Cost vs. value: Should you buy a new car or used car?
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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.
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:
Why do personal finance pundits recommend buying a used car instead of a new car?
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?
Here are the common reasons people quote for buying used:
- used cars cost less
- used cars have lower insurance
- cars depreciate fastest in the first two years of ownership
- cars are built better than ever so there’s less risk than before in buying used
Therefore every young person should buy used.
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. So in November, I started looking for a car to buy.
The date 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 buying a new or used car.
9 reasons I chose a new car instead of a used car: value (not just cost)
Here are a few things I debated before choosing between a new or used car:
- Cost. Sure, a new car costs more. But over the long-term, not that much more. And the value — not just monetarily — can be much higher.
- Reliability. Above all, I wanted to get a car that wouldn’t 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.
- Not a piece of crap. 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.
- 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. Interest rates for new cars can be lower than used cars. This becomes more important than upfront cost 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. If you’re that worried about getting in an accident, maybe you should put away your cellphone AND COSMETICS WHILE DRIVING. Also, have insurance. Anyway, having a car with good resale value can considerably decrease your total cost of ownership.
- Insurance. The insurance rates are lower for a new car compared to a used car. Even if they’re only slightly different (say, $50/month), that can add up to real savings over a few years.
- Gas mileage. 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.)
- 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 ShoeSource. Find me at the mall, walking in and out of Payless over and over.
The lowdown on buying a new car vs a used car
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 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 cars 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…
5 commonsense ways to save money on a new or used car purchase
- 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. Everyone else I know hates 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.)
- Get a great interest rate. Your interest rate matters to the total cost of ownership, especially if you don’t put money down to start. This is why having a good credit score matters — if you have multiple sources of good credit, your interest rate will be lower.
- Get a straightforward loan. Don’t do stupid things like getting an upside-down loan, where 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.
Things to watch out for when buying any car – new or used
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.
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.
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.
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