$5K - Buy New or Used

[village]

The GF's car was written off in an accident and they paid out about $5k for it.  The debate is, bite the bullet and buy a new car with payments.  Which, I hate payments on anything but maybe it's for the best.  Or run the used car gambit.  

I figure a new car, with a downpayment is still going to run around $400/mo + insurance & gas.  Or I can buy a used car, and unless I'm spending $4K+/yr on repairs we'll be ahead.

On the new car front, I'm thinking compact sedan(Corolla/Civic).  As much as I'd like to move to midsize, I think the additional costs would likely be too much.

For used, I tend to be looking at older Altima's/Maxima's and 626/929s.  I'd like a little luxory in the daily driver without killing gas mileage.

Any words of wisdom?  Have never bought a new car.  Used cars I've so far been lucky with. (Oh except for the XR4Ti and now it's a vendetta that I will beat that car ;))

Thanks,

[Serniter]

It depends on how long you intend to keep the car. If you want to run the car to the ground, its better to buy new. A new Civic or Corolla will run for a loooong time. Plus, if you ever want out, the resale values are good. On the other hand, you want it for two or three years, at which time you intend to update to a new car, buy used to save money in the short term. Just my views.

[johngenx]

If you want to run the car to the ground, its better to buy new.

With the good supply of 2-4 year old off-lease used vehicles, it's possible to buy an excellent car for 40-60% of the original price with years and years and years of life left.  I am willing to bet that our recently purchased 2001 Forester (for 40% of new) will last at least ten more years with little or no repairs.

Picking a reliable, well made brand/model is the key, of course.

The problem with $5,000 is that this price range means a pretty old car, and they're not usually much better than a $2000 car.  To get something much better usually means a junp to $8-10K or so.  It's a tough bracket to be shopping in.

[tenpenny]

I was lucky back in 97:  I found a guy who had just hit the "early retirement list" at his employer, while at the same time his son decided to go to commercial flight school....he had a 98 Subaru Legacy wagon (3months old) and a 77 Corvette for sale....he really wanted to keep the Subaru, but he said first one that goes, goes....

I was lucky to get what was essentially a brand new Subaru at a good discount, and now I can run it forever.....

[Serniter]

There's a reason why a 2001 car costs 40% of new. I doubt a fourteen year old car can be maintained with little or no maintenance, and this stage is not reached overnight. After the initial warranty runs out there is a need to buy additional warranty that'll cost another ~1500-2000 dollars. The maintenance costs are lowest in the first few years of ownership. That partially offsets the depreciation. Further you can be sure about the maintenance. True cost to own figures for most cars are available at Edmunds.com, though most of the costs can be calculated yourself. If a new car is going to idle, its a waste, but if you're going to use it for 25-30,000 km a year, I'd choose new.

[johngenx]

There's a reason why a 2001 car costs 40% of new. I doubt a fourteen year old car can be maintained with little or no maintenance, and this stage is not reached overnight.

If you're operating your new car with little or no maintenance, then I hope I don't buy one from you!  New cars need oil changes, brakes, tires, coolant changes, tranny services and all that stuff too.  I'm talking about repairs.

Look at this way...

Suppose we buy a new 2005 Forester for $36,000.  That's the replacement cost for the 2001 we have.  We paid $15,000 for ours.  The intial depreciation cost is $21,000.

Suppose we take our new Forester and drive it to 300,000km's or 12 years.  At the end of the 12 years it's worth $3000.  We spent $33,000 on depreciation alone.  Suppose it costs us nothing for the first four years in operating costs.  Unrealistic?  Yup, but biased towards buying new.  Then, we spend $1500 a year maintaing it until year 12.  Total cost is ($1500* 8 years) + $33,000 depreciation = $45,000.  This does not include any interest costs on the new vehicle, as we have an opportunity cost of capital on the used one anyway...  Our total cost divided by the 12 years of service is $3750 per year.

Suppose we buy a four year old one for $15,000.  We drive it for the eight years it has left.  We spend the same $1500 a year on service.  That's $12,000.  At the end of the term, it's worth the same $3000.  Total cost for the eight years is $24,000.  Divided by 8 years is $3000 per year.

My own experience driving a half dozen cars to over 400,000km's is that $1500 a year for well made 10-15 year old car is more than enough to budget.  Some years it's more, some it's less.

Of course, my example is not fair.  It ignores the  interest paid on $36,000 instead of $15,000.  It assumes NO service costs for the new car during it's four years under warranty.  On a new Forester, figure spending $1500 on routine service during it's four years.  I also ignored the significantly higher GST bill on the new car.  I also ignored the higher insurance costs of the newer car.  It all adds up.

Potential repair costs NEVER offset the initial depreciation expense.  They never even come close.  Depreciation is the largest single expense on a car under 5 years old by a huge margin.

Buying a new car is not the lowest cost alternative.  Never has been.  But, some people like new cars, me included.  But, it's delusional to think buying new will save money, even in the long term.

13 years ago we bought an 88 Mazda 626.  We paid $7000 for it, as second owners.  We put 270,000km's on the car and spent maybe $2000 on non-routine repairs in it's entire life.  That $2K went along way, though.  New rad, new struts twice, two alternators and a host of minor fixes.  By buying good makes, we have driven cars for years, even over a decade, out of warranty, without major costs or concerns about reliability.  That Mazda cost us about $9000 (not including routine service, but all cars neeed that...) for 13 years of driving.  Cheap!  

Warranties are great for insurance against major repairs, but drivelines on most newer cars are almost bullet proof anyway.  Of course, if you buy  certain Chrysler cars/vans, Ford products and some GM stuff, this is NOT true.  There are some products I wouldn't dare to drive out of warranty.  But, a Honda/Toyota/Subaru product?  In a second.  Heck, when they do have major problems, those makers are much more likely to come through for you anyway.  Honda is covering all repairs for out-of-warranty transmissions from those bad batches they made.

[johngenx]

Someone aksed me "off-line" about cash flow comparisions.  Interesting.

Suppose we have the $15,000 to buy something.  We can buy that 2001 Forester, or we can use it as a down on a new one.  Hhhhmmm.

Used:
$15,000 cash out-lay for car.  $1500 per year for the eight years we drive it.  Same $3000 salvage value.  Same $24,000 operating cost for the term, same $3000 per year.

New:
$36,000 loan, less $15,000 down = $21,000 to finance.  We don't want to exceed the four years, so we pay $475 for 48 months at 3.9%.  Cheap money.  Total cost is $15,000 + (48*$475) = $37,800.  Less our salvage value of $3000 the total depreciation and interest expense is $34,800.  Assume $1500 a year for years 5-12, and we get a total cost of $46,800.  per year for the 12 years is $3,900.

However, the cost structure in terms of cash flow is NOT $3900 per year in a linear fashion.  Same for the used car.

Used:
Assume linear depreciation from $15,000 to $3000.  Each year the cost is $1500.  Not all that realistic, but we'll apply it to the new car too.

Year one: $1500 repairs, $1500 dep. = $3000.

New:

Assume the $21,000 four year depreciation is linear during the four years, at $5250 per year.

We can see that the cost of the new car is higher in the early years, and gradually meets the used car.  Now, the real reason some people buy new is to minimize the VARIANCE of cash flows.  

In the above example, all you have to do is save the monthly payments you would have made on top of your $15,000 down, and you'll be way, way ahead.  If you did that, you'd have a repair fund of $22,800 after four years, less repairs.  Do you think it would be more than $22,800?  Maybe if it needed several new engines and transmissions!

My wife and I figure it would cost $500 a month per car, for two new cars.  So, we throw $1000 a month into the "cars" account.  All our cars are out of warranty.  We never come close to emptying that account.  When it comes time to buy something, we have the money, no borrowing.  We buy our cars from that account, we pay for major repairs and all maintenance.  And it keeps growing, and growing.  Every once in a while it gets silly and I tranfer a bunch into RRSPs.  We keep three decent cars (98 C230, 01 Outback Wagon and 01 Forester) in tip-top shape from that account and run huge surpluses.  It even covers the depreciation, since when we want/need a newer car, there is the cash to buy one.

Since buying the MB out at the end of the lease (quite some time ago) we've done this.  And from that account we've bought the 2001 OBW, 2001 Forester and a 2000 Suzuki Hayabusa motorcycle.  We've also paid for all repairs/maintenance for all the vehicles, including the big-bore kit for the 'Busa.  And had lots left over.  There's enough to buy a really nice 3-4 year old MB if I wanted another, and then some.

Now, for the last five years we could have had tow new cars, constantly updating.  But, instead we have three decent cars, a motorcycle and some home renovations and retirement savings.  We also have the flexibility to blow that money this month on something else.

It depends on what's important.  But, you don't save money, short term, or long term, by buying new.

[ktm525]

Great post Johngenx. Its bad enough that cars are a depreciating asset but when you pay interest on a depreciating asset it is a double whammy. I pay cash for my cars, and I buy what I can afford. It also keeps me honest as to what I really NEED in an automobile. Writing a cheque for $23k vs buying new and focusing only on the monthly payment are very different. When it is one large lump sum leaving your account at once it tends to temper the itch to flip vehicles. My approach is to buy privately 2-3 year old cars (with some primary warranty left) and then drive to about the 8-10 year mark. Using this method I am able to buy other automobiles, motorcycles etc for what buying new would cost me. I bought a new car once using financing and the novelty of new wheels wore off long before the payments did!

[Snowman]

Great post John…good advice…much too sensible for me.

[Serniter]

Got to say good posts with useful analyses. Though I wonder what gave the impression I dont maintain my cars?! I intend to buy a car for 15000 USD, and had benchmarked either a new Civic or Corolla. I also searched the used car market for these cars. According to Edmunds, the depreciation in the first year (with 15000 miles usage) would be ~3000 USD. That would attest to everything just said. However, its been difficult for me to find any that are priced thus on dealer lots. I could get it at that price from a private seller. Get it checked at a mechanic, but is that alright for a car I want to keep for the long run? Looking at a 2001 Civic with 50k miles on it, the value retained is still 50% or more. The two used cars I bought earlier cost me about 2000 dollars each time (depreciation + maintenance), but then, I dint keep them for long either. Here's the other thing: I am particular about ABS and side curtain airbags, not so much about other features. The Honda Accord DX offers it at a reasonable price. These are rarely available used, and the versions (LX, EX) that are available cost as much as a new DX. So why would I pay for features that I dont need? Its the same situation with a Corolla CE. So coming back to a safe car for $15000, what would be the ideal choice? I appreciate your arguments, helps make a decision. Though I am not looking at the kind of cars discussed above.

[johngenx]

Your gap between new and used is too small.  In that case, it can make sense to buy new.  But, that is generally not the case for most makes.  Honda's hold their value very well, and late model used Hondas are typically not a great buy.

As to buying an Accord DX, it might be a popular car in the US, but base cars can be a tough find in Canada.  We've had several members frustrated by the lack of dealer inventory of base models, and their unwillingness to order one.  Ordering one would mean no price discount.

Also, finding a great used buy on a car that was only $15,000 to begin with is tougher than on a $35-40,000 car.  If you really like the Accord EX-L features, I've seen 2001-2002's for sale in the $20-22K range, which is a fairly high percentage of the original $32-33K price, but sometimes people just plain can't stretch to $33,000 and $20,000 can be reached.

Canada's used car market is probably not as robust price-wise thanks to our much-higher new car prices.

[stodge]

Are off-lease used vehicles a good buy? Or like every other car, it depends on the car, it's maintenance history and the dealer?

[ktm525]

I like to buy one owner cars that are being sold privately. First off you save the GST/PST and whatever margin that a dealer builds in. When buying used you are buying the seller, I prefer maintainence and detailing freaks. . I like to see a nice clean garage stocked with orbital buffers, bottles of synthetic oil, vacuum etc. When I bought my used Contour SVT I was sold the moment that I saw the sellers garage: Painted bright white with little carpet squares under the tires. I could have eaten off that floor. That attitude carried through to his car collection as well. Immaculate, perhaps better than new.

[johngenx]

Yes, and yes.  Off-lease cars are usually good bets, and now they dominate the 2-4 year old car market.  You'll have trouble finding the service records, so a PPI is super-duper important.