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Finance Blogs » Cars » Are new cars worth the depreciation hit, continued

Are new cars worth the depreciation hit, continued

By Claes Bell · Bankrate.com
Friday, July 2, 2010
Posted: 10 am ET

I got a ton of great comments on the my post about new cars vs. used cars, so I'll add a little more fuel to the fire. Michelle Krebs over at Auto Observer posits that with used car prices rising fast and many new-car incentives still inflated thanks to the decrepit economy, buying a new car these days might actually make more sense than buying used in many cases.

The numbers are pretty striking. Used-car prices are 11 percent year-over-year, as people try to figure out ways to trim from their budgets by buying used. I'd also bet that fewer cars are entering the used market because people are holding on to cars longer. And because fewer new cars were sold in 2007, 2008 and 2009 because of the recession, there are fewer used cars in circulation now.

But this brings us back to the new vs. used conundrum. Think about it: If the prices of a new and a used model are only a few thousand dollars a part, all things considered, I think you have to go with the new car. You get a better warranty and the peace of mind of knowing it's been maintained throughout its lifetime, which is a big deal. I've just known too many people who forgot to change their oil until the "need oil" light came on to take for granted that every car on a used car lot has received basic maintenance.

Plus, if high used-car prices continue, it will mean that the depreciation hit you'll take will be lower when you decide to move on.

Jeep dealership in Rockville, Md.

A Jeep dealership in Rockville, Md.

Topping it off, if you plan on financing the car, you'll get an interest rate that's at least a full point lower on an auto loan for a new car than you would on an auto loan for a used car. Depending on your price range that can make a big difference (you can use our auto loan calculator to see how it would affect you).

So, you tell me. If a new car is only a little more expensive than a used one, is used-car buying still the frugal thing to do?

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12 Comments
Eric
July 15, 2010 at 1:21 pm

It really simple people. You have to stop the mindset of thinking "a car payment is a way of life". Pay for your car in cash. If you can't do that, take out a modest loan with a short amortization period and buy a reasonable used car and pay it off early. Save the money you were using for your car payment and use that cash to buy your next car. Its not that hard.

chris
July 06, 2010 at 6:37 pm

Even at 0% or paying cash a new car is still charging you interest because you have to factor in depreciation. If you spend $30k on a nice new car, 4 years later it will be worth about $10,500. I don't know about you but I don't think anyone who is not wealthy can afford to throw away $19,500. Due to quality enhancements in cars over the last couple decades, there are more used cars on the market since they last longer. That's a fact, unlike the talking points in the article above. Those same quality enhancements also substantially remove the risk associated with buying a used vehicle. If you get a used car that still has some of the original factory warranty left, you completely shield yourself from a lemon. New cars are for people who are rich and/or very very bad at math and financial planning. You would never "invest" a dime in an asset that you know for a fact will lose that kind of value, so why would you spend tens of thousands of dollars when you have plenty of high quality alternatives that won't hurt you nearly that much.

Eric
July 06, 2010 at 4:10 pm

I don't care whether a person wants to buy new or used. If you are keeping the car for the long-term, it doesn't make that much difference as the asset will be mostly depreciated. The key is to either buy the car in cash or take out a short-term loan (2 years or less). Too many people get suckered into buying a new car and financing it over 60-72 months because of the 0% interest gimmick. Firs of all, most people don't qualify for 0% and those who do typically lose negotiation leverage over the price of the car. So in the end, you aren't saving that much. I drive an 11 year old Lexus that is completely paid for and runs great. Instead of sending $300-$500 per month to the bank for car payments, I am able to save that money and make interest/investment income on it. By the time my car dies, I will easily have enough cash to put a very solid vehicle that will last me another 5 years. Its not that hard, you just have to show some discipline to payoff the car and save up for the next one.

Debra James
July 06, 2010 at 1:55 pm

Ryan, you fail to mention that in order to get the 0% financing, not only does the person need to possess an excellent credit rating, but also put down a sizable down payment. I was reading the fine print on one TV add that actually displayed the font large enough to read, and it said an average of 17% down is required to qualify for that rate.

I still stand by my belief that if you can't afford to pay cash, or in the event of an urgent circumstance, pay it off within one year, then you probably shouldn't buy that car. You need to stop thinking of the purchase of a car as a monthly payment, and look at the total price as a one-time purchase. Would you still buy the same car if you had to use cash? I think it would be difficult for many people to easily to give up $30k or more in cash if they had been saving up for a long time, and that amount was the bulk of their savings. In my opinion they would more likely look for something that is less expensive and try to keep some of that money for other things.

Another thing to consider is that every time you buy a new car, and are not taking your old car out of circulation (meaning it will stil be driven by someone) you are introducing yet another impact to the environment.

I think Claes statements about having peace of mind regarding the condition of a new car vs. a used car are somewhat unfounded. Many expensive car repairs occur after the warranty has finished, but you are still paying for the car. If a person does due diligence in having a used car thoroughly examined by a competent and reputable mechanic before making a buying decision it is likely to save them considerable money in the purchase price and subsequent maintenance costs. Also, he does not mention that in order to stay in warranty that you must get your car serviced at a dealership (whose rates are usually higher than a certified independent mechanic), and at a schedule that is determined by the manufacturer. Trust me, in the long run you will have paid for that warranty several times over.

Also, Claes's comment that he'd go with a new car if it is only a few thousand dollars more than a used car does not seem like very good advice for using money. Those "few thousand dollars" can mount up to quite a sum over the period of a loan if you take into consideration the finance charges on that amount (not everyone will be able to get 0% financing), and the interest you will not get from having put that money into savings, 401K, IRA/Roth IRA, CD, etc., or the savings of finance charges if you used the money to pay down other debt.

Chris has a good point about car payments and credit card debt stifling the financial independence of many Americans. To me, it is a great feeling to not worry about a monthly car note, and a better feeling to have money saved.

jimboh
July 05, 2010 at 11:10 am

New car?
From a retirement perspective a new car purchase is a no no unless you have a VERY sizeable nest egg. When I do the math and either have a pymt of $500-$600/month or pull $30k out of retirement savings, a new car purchase makes me shudder.
My wife and I drive two autos a 98Mountaineer (175k miles)and a 2000LS (130k miles).Both of these we purchased new.
Both cars are in great shape burn no oil,have no rust, etc but do have some minor problems that we may or may not fix. OVer the combined 22 years of ownership, we have had to make actual repairs totaling $4100 on the 2000 LS (converts to about $35/month over its 10 year life). The 98 mountainer has had only $1500 in repairs but will need another 2000 this year for AC and oil leak. So the total $3500 converts to $24/month over the 12 years. I also belong to AAA for roadside towing assistance $8 per month. So unless something VERY major happens the wise financial choice at least for us is to stay with mour existing cars. I hope to get to 250k to 300k on both.

Ryan
July 05, 2010 at 2:02 am

Chris I think you are ignoring the fact that a lot of these new car purchases actually come with financing deals of 0% which is a substantial savings over te 4-7% rate you can get through a credit union.

chris
July 03, 2010 at 10:44 pm

Unfortunately the "facts" in this article are merely talking points from the auto industry. Used cars, especially those not labled "certified pre-owned," are still a lot cheaper. Looking at my credit union (penfed.org), there is no difference in interest rates for used and new cars if you have good credit, though borrowing money to buy something that will depreciate by 65% in 4 years in sheer lunacy unless you are wealthy enough to not worry about trivial 5 figure sums of money. Car payments and credit cards are the financial chains that keep Americans from ever attaining financial independence.

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