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15 Little Life Hacks

Cost vs. value: Why I bought a new 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. 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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170 Comments

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  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.

    • I agree.
      My dad, a CPA, WW11 Navy Commander, reservist for over 20 years always told me to buy like it was 5 years ago.
      I got smart one day and told him I was buying some 5 year old sock and he just laughed but he said, they’ll be a better buy than new ones.
      He explained how buying like it was 5 years ago was more a mindset than a reality.

      Buy an older car or truck for certain he would agree. I owned my own business for over 40 years and the only new vehicles I ever bought in my life was a fleet for my company.
      Worst decision I ever made and my dad just raised his eye brows, gave me a sad grin and tipped his head like he was feeling sorry for me.
      He said the guy you sell them to, will have made a better deal than you did son. He was right.
      Cars are like extensions of ones self.
      Instead of a new car every 3 to 5 years, I retired early at 52, have a home in the mountains, a condo in town, a motorhome to travel back and forth with and no bills. I have enough money to live on if I live to age 85, and I’m 65.
      This all came about soley due this mindset. Buy as if it were 5 years ago.

      I know so many people than have worked all their lives, thinking they were doing quite well with their business suit and BMW only to find out that wen they lost their jobs a decade ago, they were going to go under for good and now live on whatever they can get from SS. Really sad.

      Would I like a brand new truck? You bet. But I’d rather have the $40,000.00 plus in the bank or in an investment making me money.

      Just my two cents worth from a child raised in the 50’s and 60’s.

      Cya

  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!

    • Jason A Balencia II Link to this comment

      Exactly. Upgraded used car with low miles > new car with no miles. A nearly new used car is way less money and comes with all the luxuries of brand new. If you dont know how to do basic maintenance you shouldn’t be buying a new car in the first place.

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