“Is that yours?” Millions of car buyers spend billions of dollars hoping that this statement will be born of admiration rather than pity. When these words come out of a car dealer’s mouth at trade-in time, they can be especially hurtful– even if the salesman is as honest as their spiel is long. That’s the moment when most car buyers finally discover whether or not their automotive “investment” has walked off a cliff and fallen into the financial abyss known as depreciation. Here’s how to avoid the freefall…
It simply can’t be stressed enough. Depreciation is the mother of all automotive operating costs. Even if gas soars to four bucks a gallon, depreciation STILL repesents the biggest hit to the car owner’s wallet. To wit: The average cost for a new car in these great United State currently hovers around $24k. After seven to eight years– not far from the ever-increasing average amount of time American new car buyers hold onto their whips– the car’s owner will be looking at a depreciation rate somewhere between 70 percent and 85 percent.
In other words, come trade-in time, they’re facing an average loss between $16,800 and $20,400. That’s before any considering of the “opportunity cost” (i.e. money lost by NOT investing the cash in a house/money market/alpaca farm). Or inflation.
Bottom line: if you want to avoid depreciation, forget about buying a new car. Yes, a new car offers warranty-related peace of mind. But it's an extremely expensive security blanket. A carefully-selected used car may need repairs, but in most cases, they'll still cost a lot less than depreciation..
If you're willing to forgo that new car smell, figuring-out your buying pattern is the next step. There are two basic buying types: Keepers (keep cars for the long haul) and Traders (trade them in after a few years).
Many Keepers are ready, willing and able to enjoy a vehicle for well over a decade. “Keepers” believe their car should be a cruising companion until the point where the perceived risk of owning it (usually the cash outlay for major repairs) outweighs the fact that ownership itself [eventually] costs them nothing/virtually nothing. In the automotive world, they are what we call "married."
The key to being a successful Keeper: marry genuine quality, not reputation. Say what you will about “import bigots” and brand loyalty, but the automotive market is a place where perceived reputation translates into dollars and cents. Toyotas and Hondas routinely receive price premiums– even though many of their products fall far short in value and performance as compared to their peers. By the same token, overlooked or unloved models represent an excellent way to keep the hounds of depreciation at bay.
In most cases, car buyers get more bang for their buck (power, features, etc.), lower up-front costs, and lower depreciation costs simply by buying a used example of a less well known/accepted car. Mitsubishi, Subaru, Saturn– there are plenty of brands that sell excellent products that simply fail to capture the public imagination. The fact that these cars take a huge initial hit on depreciation works entirely in your favor, both buying and selling.
For example, if you’re looking at a midsized commuter, a 2004 Buick Century or 2004 Oldsmobile Bravada, both of which finished first in J.D. Power’s recent dependability study and received strong ownership ratings, will cost thousands less to purchase than a comparable Camry, Accord or Pilot. Remember: badge snobs must pay for the privilege.
The Trader is a different animal, a shorter time horizon than the Keeper, requiring a different strategy.
To avoid depreciation, Traders are best off buying a carefully vetted five to seven-year-old car of their choice. At that point, depreciation has exacted the majority of its revenge. With due diligence, Traders can get a superb return on their money. The average five-year-old car kept for two years experiences minimal depreciation (20 percent or so). The average seven-year-old car experiences even less, and so on. It's a simple but highly effective buying pattern.
And then there is the Sage. The Sage can buy nearly anything and make a buck at it. Yours truly has enjoyed hundreds of vehicles over the last few years– and it’s only taken huge chunks of my free time to do it. Mechanics, auto auctioneers, wholesalers, retailers and hobbyists will always have an edge when it comes to depreciation costs. We know what’s hot, and we know plenty of people who appreciate hotness.
Again, wisdom comes at a cost. Sages don’t pay for depreciation (much), but their insight requires years of hard work, money (mistakes are never free) and a feel for the auto biz' cycles of fashion and fame.
Whether you’re a Keeper, Trader or Sage, remember: a car is an expense. It may excite you or be a daily nuisance, but it is still an expense. By minimizing depreciation you will avoid the single largest cost in the process. With that money you can save the world, buy groceries or save up for your next car.
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Steven —
Great piece.
Can you talk about the expected reliability of 5 – 7 year old vehicles? And how maintenance costs may become the owner’s #1 expense (vs depreciation), as most of us are neither sages nor mechanics.
I’m also wondering if there is any truth to the hearsay that the Honda’s and Toyota’s of the world have higher parts costs than the 2.8, especially in those later years.
Viewing vehicles as an asset is a fundamental fiscal mistake. They are not assets. Aside from used car dealers, no one purchases a vehicle for the purpose of reselling it.
Rather, automobiles are a consumable commodity, much the same as a pair of shoes. The more used the commodity is, the less it is worth to others (resale price), but the more useful it has been to its original purchaser (you got more use out of it, clearly). Automobiles, much like new shoes lose value rapidly, at least initially, as they are no longer “new”, but by purchasing new shoes, one can be reasonably assured that they are of maximum future potential utility, and are the least likely to have experiences “wear” or have defects.
As with all such consumables, at some point additional value must be put back into the commodity (repairs, service) in order to get more use out of it. Eventually, the commodity becomes nearly worthless, either because it is used up (200000 miles, blown engine, etc), or because the required additional infusion of value exceeds the usefulness left.
Total cost of ownership is what kills the US dealers. They sell you a car, and then two years later offer massive incentives on the same model, further depressing your resale value.
Then again, I would never buy a new car. There are plenty of beautiful, babied 2+ year old cars out there and they are just too good of a deal. I would much rather drive an older Porsche rather than a newer Miata (which is what I do). Everytime I think about buying a new car, I just look at the used car market and think about how much more I can get.
Though I can agree that buying a used car can save a lot on the depreciation, I beg to differ on your opinion of the Buick Century. I have one. However, it’s 8 years old now, but has been an absolute lemon since I bought it (new) and even worse right after the warranty expired. It’s gone through 3 water pumps, 1 steering rack, 1 gauge cluster, more than 12 wheel bolts, 2 fuel pumps, 2 coil packs, and constant door re-alignments. These are only the non-routine maintenance items. The car has never been in a major accident. Hopefully, other Buick owners have better experience. I keep my cars for the longhaul. It’s the only way to get my hard earned money’s worth.
The only thing I worry about when buying used is the possibility of buying somebody else’s problem. This will happen when it comes time to rid myself of the Buick. It will become somebody elses problem.
So from my point of view, the other balance is the cost of depreciation over the longhaul vs the cost of repairs.
fallout11, precious comments.
With manufacturers being the first culprits of making new vehicles easier to attain than used vehicles, what is the real depreciation of any used vehicle.
When a percentage of people are “upside down” in their vehicles the instant they drive of the dealer’s lot is it depreciation or a combination of depreciation and the fiancial package.
2007 Worst Resale Value Cars (Cars.com)
Rank Make and Model Style* Residual Value
1. Mazda B2300 4×2 regular cab 27.95%
2. Ford Ranger XL 28.75%
3. Kia Rio Base 30.18%
4. Ford Freestar SE 30.78%
5. Buick Rendezvous CX 31.15%
6. Dodge Caravan SE 31.35%
7. Ford Crown Victoria LX 31.62%
8. Chevrolet Silverado 1500 Classic LS 32.08%
9. Dodge Ram 1500 Regular cab ST 32.83%
10. Dodge Durango
2007 Best Resale Value Cars (Cars.com)
Rank Make and Model Style* Residual Value
1. Mini Cooper Coupe 68.04%
2. Subaru Impreza WRX STi 62.57%
3. BMW 650 Convertible i 62.34%
4. Toyota Tacoma 4×2 Double Cab PreRunner 61.98%
5. Ford Mustang (tie) GT coupe 61.96%
5. Audi A4 (tie) AWD Cabriolet 61.96%
7. Porsche 911 Carrera coupe 61.36%
8. Jeep Wrangler Two-door 4×4 Sahara 61.10%
9. Volkswagen New Beetle Convertible 60.23%
10. Volkswagen Rabbit
Now just recently when in the market for a car, I went to look at a 2005 Mazda 3i Touring. It was a little over $16K. I ended up with a 2008 Mazda 3i Touring (newer models have side air bags, and I have a young son so this was a big deal) – cost $16,900.
So this told me a couple of things – These cars have fairly good resale value (in fact not too many 1-3 years old 3’s are on the used market as people tend to be keepers with this model), and although I fully understand the logic of resale value, I was willing to forego that altogether for a safer car with some other tweaks and refinements for not a whole lot more $$$$.
Depreciations touches the head, whereas many car purchases are matters of the heart!
Weird. These used cars deals seem rare to me.
I just bought a used car last week. I was disappointed by what I saw on the used car market. Perhaps my price point was too low. Perhaps it was because I only wanted a wagon.
My budget was $5k max. I wanted nothing older than a 1999, less than 120k miles, a wagon, and good fuel economy.
It took a month. I finally found a low-mileage 1999 Volvo V70 that needed some TLC for $4k. It was over 200 miles away, so I had to waste a day on public transportation getting down there.
Still… I looked all over the California using Craigslist and cars.com for over a month. When this Volvo popped up, I snagged it.
So where are all these great deals?
I just look at the used car market and think about how much more I can get.
I beg to differ on this. Price of pre-owned Civic, Odyssey etc. are very close to that of new.
By buying used you are taking a risk of getting a car that has been abused even it it is under warranty. You finance rate on older car is more tthan that of a new one.
I used to own 10-12 year old cars, cars which were bottom-of-the-barrel when new, mostly out of necessity. Then I started working, moved up to a four year old fun car, and I’ve been disappointed. I guess my mistake was equating “less than five years old” with “new” but I’ve had to do a lot of maintenance and worse, a lot of corrections to bugs and stuff that I’d consider warranty repairs. Basically I’m turned off from buying a slightly used car ever again.
I used to swear I’d never ever buy a new car, but that’s what I want to do next time. There would be some value to me to own a car from the start, have that warranty, know that every scratch and sign of wear is my fault and my responsibility, know how the car felt when new so I know if crummy shocks are due to age or if they were just meant to be crummy… if I can afford it, I want that experience instead of what I have now
One thing I always tell people is to look at the resale price of something to determine its “true value”. I’ll start with a non-car example: compare the “new” versus “used” prices of diamonds versus other precious stones. A $5,000 new diamond ring may easily be worth less than a $1,000 the next day to resale. But other precious stones hold their value much better. Why? [putting tinfoil hat on] Well the diamond industry inflates the prices and sells the experience of a new diamond (you wouldn’t want someone else’s used engagement ring would you?), so the new price is inflated way above what it’s actually worth. The used market quickly adapts and the actual value of the diamond is seen.
Same thing goes with cars, the used value tells you much more about what the car is actually worth. Why did I just buy a new 4Runner rather than a used one? Well when I was looking around, the used price was not that far off of a new one, so it was worth it to be to not have to worry about someone else’s problem. The market has spoken that a used 4Runner is worth nearly the same amount as a new 4runner minus maintenance costs that it’s incurred. Now, if I were looking at Tahoes instead, then I’d have gone used. People may get up in arms about the domestic makers slapping cash on the hoods which lowers resale values, but that’s just a symptom of the problem. The real problem is that they’re inflating the new price to sell the experience of something new, but the car really isn’t worth that new price and when the sells slow down, they need to do something else.
The used market (in particular one with large numbers of buyers and sellers, e.g. ebay) quickly equilibrates to what the car is actually “worth”. The new market has artificial constraints that generally make it advantageous to the seller (higher prices). 1) Limited supply which only comes from one source, 2) The “experience” of a new car, 3) easier financing/lower interest rates on new car loans versus used. All of these things make a new car price more than what it’s really worth (in most cases).
Call it a commodity, call it a depreciating asset, it’s all semantics. You can invest in commodities, and most people do not throw away their cars like they do old shoes.
Just so long as you understand that everything you spend over the cost of a dependable beater that meets your actual needs is an entertainment expense. It’s like money spent for a nice dinner. You are happier, but poorer. Nothing wrong with trading money for happiness.
Many people need features in a vehicle for their ability to make money (even more fool themselves into a rationalization rather than a justification). If you need a truck to haul stuff for work, then that’s different than if you need a truck to fit in at the country western bar.
Lot’s of wisdom in this piece, and I especially like Mr. Lang’s pointing out that the best deal for you depends a lot on you. Kudoo’s. It would be even better if you made a more pointed case about how much more depreciation is than fuel even if fuel goes over $5 per gallon.
It will be an interesting test of the site’s fans to see how many posts have some nonsense about some absolute certainty that just doesn’t apply to everyone.
Thanks Steve, I do have a question though. Where do special edition versions of popular cars fall. For instance Would a Cobalt SS or a Malibu SS suffer the same depreciation dive as their low rent base model sold extensively to rental fleets? Or in my case, how would a Mazdaspeed6 do vs a standard Mazda6? I have noticed that the Mazda6 has really ramped up fleet sales for the vehicle to the tune of 40-50% of the cars production. Obviously, no Speed6’s were sold to fleets, but will it retain its resale any better?
Drifter,
If you are a young college graduate who has a standard of living that you can’t quite afford yet, but who REALLY will be seeing a doubling of income over the next five years, then yes, new or certified used is the way to go. High finance rates are a bigger waste than depreciation. Still, spend as little as you can that will still leave you happy for three years.
Another way to go (I may get flamed for this) is the cheap lease. If you can find a car you are happy with that will lease out at less than 300 per month, then that MIGHT be a deal for you. These deals are almost always manufacturer specials. First, take the total cost to you over the term and divide it by the months (3,600 initial payment with taxes, plus 200 per month for 36 months = $300 per month). Make sure that the mileage allowed is more than you drive. The reason this lease works is because leasing is not much more than buying if you trade every three years, buy average price cars, and aren’t experienced at trading. If you can get less months, then all the better. Don’t go longer than 3.5 years. You will end up unhappy.
If you are not the person I descibed, or if you are especially wise, then you should likely be driving whatever you can pay cash for (I won’t list the exceptions, they are a small percentage of the population).
There is no free lunch. Whether you retire rich or poor will have more to do with this sort of decision than how much you earn. You can spend your life filling the wallets of a bunch of New York fat cats, or you can be a winner.
I also am someone who disagrees with the sentiment that used cars are the way to go. Reliability is crucial to me and as such I’m not nuts about the unknown, which is something you have to deal with to a greater or lesser degree with every used car you buy. Also, I like having a car under manufacturer warranty. I had an Isuzu Rodeo with an engine sludge issue that required about $5,000 to fix. That I was lucky enough to have it happen with 800 miles left on my warranty is something I’ll always remember.
I think the key to smart new car shopping is having some flexibility in how the car is optioned, its color, etc., and having the luxury to wait until the right car turns up. I saved about 20% off sticker on a car with 90 miles on it that was called a “demo” and got mega-discounted. It is a really great car and has full warranty and I don’t have to worry whether or not it was problematic for a previous owner. Unless you’re sold on a car that just isn’t in inventory (like the Prius used to be), or you just have to have some color or doo-dad, you don’t have to give up the new car smell to get a great deal. It’s like anything else, haste in the buying process or perceived (though not necessarily actual)necessity of any sort is the enemy of a good deal.
Viewing vehicles as an asset is a fundamental fiscal mistake. They are not assets. Aside from used car dealers, no one purchases a vehicle for the purpose of reselling it.
Rather, automobiles are a consumable commodity, much the same as a pair of shoes. The more used the commodity is, the less it is worth to others (resale price), but the more useful it has been to its original purchaser (you got more use out of it, clearly). Automobiles, much like new shoes lose value rapidly, at least initially, as they are no longer “new”, but by purchasing new shoes, one can be reasonably assured that they are of maximum future potential utility, and are the least likely to have experiences “wear” or have defects.
I get your point that buying a car requires a different perspective than buying an investment asset. But my inner accountant can’t let go of your use of financial terms. Saying a car is not an asset makes you sound like you’ve been miseducated at a Robert Kiyosaki seminar.
Kiyosaki, who apparently knows how to make big money in real estate and selling books but wouldn’t recognize a financial statement if one hit him in the head, insists that cars and the homes we live in are liabilities because we make monthly payments on them and they don’t generate monthly cash flow. Not true. It’s the loans that we usually take out to purchase our homes and cars that are liabilities. Assets are assets whether they are cash generating investments or not. In fact, with cars and homes, every time you make a payment to reduce your liability you are increasing your net worth.
A car is an asset – usually a depreciating asset with a limited functional life span. As such its purchase and ownership must be managed differently than an investment asset. The key is purchasing wisely so that you can retire the loan (i.e. reduce your liability) faster than your home or car depreciates or wears out. This keeps the net worth of that asset in the black so you can resell it without losing additional money (cash) on the loan to cover the depreciation. And done really well, as Steven Lang pointed out, you might even be able to turn a profit.
Oh, and shoes are assets too.
There. I feel better now.
I actually tried to buy used, but when the incentive price of an 07 was the same as a certified preowned volvo, I took the new one. Oddly, the certified might have had a longer warranty, depending on the year. Certainly not an investment. Perhaps an insurance policy (safety features). Things like ESC and side curtain bags may be an argument for buying current cars over used.
What is emerging from the comments, just like there is a generation gap between folks that have Detroit Iron and folks that have imports.
There is a generation gap between folks that want a used vehicle to folks (usually younger) that have no desire for a used vehicle, no desire to spend money maintaining or reconditioning a vehicle.
Different ownership experience is expected, one wants to save money fool around with maintenance, the other is looking for the latest technology and safety features, understands the electronic unreliability of modern vehicles, prefers a “deal” on a new vehicle.
The Trader is a completely different animal. Traders tend to be single people who prefer to have a vehicle for a few years and move on. (Many Traders become Keepers when they finally find that one car that suits their tastes.)
I guess you’re not the first person to liken car ownership to dating, as indirectly as it was done here. I’d like to note that both activities also take up large amounts of money.
On that note, after a Dodge Neon, a Mazda3, a Honda Accord and a Ford Mustang, I’m still looking for “her”.
For Mr. Montgomery:
Accountant’s view of the glass half-full, glass half-empty debate
Cars will typically depreciate only so much and a lot of that depends on they car itself but there comes a point where a car will sell to someone looking for a beater or 1st car for their kid.
I was recently looking at some used cars in a kinda of what-if scenario. I looked at a 2002 Mazda Protégé 5 with 70k miles and they were around 9-10k, 03 Subaru WRX with 50k miles was around 13-14k and an 06 Dodge Charger SE was 14k with 15k miles. Significantly different cars but it tells you something. The WRX is a popular car and keeps a bit better value as it has some performance roots. The Protégé is a good car and functional with limited reliability issues while still being fun to drive. A comparable Ford Focus was 2-3k cheaper. The Charger has been overbuilt and not in demand. The SE is also the bottom trim but it is still surprising that after 1-2 years its worth about 50% of its MSRP.
Personally I would never buy a car older than 4-5 years. You most likely don’t know how the car was run and maintained and you could run into some serious maintenance expenses such as the transmission or engine. Modern cars also have a lot of electronics and there are lots of things that can go wrong. You are either making payments or you are making repairs, either way money is going out the door. Do you want scheduled, budgeted money or surprise money? Now if you a mechanically inclined I say buying an older car can be great if you can fix most things yourself as well as tell if a car is in good shape.
The rest is from my point of view and many might disagree:
A lot of people have to buy used homes (yes I know pre-existing is the PC term) do you really want to buy someone else’s car too? May as well just buy everything from Goodwill and consignment shops, eat the almost expired meat and 3 day old bread. This is taking it to the extreme a bit but it follows the same line of reasoning. Life is for living and working is to pay for the things that make life enjoyable. Beyond family and your home for some that’s a fast car, perhaps a big honking truck or to be swaddled in rich leather while getting a back massage as you commute in luxury.
I may buy used in the future but it will solely be to buy a car I wouldn’t normally be able to afford anyway.
Another good editorial and intelligent comments. I would second many of the points being made here.
I don’t think that there is any definitive answer to the “new or used” dilemma because it all depends of who you are and what you are looking for out of the deal. If you are mechanically savvy and confident then running a 5 -10 year old car make a lot of sense. If you can do all the work yourself and there fix most problems form little more than the cost of the parts then your cost of ownership will be very reasonable.
However, if you had to pay someone else to do all that routine maintenance and fixing the little things that will inevitably crop up then the financial equation may quickly tilt against this approach.
In looking for a good used car I would agree with the author that there are always certain vehicles that fall into the category of “unpopular but not actually bad or unreliable”. As has been pointed out in the comments, some cars are cheap used because they are crap and you may well live to regret it if you were suckered in by the cheap price. On the other hand other cars have poor resale value simply because they are “unfashionable” and most people just wouldn’t want to be seen in one- even though they may be generally sound ownership proposition – if you are secure enough in your own ego to drive around in a car that just isn’t hip and trendy others. Obviously many folks are not – judging by the number that spend thousands of dollars on the sort of cars they want to be seen in but really don’t actually need (see earlier comments about “image” truck buyers).
When looking for a nearly-new used vehicle (minivan) within the last 12 months or so I encountered the excessively high prices being asked for good used examples of the very reputable Honda and Toyota models. I acknowledge that these are good vehicles but felt that these prices were just not realistic. We were able to buy a brand new Kia Sedona for $17k – which would have got us a 2 – 3 year old Sienna or Odyssey with probably at least 40-50k on it? We plan to keep the Sedona 10 year so and drive it into the ground so rate of depreciation will be less of an issue on that one.
There is something to be said for the peace of mind of a good warranty (especially if it is 10 years) and as others have said – newer cars tend to have ever-improving technology on the. As the Sedona is a family hauler for my wife and kids it is reassuring that ti has every electronic safety gizmo you can think of – which you’d be unlikely to find on older vehicles?
As for my own car – I think I’d fall into your “keeper” archetype. My own car is nearly 10 years old, going strong and I hope to keep it for at least another 5 years. It is in that certain spot in its life-cycle where it is still a very nice reliable usable car but has depreciated to the point I would get little return if I sold it. The only real reason to get rid of a car like this is if you hate it or are bored and simply want something new.
Oh – there is an amusing UK website at http://bangernomics.tripod.com/ that celebrates the art of running an old used car on a veritable shoestring….. it relates to UK-market models obviously ( “banger” being the Brit-speak slang equivalent of “beater” ) but the sentiment would resonate with US enthusiasts.
Buying ~2 year old cars is the sweetspot for me. You’re still getting a car under warranty, but you’re not getting hit with 2 years of depreciation.
But it depends on the car. You will not save that much on a two year old Mini Coopper S versus a new one. OTOH, a $60K(sticker) BMW M3 w/20k miles can be had for low $40s in a careful private party search.
This is an interesting debate. My personal opinion is to buy a low milage 1-3 year old car and get rid of it around the 5-7 year mark. To me, it seems like you are able to get the greatest amount of reliability from a car that has low milage and still takes a major depreciation hit and then sell it when many of the expensive maintainence needs to be done at 80-100k. Thus far, I was able to get myself a 3 year old Nissan Altima for 50% off MSRP, a 3 year old Camry for my dad for 6k off sticker with only 17k miles on it, and a friend just bought a loaded 2006 v-6 mustang for 16k out the door. I plan to pick up a 1-2 year old car soon as my car is at the 7 year mark. I figure to buy a 17-20k car for 13-15k and put 40-50% down if I sell my Altima for about 6-7k (low average milage, fully loaded).
a car is a (depreciable) asset, but not an investment
Steve S. – You are either making payments or you are making repairs, either way money is going out the door. Do you want scheduled, budgeted money or surprise money?
I will disagree with the part you didn’t think I would disagree with. :)
First, you are only making payments if you borrow. While there is time value of money, only one tenth of one percent of us can dependably make money by borrowing.
Yes, there is an excellent point to surprise money vs. regular money, but the two aren’t even in the same ballpark. How many people are really in some trap where they have to have a super reliable car this week, and do not have a down payment?
If you will mine all your trusted friends and family to find a reasonably reliable car for around $3,000 or less, you will likely not spend more than 2k in a single year to keep it running. If you do, part it out and start over. At $300 per month, you have enough to buy another one in only 10 months. You also now have the original that is likely still worth close to what you paid. In two years you have enough to pay cash for a much nicer car, even if all you saved was the 300 a month you were going to spend on a payment. In about 5 years, you will now be way ahead, and likely be able to buy new or nearly new cars for cash FOR THE REST OF YOUR LIFE. Maybe one of the accountants can tell you how much that is worth, but I will bet it’s enough to make a HUGE difference in the comfort of your retirement.
The real value comes from living debt free. All the people I know that have become debt free start making better decisions immediately. They end up being MUCH more wealthy and happy than their peers.
As for the bit about used houses, never buy a new one either. They depreciate in real terms. If you buy one EXACTLY like the new one, in the same neighborhood, but only older, they will be worth the same amount of money in only a few years. The difference is depreciation in my book – even if they both appreciated.
Where we agree is the part you thought was arguable. It’s not, life is worth living. Spending money for happiness is a great idea. The problem is that if you borrow to do it, you will end up with less happiness for the money. If buying a new Ferrari makes you more happy than the money you have in the bank, great. Just don’t borrow. It WILL end up lessening your enjoyment of the car, and will make you less happy overall.
I will agree to some exceptions, like young professionals who have a well mapped out future. They can get a lot of value out of a new compact, the reliability that comes with it, and the budget value of the warranty. One key reason it works is that their utility for money is also going to change drastically. For almost everyone else, it’s a fools bargain.
veefiddy:
Things like ESC and side curtain bags may be an argument for buying current cars over used.
That’s exactly my rationale why we’ve gone with new vehicles.
We’re Keepers of vehicles >10 years and expect (and can afford) to lose the just about the entire value of an car. No car loans here – if we can’t write a check for it, we can’t afford it. It helps that our vehicles usually cost less than the average new transaction price.
The problem here is that we can’t often figure out how cars age. I had a Mercury Mystique, with the v-6 and eventually a few SVT parts. I do a lot of mileage fighting speeding tickets (for a living- http://www.speedlaw.net) and the car was worn out in four years and 100k. It still ran, but was clearly worn inside and getting loose all over. I take very good care of cars, but this one was a Kleenex. Worse, it was not really designed for repairs-all the clips were one use ! Let me also say the car was reliable-I didn’t get a lemon.
My next car was a BMW 3-er, and in exactly the same usage and maintenence, it is still tight at 140k at four years, and I anticipate at least another four years. It has ONE small rattle I can’t find :). The BMW is designed for repair and long service-whereas the Mercury was engineered to be cheap and make it to warranty, the BMW is designed for a ten year service life in everyday use.
The end result is that while the BMW was about twice the cost of the Mystique, it will most likely last three times as long. So, overall, it would come out less expensive, provided you can access the “game” (give us all your money) at that level. I figured out this sort of thing a few years back, calculating depreciation on three Taurii, and comparing it to owning one E -Class, and the MB won financially, never mind the intangible ego issues.
My other car, an eight year old SAAB, still runs well, save occasional small issues. I gasp when I see that even a Magnum, properly kitted, is a 40 K car, or that MB the Mrs. likes is 50 k.
When I even calculate the tax on that car, I can afford to repair the SAAB again. Still, it is reaching the end of reasonable service, and trying to figure out my next ten year car is very tough.
Separation of EGO and NEED is very important in this discussion-and ego is where the money comes from…I tell my wife we can afford transportation easily…it’s the ego-mobiles that are expensive…….
My take.
First, it’s true there is no one answer, as we all have different priorities.
For new cars I like to buy Hondas. The ownership costs in most cases are equal to the payments, + scheduled maintenance+ gas, oil, insurance – the kind of expenses that one would have regardless. (Though you could of course get PLPD on the older used car if you paid cash). I tend to keep cars 10 years, so I really have little residual left (but something, because it’s a Honda). After the first 5 years, the payments disappear. I take the depreciation as a cost of ownership, and it’s worth it to me for the peace of mind.
One thing to consider is that while it may be cheaper in terms of total outlay to fix an old car, the money just might be hard to come by. I can afford $425/mo for a car payment, but I already have plans for the rest of my money, including savings and investment. I wouldn’t like to have to come up with a thousand or two on short notice to keep my transport going. Buying new lets me know what my costs will be.
For used cars, I have two routes I’d go. One is to get a one or two year old car. These are new enough that one isn’t likely to have nasty suprises, yet a lot of depreciation cost can be avoided. I was recently looking at new Impalas, and found that I could save 6-7K just by getting one a year old. (but then there’s the nagging question – why’d someone trade it in if it’s only a year old? ) Especially with domestics, the depreciation in the first year or two can be substantial. Though this route makes sense, I hardly ever do this, prefering to have the new Honda.
The other route, that I have occassionally used, is what I call the “Rambler” method. Get an old (maybe really old) car that either barely depreciates or even slightly appreciates. For me old Ramblers have been good, because I could get them for a song, and they are simple and solid cars that are easy to work on, and parts are readily available. (well, mechanical parts anyway) A ‘57 Chevy otoh doesn’t work as well because it’s hard to get a decent price. People want an arm and a leg for a clapped out POS 4 door sedan just because it’s a ‘57 Chevy. I used this system when younger, but not so much anymore as I see the wisdom of having air bags and other safety equipment. There are idiot drivers out there.
My brother in law tookthe “Rambler” method to extremes. He’d buy Gremlins and Hornets for $50 (this was before they were retro cool and sought after) and drive them for a year or so, then when it needed a repair that exceeded $50, he’d get another one.
I’m a keeper who has had some good luck with this formula. Bought an 03 Century(decontented) in 04 with 23K on it(lease car I believe) for $9500(wife is a pit bull with dealer price). Very clean. Coming up on 4 years now with no repairs, just maintenance. In the 4 yrs I’ve owned it it has depreciated maybe $5K. I’m a low mileage driver, maybe 10-12K per year. Almost 5 years old now with 62K on it. With any luck it will be ready for my 12 year old son in 4 years. He can take it or leave it. It handles like a yacht and brakes like one too. Forces one to be a more careful driver.
Landcrusher
“If you will mine all your trusted friends and family to find a reasonably reliable car for around $3,000 or less, you will likely not spend more than 2k in a single year to keep it running. If you do, part it out and start over. At $300 per month, you have enough to buy another one in only 10 months. You also now have the original that is likely still worth close to what you paid. In two years you have enough to pay cash for a much nicer car, even if all you saved was the 300 a month you were going to spend on a payment. In about 5 years, you will now be way ahead, and likely be able to buy new or nearly new cars for cash FOR THE REST OF YOUR LIFE. Maybe one of the accountants can tell you how much that is worth, but I will bet it’s enough to make a HUGE difference in the comfort of your retirement.”
Food for thought.
One insurance point due to a tiny rear-ender in a car with bad brakes, when you’re young, can add a thousand bucks a year to your car costs. That can wipe out any pride in taking the economical route; just thought I’d warn you from personal experience.
Anyway, financially my approach is to ask myself what I need in a car to justify having one at all. Basically something that works. I set my baseline cost based on that, and then I move on to asking myself what I want. Anything above beatership is a cost that I consider throwing away on a luxury item… which I freely do, knowing I could do other things with that money.
Need: $300 car, like my old Sentra
Want: a car I derive pleasure from, not frustration, anger, self-loathing, stress over getting killed easily, and embarrassment
When I was traveling as a sales rep I used to buy 2 year old Windstars and drive them for at least 100K miles. I would generally have to put in a new transmission and maybe ac and there were alot of front end alignments and brake pads, etc. But it was worth the hassle because of the 50K mileage per year.
Now that I am retired I buy new and generally Honda or Toyota. I have an 04 Prius and an 06 Ridgeline. Both have only required regular maintenance. I don’t want to have to hassle with car problems any more. So I will probably keep buying the same brands after owning these cars for around 10 years. Maybe I will never buy another vehicle. Whatever, the hassle with higher maintenance vehicles is no longer worth the lower purchase price.
Veteran beater owner checking in. In my opinion there are only two ways to buy a car.
1) New or slightly used vehicle where the warranty runs the length of the payments. The frustration of making payments on something you trust as far as you can throw is one of life’s less fun experiences.
2) Used for cash. My current daily driver cost $2200. I keep about $1500 in savings to cover surprise repairs. When something comes up I buy the parts, put it up on jack stands, and fix it. Then replace the car repair fund as quickly as possible. When you consider that a car payment is about $300 a month, or $3600 a year, you can justify quite a bit of repair costs.
Buying a new, quality Asian car and retaining it 10-years or more works for me.
When one buys a used vehicle he gets its remaining lifespan, whatever that may be. Most Honda, Toyota and Nissan products demonstrate superior long term reliability and durability.
Detroit-3 cars are value engineered to fail soon after warranty expiration notwithstanding careful use and optimum preventive maintenance. Poorly maintained and abused examples, or the not so infrequent lemon, will fail even sooner.
I am amazed to see so many buy new or drive it into the ground folks here. I would warn people that you don’t know if you are actually capable of keeping a car for ten years until you actually have, so don’t use this to rationalize buy a fancy new car until you have proved it.
Still, if you do keep a car for ten years, then buying new has a much lower cost to you. Still, would a one year old certified pre-owned be just as good at less price? Certainly you don’t get a heck of a lot off without a serious haggle, but you do get even more warranty.
Also, how many of you are buying on time? Having once not had a payment for several years, I just couldn’t borrow money for a car ever again.
“I am amazed to see so many buy new or drive it into the ground folks here. I would warn people that you don’t know if you are actually capable of keeping a car for ten years until you actually have, so don’t use this to rationalize buy a fancy new car until you have proved it.”
I’ve proved it several times. Even my Ford Ranger is almost 10, so it’s a cinch the Hondas are going to go that long. All my prior Hondas did. My son’s ‘89 Civic is, obviously, more than 10 years old.
I do like your idea of being payment free. Maybe I’ll try to get 5 more years out of the Ranger. By then I’ll have enough for a new buggy.
Or be smart and buy something like a VW R32. Some of those cars are still listing at 85% of their original MSRP…talk about resale!
What I’m getting from all of this..The most sensible car ownership guidelines are:
1.) Only purchase cash (don’t live beyond your means)
2.) Get the most reliable low maintenance car (like a Toyonda-san appliance)
3.) Own it until the cost of repairs doesn’t go above its residual value (10-15 years or more)
It’s funny because all the auto marketing gimmicks are trying to lure us to do the exact opposite – make an emotional purchase.
Emotions define our lives, imo. But despite what I said about wanting a new car next time, I haven’t even come close to doing it yet. Might not. Just kinda disillusioned with a sort-of-used car after a lifetime of really-used cars.
Having been one of those really-used car owners, I never understood the argument that you should get rid of a car when the repairs cost more than the car is worth. If the car’s worth $1500… it’s not easy to go find a $1500 car that’s just as good and won’t need that much money in repairs anytime soon.
If the repairs cost more than the cost of a replacement car (one actually being offered, not a theoretical one!) then I’d think hard about it. Easier to know and trust your own car than take a chance on a new-to-you beater.
For deals on used cars you gotta be in the loop. You have to watch watch watch and more watching. Huge chunks of time indeed.
As a former car salesman I’ll tell you being able to buy a used gem at wholesale plus 300 bucks and flip it after a few months (and taking the ire of the dealership for doing so) and make 2k is good stuff.
I bought a 97 base dakota in pretty good shape for 3000 when my dealership had a sticker on it of $6995(that was 2 years ago and in Canada). I still have this truck as I find it’s use it quite high for me at present but it’s a prime flip type car for a salesman.
My latest acquistion is an 02 Civic SIR (hatchback Si in USA) and I had to fight like mad with the dealer to get a price close to blackbook and had to ship it in from two province’s away as noone in town would play ball on a solid rare car like that. I’m sitting on 1500 to 2k in markup in my opinion…trouble is I like the car alot and am having trouble getting the motivation to flip it!
The deals are out there folks, it just takes time, watching, heavy duty haggling and patience.
I am pretty much in agreement w/ Landcrusher’s philosophy here. The one new car I bought I kept for more than 11 years, and the only reason I bought it new was because the depreciation was so little, less than 10% a year, in the first couple of years. My first car was a ‘77 Toyota Corolla which I bought for $400 in ‘85, and sold for $200 in ‘93. No depreciation there!!! It served me very well. My current car is a ‘99 Accord (stick) which I bought for $5,500 in November ‘04, with 67k. It is serving me very well. I am currently considering buying a neighbor’s ‘02 3-series (stick and clutch), with 58k for $14.7k. I’m trying to figure out if I will get enough additional joy from the BMW to make it worth it. Believe it or not I enjoy tossing the Honda around, and I love the sound of winding it up.
Meanwhile, a lot of $ did go towards retirement.
A lot of good remarks. Let me take a couple of ideas for now…
1) What ‘year old’ car will offer the biggest bang for the buck?
On average, it tends to be a seven to nine year old car that has been conservatively driven and well maintained. Tom & Ray Magliozzi (of NPR’s ‘Car Talk’) released a book by the same name which highlighted the fact that vehicles with minimal depreciation and minimal cost invariably result in the maximum ‘economic’ return. The studies they highlighted in their book showed that a seven to nine year old car that was kept for around five to seven years best achieved that value point.
As I mentioned in the ‘How to Buy A Used Car’ series, it’s best to start with online resources to narrow down your search. Dealer visits are frequently shared with Carfax (as are most title and accident issues). An experiened independent mechanic can inspect a vehicle AND perform preventive maintenance for a fraction of the cost of dealers. Finally, most vehicles today are designed to last anywhere from 200k to 275k on average if they are well maintained and conservatively driven.
2) Unpopular vehicles
For those who wanted a quick list of ‘unpopular’ vehicles… here are a few possibilities to consider.
Luxury Cars: Infiniti Q45, Mazda Millenia
Subcomapcts: Saturn SL1’s, Ford Escort, Mitsubishi Mirage/Lancer
Midsize Vehicles: Galant, Sonata, Kia Optima (which is a Sonata in drag), Buick Century/Regal, Ford Taurus and Mercury Sable (only with the Duratec engine), Dodge Intrepid / Chrysler Concorde (only with the 3.5L engine)
Wagons: Non-Turbo Volvos and Subaru Imprezas (especially in the South), Mercury Sable/Ford Taurus
Minivans: Ford Windstar/Freestar , Dodge Caravan / Plymouth Voyager, Mercury Monterey, Oldsmobile Silhouette
This list doesn’t mean you HAVE to get a Saturn, or a Corolla, or a Volvo, or a Miata (although the Miata/MX-5 really is by far the best in it’s class). It does mean that you may want to use the online resources that are out there, take the necessary precautions, and be patient.
2) A used car’s maintenance costs go up substantially as time goes on.
Not true at all. The maintenance costs of a vehicle increase gradually during the first four to five years (assuming an annual driving rate of 12,000 to 15,000 miles) and then plateaus in average overall cost during the next eight to twelve years (depending on product quality and driving habits).
The increasing cost during the early portion of the life cycle comes from the major service that typically needs to be done right around the 50,000 and 70,000 mark. There are a few exceptions to this rule. Some major services now take place at the 90,000 to 105,000 mile level. But by and large most vehicles have a cost structure that resemebles the following.
Maintenance Costs
Year 1: $200
Year 2: $400
Year 3: $600
Year 4: $1000 (major maintenance service)
Some folks naturally assume that it will just cost more and more as time goes on and jettison the vehicle before it reaches 120k. But the truth is exactly the opposite. The costs for the next several years, on average, will be right around the year 4 level.
Year 5: 300
Year 6: 850
Year 7: 600
Year 8: 1150
Year 9: 850
Some years you will just need a few oil changes and an air filter. Other years you will need to perform one or two major services. Such as replacing a compressor or changing a timing belt. But on average, given the millions of vehicles out there, the average annual cost over those next eight to twelve years will be somewhere between year 3 and year 4. This was also highlighted in the book, ‘Car Talk’, which I’m obviously endorsing at this point ;)
On a personal note, I have on occassion driven 100+ miles in an 18 to 20 year old vehicle that I bought directly from an auction or a dealer’s inventory. An older Volvo 240, Chevy Lumina, Saab 900, Ford Bronco, or any of the hundreds of other models that are out there (with a few exceptions) can be exceptional buys if they have been treated the right way.
Just as a footnote… even back in 1989, the average Volvo was designed to withstand 17 years of use and abuse in the Swedish arctic. Today, most cars will typically last on average between 15 to 20 years and 200,000 to 275,000 miles. Even a four year old car that has 50k on it still has a very long life ahead IF it has been driven and maintained properly. In strictly economic terms, it also represents a far better value versus a new car.
3) Are new cars bad values then?
Absolutely not. The one key thing I have learned in my auction work is that ‘value’ is all about a person’s perception.
New cars are a better buy if at least one of the three are true:
1) You want absolutely no uncertainty about ‘wear and tear’ issues and you’re not an expert in these matters.
2) You make enough money to make it a cash payment.
3) There is something out there that represents your dream car… and you don’t want to wait.
I actually started out in this ‘have to buy new’ group not too long ago. Back in 1994 (okay it’s been quite a while, but please give me a break) yours truly bought a red Toyota Camry coupe for the drive out price of $20,900.
I planned to keep it for 12 years. Did so. Drove it for 240k, and sold it for $2500. And you know what? It wasn’t the wrong decision. Buying a new car then enabled me to focus on the things that really mattered to me. There are a lot of people that simply don’t want to think about cars, and beyond the economic proposition of ownership, the Camry did a wonderful job.
To put it another way, your footwear may very well have a greater impact on your life than the car that you drive. Most cars of today are used for ‘A to B’ transportation. For non-enthusiasts, a new car can represent peace of mind and a perceived elimination of uncertainty. For the enthusiast, a new car also represents the very best in the marketplace. Both are fine because they both represent what is most ‘valued’.
And that’s the point. Used cars are typically better economic values, but your values may be elsewhere. Figure out what you like, do your due diligence, and go with it.
With only a few exceptions, I usually purchase new and then keep a vehicle for 8-10 years. I like knowing how it has been treated and serviced from the very start. Because I take good care of my cars and trucks from the very beginning (in terms of both treatment and maintenance), keeping them for a decade isn’t that difficult.
I also buy new because the interest on used-car loans for anything that can be considered late-model is just too high. Often it wipes out any advantage in purchasing a 1-3 year old vehicle. Yes, I understand the benefits of paying cash. But I am not rich and the reality is if I simply put money away every month for that eventual total-cash purchase, something will always come along to use up that money. Like the furnace and central air conditioning system I recently needed to replace.
In the rare cases that I didn’t keep a car for a long time, it was during a period when I was putting very high mileage on my vehicles. In that case, I bought new but inexpensive cars (always under 15K in 2007 dollars). Then I’d put 200K on them and essentially throw them away. But because I took care of them, repair costs – even in the 100-200K range – weren’t unreasonable. And even with the cars I keep for a long time, it’s difficult to get me to pay more than 20K.
Just like several have already mentioned – we all have our specific needs and situations.
Dynamic,
You won’t regret going cash. I have converted many people, and everyone who has tried it loves it.
Steve,
Even more good stuff! Do you have any advice about signs that your car is truly done? It seems to me that even replacing my crusher’s engine would be a good decision, but the crusher isn’t like most cars. My real concern is Mom’s ‘89 Maxima. It only has 60k miles on it. I was thinking about putting in a new interior, but of course, she is angling for me to buy her a new car. Aside from the interior starting to show wear, her car still looks pretty much new, and still costs less than $1,000 a year to replace aging parts (nothing could possibly fail due to wear).
Speedlaw, I’m going to shock you and suggest you consider a Hyundai Sonata with the 2.4 four cylinder engine (stick or automatic, your call) for your next car to replace the old Saab.
Why? Because I did a lot of reading of automotive journal type stuff when the new Sonata car was still in the oven, and this new Theta four cylinder engine is engineered and intended to last 250,000 miles. And the four speed automatic transmission is apparently a shared piece with an earlier Toyota Camry unit (i.e. proven reliable). Plus the long warrantee (for initial owner). And the overall excellent value of the cars.
I’ve owned a Saab and the Hyundai is way more car. Ours is a 2007, four/automatic, built in Alabama.
The fit and finish on the car is light years ahead of anything GM makes. I walk out into the garage to put the dog in or out and just stop and stare at the paint finish, it’s so good. It’s WAY better than the 2002 Sonata was, and equals the quality of our 2008 Prius.
I have a fair amount of mechanical ability. I do all my own work except for AC — ROI doesn’t justify owning AC tools.
For years now I’ve been purchasing cars with with low miles and clean bodies/interiors, but with known mechanical issues. I offer the owners a bit more than they could get on a trade, and I let them know that I’m aware of the mechanical problems and have taken them into consideration — in other words, I’m not going to start harassing them when I get the car home.
I repair the cars for very little money, parts are now cheaply available from national chains like Autozone, junk yards and eBay(cheap car parts heaven).
Some times I feel sorry for the mechanically ignorant. Uhm, not really, you all are keeping me rolling for almost nothing.
The Hyundai Sonata is an excellent choice. My advice is to simply go out and test drive all the ones that are out there that interest you. You’ll most likely find that there are twenty shades of quiet in this segment and most everything worth considering will give you over 30 mpg in four cylinder form. The Hyundai should be good for at least 15 years and 200,000+ miles.
Funny you mention the Maxima, Landcrusher. I’m right now in the process of replacing the seats on a red 1991 Toyota Celica GT-S that was a one owner Southern car (no rust) with only 66,000 miles. what you may want to do is reupholster the seats with top quality leather, replace all the hoses, fluids, struts, and filters, offer $300 for a paintless dent repair place to get all the dents out, get a top quality paint job if there’s serious paint fade (For $500 you should be able to get an excellent basecoat/clearcoat, don’t be afraid to haggle) and give it a thorough detail inside and out. I’m not sure how much wear is involved here. But doing all of these things should cost less than $1500 and the Maxima will literally drive and feel better than brand new.
By the way, I consider the Maxima to be the first good looking sports sedan of contemporary times. A lot of the design themes in that particular car (elliptical curves, a sports oriented design and layout, ergonomics) are not too different from many of today’s mainstream sedans.
Buying a car with cash. Not something I think I’d ever be able to do unless I hit lotto. Buddy of mine at work is a lot like you Landcrusher; very practical, keeps cars for 10 years. Sold his Achieva with 190k miles and bought a new car for about 19k which he’ll keep for another 9-10 years. I just couldn’t do that to myself. At that rate I’d have only 4-5 cars left before I would go into a home or something. The best I could do is 5-6 years, I start itching for something new (or new to me) after 2-3. If I could I’d have a stable of fun cars and just pick what I wanted to drive that day; like women have shoes.
I can do it with a TV or dishwasher or some other appliance; run it until its dead but not a car. Cars and driving just mean too much to me. It’s why I don’t have a beater; I can’t subject myself to being in a car I loathe for 3-4 months out of the year.
Driving is a passion. It wasn’t always that way but I find it is more now that I can afford nice sport scars. I will eventually get into racing when I can dedicate money for a track car at some point. I enjoy my hour commute each day (no stop and go). It’s peaceful or exciting or whatever I want it to be, it’s my “me” time before I start job #1 in the morning and job #2 in the evening when I get home. I don’t make calls in my car or eat in it if I can help it; my focus is driving, the connection between man and machine.
Life is short and can be brutally short. As long as you don’t have any more debt than house and car, are not upside down on a loan and are saving for retirement and the children I say carpe diem.
What happens on newer vehicles when the O2 sensors start to fail at around 90-100 miles, Mass Air flow Sensors that fail at approximately the same mileage. How much does it cost?
Check engine light comes on, a few ingition coils are defetive enough to turn on the light.
ABS light comes on, the ABS module is defective, the SRS light comes on, a seat belt buckle is defective, the SRS light comes the actual module is defective. What is the cost of these black boxes?
What is the normal life expectancy of an automatic transmission, 120,000 miles?
How long does a catalytic converter last, that a vehicle can still pass emission tests?
When does any vehicle still perform as per factory specs, and when does it perform as per “shoe string” specs.
At what mileage does a vehicle reach a critical wear and tear “replacement” juncture?