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A little math on new cars vs. used cars

By Claes Bell ·
Thursday, July 8, 2010
Posted: 3 pm ET

Many readers were a little uneasy with my post about how new-vehicle incentives are affecting the age-old new car vs. used car question. I can understand that; the conventional wisdom in the frugal community seems to be that depreciation, especially with that dreaded "50 percent as soon as you drive it off the lot" rule of thumb, outweighs any benefits buying a new car might offer.

But when it comes to personal finance, I'm always a little skeptical of the conventional wisdom, because there are just so many darn variables for every person's individual situation. So let's take a closer look at that conventional wisdom by plugging in a few real-world and hypothetical numbers.

Let's say you're trying to decide between a certified pre-owned, or CPO, 2008 Toyota Camry and a brand-spankin' new 2010 model, either of which you plan on keeping for 4 years and then moving on to bigger and better things. You like power and a few creature comforts, so you want a V-6 and a few basic options. I found a new 2010 Camry that fits the bill for sale locally for $21,600, significantly below the over-$25,000 MSRP because of dealer incentives. A Kelley Blue Book price check on a similarly-equipped 2008 Camry showed a price estimate of $18,085.

At this point, the certified pre-owned Camry is ahead by $3,515, or as I put it in my last post "a few thousand dollars," (much to the chagrin of a couple of readers, who had a legitimate beef with the flippancy of that phrase -- after all, that's a ton of money in this economy).

Now it's time to get the car loan. A popular loan term these days is 4 years. The Bankrate national average for a 48-month, new car loan is 6.98 percent; for a 48-month, used car loan, it's 7.66 percent. After plugging those numbers into the handy dandy Bankrate auto loan calculator, I figure the new Camry is going to cost you $2,575 in interest over the life of the loan, assuming you put 20 percent down. The "used" Camry, on the other hand, will cost you $2,375 in interest.

With yet another $200 advantage, the pre-owned Camry has pulled even farther ahead and is now sitting on a comfortable $3,714 lead.

Now let's figure in the dreaded depreciation. Kelley Blue Book estimates the 2010 Camry will be worth only $8,597 in 2014, only39 percent of what we paid originally. Ouch!

Estimating depreciation on the 2008 Camry was a little tougher. Since by the time 2014 rolls around the pre-owned Camry will be 6 years old, I decided to use what a similarly equipped 2004 Camry is worth now as a guide. The number Kelley Blue Book spits out is $7,150, or a little over 39 percent of what we originally paid.

So, in 2014, if we sell the 2010 Camry, we'll overall have paid $15,577 for the privilege of owning it, excluding regular maintenance, gas, etc., which I assumed was the same for both models. The certified pre-owned model, on the other hand, cost us $13,310.

A clear $2,267 victory for the used Camry, right? Unfortunately, I have to step in here and kill the mood, World Cup referee-style.

The 2010 Camry has comprehensive warranty coverage which would theoretically handle the majority of the car repairs for those 4 years. On the other hand, the certified pre-owned Camry has only a few thousand miles left of coverage when we buy it, so in lieu of trying to figure out how much we'd have to pay for unexpected repairs, I priced out a 4-year extended warranty, which would come in at $1,742 for four years and 50,00 additional miles worth of coverage.

That added cost narrows the gap a bit. Now the used Camry rings in at $15,052, just $525 less than the 2010 Camry. Now $525 isn't chump change, but spread out over 4 years, that amount seems pretty reasonable for the privilege of driving a new car that you know without a shadow of a doubt has been driven and maintained sensibly.

I'm not trying to shill new cars here, I'm just saying that when prices for used cars are up and prices for new cars are down, maybe it's time to question the conventional wisdom.

What do you guys think? Math wizards out there, do my calculations add up?

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July 16, 2010 at 1:22 pm

what about the cost of sales tax...probably adds 10% to the price of a new car. No sales tax on a used car.

July 09, 2010 at 12:51 am

It looks like you have compared a New vs. Used car by features which im sure simplified the evaluation. This evaulation would definately depend on things to long to list here but one would be comparing a 2010 with a 2005 or 2010 with a 2009.

Conventional wisdom also says that it costs more to insure a new car than a used one in the same brand/model for an individual.

July 08, 2010 at 8:25 pm

No one questions your ability to do basic math. I just question your ability to use that ability and apply it in a logical way to your personal finances. In your example above, your car buyer only has about $4k for a down payment. In your mind a ~$20k car with a ~$380 car payment is reasonable. I think that's insane for a person with no money. What happens if you lose your job? How easy are those monthly payments now? What about the opportunity cost of those payments? Wouldn't it have been better to use some of that money to pay off debt, save for retirement or you kid's college? The rest could have been socked away to buy a decent car. I LOVE cars, especially ones made in Bavaria, but the vast majority of Americans (including me in the past) waste huge sums of money relative to their net worth on depreciating toys - and anything beyond basic transportation is JUST A TOY.

July 08, 2010 at 7:49 pm

Does it hold up if you drive them both into the dirt?

Debra James
July 08, 2010 at 5:49 pm

I clicked the link for the Bankrate national average loan rates, and ran the numbers using the rates in the graphic for Overnight Averages Index; which shows the 48-month loan rates for new car loans as 6.40% and 6.41% for used cars. As noted in the explanation of the indexes, the overnight average uses different sources, and it is gathered daily vs. weekly, compared to the national average. However, since I read your article today, and I put myself in the mindset of a buyer making the purchase decision today, I wanted to run a similar scenario as you did with rates for today.

New Car:
After 20% down payment, the amount to finance is $17280. The monthly payment at 6.40% for 48 months is $409. Using simple math, the interest paid on this loan will be $2352.

Used Car:
After 20% down payment, the amount to finance is $14468. The monthly payment at 6.41% for 48 months is $342.51. Using simple math, the interest paid on this loan will be $1972.48.

Simple Interest difference between new and used vehicle = $379.52; added to vehicle price difference of $3515= $3894.52. Please verify if I did the math correctly.

You make a good point about the warranty coverage, but that only plays significantly if one were to buy a car that is almost out of original warranty. If the car still has at least 1 year's worth of original comprehensive warranty (meaning the original driver didn't drive the vehicle above the 12,000 mile yearly average for the warranty period), then I'd feel comfortable not buying an extended warranty, because there is still a few years left on the powertrain warranty. Of course, other factors will play into this decision, like if the car has a documented service record by a certified Toyota mechanic, and what other services the dealer has thrown into the deal.

This is a quote from about what kinds of warranties are provided with their CPO vehicles (the numbers in brackets are links to more details), "Each Toyota Certified Used Vehicle comes with a 3-month/3,000-mile comprehensive used car warranty from date of certified purchase [1]. This warranty covers any repair or replacement of components which fail under normal use due to a defect in materials or workmanship.

Each Toyota Certified Used Vehicle is also backed by a 7-year/100,000-mile Limited Powertrain Warranty (from original date of first use when purchased as new) [2]. We also add a 7-year/100,000 mile 24-hour Roadside Assistance Plan (from original date of first use when purchased as new) [2]."

If I did decide to buy the extended warranty and finance it with car, the total purchase price, less tax and fees is $19827.

Used Car:
After 20% down payment, the amount to finance is $15861.60. The monthly payment at 6.41% for 48 months is $375.50. Using simple math, the interest paid on this loan will be $2162.40.

Simple Interest difference = $189.60; added to vehicle price difference of $3515 = $3704.60. Again, please verify if I did the math correctly.

Using this scenario, and IF my math is reasonably correct, it looks like the CPO is holding up on the rule of conventional wisdom.