaled tomorrow, I’d have gotten well more than my money’s worth.

  84. Quick update if I might. Went and signed the papers today. A $35,000 stickered F150 bought today negotiated to $30,250. less Manufacturers rebates of $4500, a $420 rebate from the dealer to cover the first 3 months “interest” (I will of course, pay the truck off as soon as I take delivery and pocket the $420), and a $1,100 rebate from CitiCard Drivers Edge (like airmiles but BETTER, its CASH) brings my actual out-of-pocket expense to $24,230. If I drive this truck for 11 years like my ’97, and get $8,000 for it used, like my ’97, my cost of ownership will be $123 per month. $17 per month LESS than if I purchased a comparable used 2004 model from Ebay. It pays to shop. New car deals are very strong and in this case, it was definitely cheaper to buy new.

  85. I bought a brand new car in 1986 and have never regretted it. Why? Because 21 years and 385000km later (about 240k miles) I’m still driving the same car, and still happy with it, and saving money.

    The car is a Nissan Pulsar, bought in Australia. In its day it was a solid reliable vehicle, and by buying it new I made sure that I was its only owner. That meant I could be absolutely certain it was well maintained and driven sensibly from day one, and I think that has a lot to do with its long life.

    Contrary to common belief, the cost of maintaining and repairing this old car has averaged LESS per year over the last ten years than the first ten. I’ve got all receipts entered into a spreadsheet to prove it, and I wrote about it in my blog recently to bust the myth that older cars always cost more to keep on the road.

    Repair bills and insurance are cheaper, and I haven’t paid a cent in car payments for over 17 years. When I eventually have to replace the car, I’ll be looking for a new one, in the hope that by looking after it very well from the beginning it too will last a long time. It worked with my current one! I wouldn’t have that confidence in a used car which may not have been treated as well as I would treat it.

  86. first let me give some background, i am 28, and purchased a 1990 honda Accord with 143k on the clock for $2550 3.5 years ago. The honda has treated me well, and the lack of payment has felt so great that i am afraid to purchase another car! Currently the car has 180k, driver side door is stuck, and the bumper is falling off (held up by string…literally). Now, this car has not given me any trouble other than a “Main Relay” issue that was repaired with $190 bucks. Everything else has been normal wear and tear. 3.5 years later, to fix the door will be $590, and the bumper will probably be ~$800 range. Now, the $1400 bucks i put into the car, will be nothing compared to the $300/Month car payment for a $20k new car. In 4 Months i would have paid off my repairs. $590 will take the sting out of exiting my car from the passenger side…..and $800 will take the fear out of worrying if my bumper will cause an accident. But nothing will take the sting out of driving up to a job interview or consulting job in a 17 year old 1990 honda accord…I have to come to terms with the fact that i am not in college anymore.

    With that said, i’ll have to agree with the previous statement about cars being a hunk of scrap metal. The only time you should treat a car as an investment is if you are a dealer, or if you are a collector. To Anyone else, a Car, just like a computer, is a tool. Never pay cash for a car, when you can finance and get a low interest rate. These arnt house loans, the interest isnt front loaded. Use that cash for something else! Depending on how low your interest is (some people are getting 0%-2.5%) you can:

    a) stick that cash in a 4.5% interest savings account and come out ahead. Cars depreciate way too fast to be an investment, this isnt a house.

    b) take that 20k, buy a house, rent it out….rent paying the mortgage down, plus appreciation of the house (including 4% a year for inflation)…..could net you much more than the interest on the car.

    Think of cars as high priced tools like PCs, ask yourself what do you want them for, what will they do……and if you want neon lights and extra fast engines (processors) to show off your purchase (or to personalized your purchase) or play PC games (ie. driving really fast), go ahead, but dont justify it with a true “value” statement. You cant quantify personal enjoyment in monetary terms nor should you ever try.

    I am glad i found this site. I have been researching and it looks like I’ll be purchasing a new car without guilt, and i’ll be buying intelligently. The conversation here has been very valuable!

  87. In April of this year I purchased a new 2006 Honda Civic Hybrid with a navigation system, Low Jack warning system and a satellite radio program for approximately $25,000 including tax and fees.
    It was not my intention to get all those bells and whistles, but the car seemed to be a good deal so I purchased it.
    This week I discovered that the car had been previously purchased, had been driven for 3 days, had broken down
    and was returned for a 2007 model. My model has been recalled for that problem. h.
    The past history of the car had not been revealed to me, so I have complained loudly, and have been given the choice of an extended warrantee at no charge- or to trade the car in for another model. What shall I do?
    Thanks for your help.
    Joan

  88. silly. if you are buying a new car just for the smell, buy new car smell in a can like I do.

    http://www.lanescarproducts.com/newcarscent.html

  89. For such a smart kid so interested in personal finance, you made a really stupid decision buying a new car, and the rationlizations (new car smell?!?!) are just that.

    While it is a necessity for the vast majority, a car is probably the worst way to spend your money. They really are so well made today that getting a lemon is the exception rather then the rule.

    Find a low mileage Honda that’s no less then 3 years old. Take it to a mechanic and have it inspected (they even have inspection services that will come to the vehicle). Getcherself a good one, and drive until you’ve enough disposable income to not worry about depreciation.

    Then, take your frugal butt on down to Sears and pick up a 150 piece mechanics toolbox & the service manual for your car. Basic maintenance like oil & fluid changes, tune-ups and brake jobs are extremely easy to do yourself, and you save yourself a ton of moola. Special note on brake jobs: this is the biggest ripoff/moneymaker for mechnics. They scare you by saying you need brakes (you probably don’t), and that they’ll fail if you don’t get them done right now (they won’t). Anyone can do a $350 job themselves for $75 or less, in about an hour.

    So, if new car smell is worth $7,000 on a $20,000 car, well, you’re either much richer, or much stupider then I am.

  90. wow, now I don’t really know what to think about your advice. I was reading some of your things and I don’t think you can speak for the average college students generation. I have other problems in grad school than worrying about a new Benz or Honda (or everything else that cost more than a $20000). But maybe thats different at Stanford, maybe the standards are a little higher. But don’t think you are actually able to give any serious money advices for the average student who has to work part time for $8 an hours to be able to afford rent, food and occasionally some beers.
    You seem like many other spoiled people, because only they are really trying to fool themselves that any business meeting in college is so important that you need a new car (how about a new computer too, just to be on a safe side).
    I drive a 1986 Chevrolet Caprice to the school (EVERYDAY) and it works fine!!!
    Don’t forget that at 30 you should at least get that new S-Class, you don’t want to break down on your way to the golf course.

  91. This article makes no sense….you bought a primarily for reliability? If you look at the statistical difference in reliability between a 3yr old used honda accord and a brand new one is marginal. So your argument is invalid….first and last time im reading this blog

  92. if your worried about repair costs of a used vehicle, you can buy an aftermarket extended warranty and still save a huge percentage off new. Lets face it, 3 years old with reasonable mileage still drives as new. This formula provides the best value of reliability:cost. Buying a warranty for a honda may not make as much sense as buying one for a domestic, but you see the picture. Run the numbers and youll find cost of ownership is considerabley lower per year.

  93. Maybe used isn’t always better. For example, I’d never buy a used jag, mercedes or bmw unless it was a second car because those vehicles have poor reliability and they’re very expensive to repair, I wouldn’t want something to go wrong and have to pay top dollar to have the car repaired ASAP.

    But you bought a Honda, one of the most reliable cars on the planet. You could have bought a 2-3 year old Honda and saved 10+ grand and it’d probably be just as reliable as a new Honda.

    For example, I bought my 3-year old Toyota Avalon for 10 grand on ebay of all places (yes, I inspected it thoroughly before paying for it). A $30,000 car for 10k after just 3 years. Had 80,000 miles on it and the new body style came out just a year after I bought it but 50,000 miles later it still runs great. About the only new car I could have bought for 10k would have been a tiny 4-cylinder coupe. So given the option of a crappy economy 4-cylinder coupe or my semi-luxury Avalon what would you have chosen?

    At least you were smart enough not to get the C230. They’re the “cavalier” of Mercedes so it’s the crappiest of all Mercedes and whenever I see a C230 I imagine someone living beyond their means and stretching their narrow budget to afford the least expensive Mercedes they can afford. And like you said, they’re expensive to repair.

  94. Why pay Consumer Reports or the fightingchance for information that’s free? Besides pricing info at kbb, there’s so much free info at edmunds.com you can spend months there reading and getting invoice prices.

  95. when the day is done, whatever decision you make, as long as you are happy with it, that’s justification enough for me. it’s your car and your payments to deal with. i am confident that your new purchase isn’t running you broke, so it ties in with your article on spending $5,000 on shoes, etc. congrats on your new car, Ramit!

  96. I remember when the author for “The Color of Money” article tried to rationalize her purchase of two new cars. She was sinking deeply in trying to explain why she thought it was such a great idea. I tried her read her column after that, but admitedly had lost a little respect for her. She just didn’t make sense.

    On a positive note, you recognize in your explanation that new vs. used is a decision (partially based on vanity) that does cost more overall for a new car vs. used (though doesn’t have to be a huge difference if you are careful). In that you plan on driving your car for more than one or two years, I don’t buy the reliability argument of why this car would be more reliable than a one or two year old car that has already taken the steepest depreciation hit.

    In that most of us don’t buy anything electronic as used (cars = large scale cell phone or ipod), and the fact that you “did your time” with rickety-ass minivan, your viewpoint is understandable. You also had a good paying job, which made the decision a little less sacrificial than it would be for the average recent college grad. However, when you are finally moving on to the upscale $100K+ car, you might consider buying a shiny 1 to 2 year old used model of the same car and saving yourself an extra $30K.

  97. “If you’re buying a Dodge Neon, your resale value is going to suck and you’re going to be angry every day of your life.”

    As a long time owner of a used Dodge Neon -and I think I speak for all long time owners of Dodge Neons here- I couldn’t agree more.

    I recently traded in my ’96 Neon, I got $300 for it, which is exactly the price of the scrap metal it contains. I traded in for a new Honda Civic, for pretty much all of the same reasons you mention.

    What most financial sites miss in their “buy used, drive it forever” advice is that you can’t put a price on things like knowing your brakes will work (though you can put a $800 dollar price tag and 2 days of missed work, and one of the scariest rides you’ll ever have on it when they finally go out). Or the radiator springing a leak, and missing work. Or a ticket because your headlights randomly stopped working.

    Also, if you buy new, you can be sure your car has had all of its regular maintenance for its whole life and will therefore last longer. The simple fact that you know the car has been taken care of makes it safe/sensible to actually drive it a few years longer than you would otherwise, again, closing the new/used price gap.

  98. Since you bought the car new, at least plan to drive it for a long time…not just 8 years. After all, you bought a [hopefully] good car. Your “buy a good car” is just as valid for a used car.

    I bought a 1993 Honda Accord in January 2006 with 193,000 miles on it for $2,000 cash. I’ve driven it for 38,000 miles in the last two years and have spent a total of $1,700 in repairs ($1,100 planned at 200,000 miles, e.g., timing belt, tune-up, rotors, etc.).

    Total cost of ownership: $158 a month (plus gas/oil changes, etc.), 9 cents per mile and (so far) I’ve never been stranded on the side of the road.

    The secret: buy a GOOD used car, have a GREAT mechanic and fix EVERYTHING at the first sign of need.

    It’s kept this 22 year old on the road, out of debt, travelling internationally, and with fully-funded retirement accounts and emergency funds. :)

  99. Dude, your advice is ridiculous. How much time did you spend on writing this? When you buy a good used car, you save. Car after car, you will save in the long run. Good used cars last just as long, and you aren’t paying top dollar. The minute you drive a car off the lot it loses value. You should be advising people to research the local solid good used car dealers. There are so many of these around every city. They have a reputation. Rewarding yourself with a brand new car is not going to teach anyone how to be rich. The bottom line is that cars are not an asset, they are a liability, but a necessary one to get people to work. So no one should spend more than $6k on a car. And they should pay for it in cash. That’s my advice. I can’t read your blog. Mainly because you are too young to know what steps to take to get ahead. Start again in 10 years after you’ve made your mistakes, like buying a brand new car. Good luck.

  100. I never buy used cars. I bought my first car in the 70′s. I sold some stock that I’d had since I was a child and bought a Plymouth Valient. I kept it for 10 years and without car payments I had enough put by for a new VW Rabbit. Buying a used car takes time which I don’t care to spend. My practice has been to buy new cars but as infrequently as possible. If you keep a car a long time the difference is small. I am always driving a used car but it is one that I know. I know I’ve saved lots of money by not paying finance charges.

  101. Ramit, I agree with your reasoning on a new car. Bought a Nissan Pathfinder back in 2002. 2.9% financing over 5 years. Paid it off early, thanks to company stock options. Been driving it for 1 1/2 years now payment-free. Plan to keep this for about 10 years or run it into the ground.

    Another thing to keep in mind is if you have kids. My wife and I had our first child last year. By having no car payments, my wife is able to stay home with Baby and not have to go to work.

  102. My stepson sent this to me to “prove” that new is better than used, and let me tell you, this proves NOTHING. What a ridiculous rationale to buy a new car! I remain unconvinced, and think this country should eliminate as many cars as possible. We should make our cities car-free. Cars are ugly, polluting monstrocities that are much more trouble than they are worth. Is it any wonder that Americans are in debt up to their eyeballs and obese to boot? They buy new cars every couple of years and never walk anywhere.

  103. Suzanne, I suspect it must be very frustrating to have one lens through which to view everything. This article wasn’t about keeping cars out of our cities. It was about new vs. used cars, and the fact that used cars aren’t always the “best” choice.

  104. Wow, I’m amazed by how long this thread has run (2+ years! Ramit , do you still drive the Accord?). I came upon this site as I’m currently deliberating whether to buy a new Miata (love the power retractable hard-top) or a used 325i. This thread hasn’t really helped me one bit ;-), and I think everyone’s missing one point here from basic market theory: If new cars are more expensive to buy/own than old cars (and most people seem to feel they are, as I do), then it is only because market forces have determined a fair premium for the privilege. Whether this privilege is due to prestige, peace-of-mind, or a territorial urge is irrelevant…. What this effectively means is that that if you’re a ‘typical’ consumer, since the efficiency of the market has already priced-in the benefit of new car ownership for you, you should gain no utility by making a decision one way over the other. What, then, you as a consumer need to decide is whether your situation or disposition is such that you might deviate from the typical consumer in some meaningful way, and then decide how this should affect your decision accordingly. For instance, Ramit seems to be less willing than the average person to expend time dealing with an automotive malfunction, which would be an argument in favor of his buying new. In my case, for example, my situation differs from the norm in that I don’t know how much longer I’m going to be living in the States. This should incline me to buy used; however, there are unfortunately no used cars on the market quite like the Miata I’m interested in, and this is what complicates the decision… Again, it’s all about how you are disposed relative to the average consumer, for whom the new car premium is (or at least should be) fairly priced… Z.

  105. Zain, thanks for the nice, thoughtful comment. Yes, I still drive the Accord — that’s the point! If you drive a car for only 2 years, you made one of the worst financial decisions you could make. The keys are: (1) Get a good car, (2) Maintain it well, and (3) Drive it for a LONG time. I hope to have this car for many, many more years.

  106. We are a one car family in a cold climate so it’s important that our vehicle be very reliable. When our (used) minivan was totaled in a wreck a couple of years ago, we had little time to find another one. So we ended up buying new (even though all of our earlier vehicles were used). And that worked out fine for us.

    A lot of the posters assume that most people have lots of time to find that perfect reliable used car. But that’s not necessarily true! And I think some kinds of vehicles (such as minivans) tend to get pretty hard use, so they aren’t as good a bet when buying used.

    I appreciate Ramit’s original post about the subject, because it challenges some conventional wisdom that, while true in some instances, shouldn’t be taken as true in all cases.

  107. Since I started law school with $0 income, or make that -a propective $150K debt, I came back to the States and bought a $1,500 car in which I had to put about $1,500 of work over a 2 year period.

    Basically, I bought a beater (Subaru beaters are the best). However, I leave the country a lot and I can’t be commited to (nor can I afford) a 5-year monthly payment of $200-$300 dollars. In my experience you should either buy a beater, or a new/almost new car. The middle ones make no economic sense. People make fun of my beater, but I simply couldn’t afford anything else, and I feel the freedom of not being wedded to an expensive machine.

    I wonder, can any of you tell me why I have such commitment issues when it comes to cars? Or electronics for that matter- I refused to sign up for the 2-year cell phone services and opted to pay more up front for a 1-year contract. (I’m a female)

  108. I think this is a funny article. The reason is because I too bought a new car and I just recently graduated from college. You make an excellent point that a new car is a great investment. I plan on keeping my car for at least 6 years (just a random figure). This way I will save on maintenance and cost of repairs for at least the time being. I also love my car. Your right the intrinsic value is an important part of a car (I love the new car smell as well… Is that wrong?).

  109. One thing I would say to those who are looking at purchasing a used car would be to make sure the car has at least some form of a warranty. When I bought my VW Jetta (WHICH I ABSOLUTELY LOVE, BTW), I made them give me a warranty (3 months/3000 miles). The second day I had it, the transmission effed up and the Honda dealership I bought it from (yeah, don’t ask) was forced to pay for a brand new transmission (2000+).

  110. Ramit–if you don’t give a flip about cars one way or another (like me), what about buying one that’s a year old? Seems like you take the edge off the new car price and still get a dependable vehicle.

    Also, I liked Suzanne’s comments. Cars=fat people. I’m selling my car and cancelling my gym membership today.

  111. I came to this conclusion myself at the end of last year. Everyone argued with me when I sold my 8 year old tricked out Passat in mint condition to buy a new car. Just the cost of repairs in the offing would equal the car payments in a matter of months. That doesn’t take into consideration reliability (and the peace of mind that comes with it),or fuel-cost savings that can come with a newer, more efficient engine (and the Passat required 91 octane for it’s high-compression engine). Apart from the new car smell, the best thing is I never have to deal with VW repair people again…Priceless!!

  112. I totally agree with you Ramit. We have a lot of kids, so we hand-me-down cars, computers, furniture,etc.. through the ranks, especially while they are in college. But as soon as they are get that after-college “real job”… we go with them to the new car dealer. The reliability and warranty are price-less, along with Road side assistance and other bonuses they tack on.

  113. I have to ask…why do Indian people hate coupes?

  114. They are uncomfortable and impractical. Plus, Indians are always thinking about roaming around with 15 other Indians, which makes a 2-door car worthless. For example, think about the last time you invited an Indian person over to a houseparty. They came — and brought their 14 closest friends.

  115. Insightful post Ramith.

    I drive a ’00 Honda Civic which I purchased last year. I’ve driven this car a LOT and it is still surviving. I got the car for $5000, few months after the purchase – the A/C stopped working, I had to put in $1000 to fix it. Few weeks after that, a truck rammed into my car from the side and caused quite a lot of damage to the body of the car. Insurance covered the damage, but I paid $500 deductible(for no fault of mine..argh!). The accident has automatically reduced the value of the car by a certain amount, and as it stands today – the car is worth around $3000(based on KBB). Why on earth would I buy a used car again after this experience. I almost lost 50% in value in just a year.

    I might be in the market for a car soon, and guess what – a new car is what I have in mind. The reason being, the cost of maintenance on used cars. Period.

    It might be a different story if you buy a car that’s a year or two old. Especially when it is a well maintained one. But again, the risk is always going to be there in the back of your mind. Warranties are limited, even if you buy it from a dealer.

    In my mind, a new car will keep me out of worries at least for 5 years. It is a big purchase afterall.

    On being Indian – coupes are one thing, the other being the fact that we Indians usually end up with an Asian brand (read:Toyota/Honda) or German(for the affluent ones who like cars and want to spend on it). An unavoidable cliche` of life :)

    Cheers!

  116. I agree that a new can be more cost effective than used. I drive an average of 30,000 miles a year. It took me two years to find a car that could replace my 1995 2 door. In 2004, I finally decided on a Toyota Corolla S for $2000 under invoice and 0% interest for 60 months. My strongest decision factor was MPG.
    My husband prefers used cars, and I am the angry one when we put money into it for repairs. He will calculate the cost to prove to me we are still saving with used vs new.
    When the loan for my Toyota is complete, I have the payment direct deposit into a goal setter at 5/3.

  117. Apples to apples: I just bought an 06 BMW 750Li used (about 2-3 years old) for 40K. New, the same car with all the options is closer to 90K, and drives as close to new as I care about.

    So… after saving 50K (more than 50%) of the cost of the new car for a car I fully intend to drive another 10+ years (my last one I drove for 15 years).

    This is the only option that makes *financial* sense and I still have an awesome car.

  118. I just bought a new ’08 Toyota Sienna Limited with all the bells and whistles. I got a $2500 rebate for model year-end from Toyota, paid the invoice price, got a reasonably fair price for my trade (an ’02 Honda Odyssey with 97,500 miles on it), and tons of extras that I didn’t have to pay a dime for because the dealer needed to dump this car so badly. But why would I trade in my Odyssey, which was running fine and never cost me a dime in other-than-routine maintenance? I was afraid I’d never get a better chance to get a new car! As it neared 100,000 miles the value for trade-in would drop significantly. My husband drives a 2006 Prius and he already has 67,000 miles on it. With my luck, he’d need another new car just as my car was ready to fall apart and we can’t do two car payments. I really wanted some of the conveniences that my Odyssey simply didn’t have, and while there was no way I would have bought anything OTHER than a Toyota or a Honda minivan, I was somewhat indifferent between the two until I test drove them. A test drive revealed a very uncomfortable Honda headrest that was safe but that was excruciating to my neck. So a Toyota Sienna it would be.

    I did research used Toyota Sienna Limited models, and saw one in CA that was nice. The seller wanted over $30K for it, plus transportation costs (at least $1200). It had over 11K miles on it. I got mine brand new for $34K. To me, that’s a wash!

    I value having a full manufacturer’s warranty, being the only owner, and knowing that the maintenance is being handled reasonably well. You honestly never know exactly what you’re getting with a used car! With two little kids that have to be shuttled here and there, reliability is more important to me than almost anything. I still question whether it really was time to trade in my Odyssey, but the dealer desperation made it as good a time as any.

    I don’t disagree with you at all, Ramit. When the price differential is reasonably small between new and used, the value of that new car smell can’t be measured. :-)

  119. I bought a C230K but from 2000 last year. Spent more then on comparable cars and I have had to put work in. Thing for me is. If I go away on vacation for 2 years (extreme example) I’m cool. My car sits and its ready for me when I come back. Buying quality lasts longer as well as a whole. I mean I have ~130,000KM I have a long way to go.

    I see your logic. I’m just against payments because it’s a form of slavery IMO. Just like my phone contract. Do I want an Iphone? YES YES YES. But I’m locked into a 3 year plan so that limits my choices.

    Hope the car is still running well!

  120. You can justify anything you really want. This is a perfect example. Show me any study/facts that indicate a new car is a better “value” and costs less in the long run than purchasing a 1-4 year old used vehicle. And make sure you include the interest you pay on the new DEBT you incur while I drive the same vehicle debt free because I paid cash and let some other guy take the depreciation hit who just HAD to have a new vehicle because he justified it and who also justified buying a car he couldn’t pay cash for by saying it will improve his credit score that is so important. Keep paying those banks and I’ll keep paying myself.

  121. I agree with you here. I also bought a Honda Civic (I know it’s not an Accord) this year new. I’m 22 and I just did not want to go through the hassle of possibly buying a car with hidden problems. I also knew that I wanted a car I will drive for a very very long time. I figured in my industry as a consultant it also pays to make sure you look at least presentable to others, so riding a ghetto car was not an option. I believe people who are complaining that you are extravagant for buying a new car are the same people who dress terribly to work or to interviews. So many people on “frugal” sites are so wrong in this area about being against dressing well to work. I know as a career counselor that what you look like to work or to an interview is a deal maker or breaker. So thanks for sharing your honest opinion and I do agree with you on this post.

  122. We were in the market for decent used cars over the summer.

    In our area, there was hardly any supply of decent 2-3 yr old honda/toyotas. We looked for weeks and found nothing. We widened the scope and took a look at 3 different 3-4 year old hondas at a decent dealership. Their condition was ridiculous.

    On the way out, I noticed the Honda Fit was selling new for only $1,000 – $2,000 more. We bought the Fit and love it.

  123. There are better ways to do this if you know the car business:Way #1: The dealer demo.This is a cream puff, immaculately maintained and because it’s a dealer demo sells as a “used” car, but has a “full new-car” warranty PLUS, all the new car garbage (loose screws, fixes, etc.) have already been done. Savings can range 30% easy.Way #2: The off-lease beauty.Major rental companies like Avis are the largest purchasers of motor vehicles in the USA. They turn their fleet over every 8-14 months, keep full records of all repairs including service, accidents, paint chips, whatever, and buy all major brands and models. And the existing factory warranty still applies to these cars, plus you can add a factory extended warranty, which is always worthwhile if you plan on keeping your car. Financing? No way. If you need financing, go to Way #1.Tip: Avoid buying a used car from a private party, You have no recourse. If you buy from a relative and there’s a problem, it becomes a “family issue” that will fester for decades. If you buy from a friend and there’s a problem, you have one less friend.Tip: Avoid non-factory “warranties”. I don’t care how convincing their ads are. There must be fifty bazillion of these schemes out there and the only person it pays off for is the one who sold it to you. These are not “warranties” at all. They are insurance policies. Read the fine print!The bottom line with this is that you have all the practical benefits of the new car, i.e., reliability, warranty, technology, etc., and none of the drawbacks, i.e., 30-50% instant depreciation, delivery bugs, etc.If you want that “new car” smell go buy a can of “new car smell”. Yes, I know it sounds ridiculous but it actually is an odorizer and can be purchased in a spray. It is commonly used by dealers for both their new and used inventory.

  124. Now you know TWO people who like their VW Jetta. Actually, I LOVE mine. It’s 10 years old and still running great. Much more fun to drive than my Honda, which I also like. Lots more pick-up, too.

  125. Three people that love their Jetta. I have a 2007 Wolfsburg that I bought with 35 miles on it (10 of which I put on in a test drive.) It is the finest car that I have driven. I’ve had a count of one warranty issue (airbag controller needed replaced.)
    It’s a little small for the baby seat, but will be fine once my littleun is too big to sit backwards.

    NEVER buy a former rental. Those things may look nice, but will be a mess under the hood. They’re beaten, and beaten, and beaten. That’s why the rental companies cycle so fast. Otherwise do you think _they_ would by new cars so fast?

  126. I’ve always wondered if Toyota or Honda has better marketing than other brands because their cars have a reputation of reliability. However, I’ve owned only Toyotas and Hondas all these years, and they are very reliable. If you buy them used, they normally cost almost as much as a new one. The unknown factor is the previous driver(s). Did they drive the vehicle roughly? If you have intellectual skills, it is better to buy new so that you can contribute to the advancement of society because you will not be restricted by the reliability of your vehicle. If you are mechanically skilled and have lots of time, then buying used would be a rational option. I remembered my old boss who tried to save money by buying a used mustang. The engine died while she was on the freeway. She got hit by another car. She ended up buying another used car which made it more expensive in the long run.

  127. I find it amusing that Ramit will say “to apply a broad rule that “used is the best” is idiotic” and yet makes the same broad comments that renting (vs buying) a house is “the best”.

    His overall argument for buying a new car is “value”…and gives a few examples demonstrating that, yet cannot comprehend that someone could make the same argument of ‘value’ in talking about buying a house.

    Also, in his blogs he almost brags that he applies ‘cold reason and logic’ and elminates all emotion from financial decisions. If that were true, he would admit that buying the identical ONE year old car and driving it ONE year less (getting a different car sooner!) would save him the first year’s depreciation (3-5k in his example)…not to mention cheaper insurance and less interest paid on his loan.

    It seems like Ramit is really just writing this article to justify a very, very dumb purchase…
    Anyone with basic math skills could step through his argument and show the bottom line

  128. You are so “human” that it makes me sick.

  129. This goes well with understanding the difference of value and Price .

    I bought a mobile phone at Rs 800 ($16) for my home , just to use it for days use . The value it provided my was much more than $50 i would say .

    This is a nice read on the topic : http://jagoinvestor.com/2008/10/price-vs-value.html

    Manish