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Are new cars worth the depreciation hit?

By Claes Bell, CFA · Bankrate.com
Thursday, June 17, 2010
Posted: 11 am ET

Trying to decide between buying new car and buying used can be difficult. I bought my first -- and probably last -- new car a little over two and a half years ago. I paid around $22,000 for my 2008 Mazdaspeed 3 in the fall of 2007. At the time I was living in a neighborhood where my car was stolen twice in less than three years, so I threw in a LoJack security system. Because the new car has a turbo, and I've often been warned about the expense of replacing them, I bought an extended warranty as well. My grand total after taxes, tag, title, gap insurance and everything else was $27,870.

Now comes the painful part. If I sold my car today to a private party today, Kelley Blue Book tells me I could expect to get, at the most, $17,705 for it. That's over $10,000 total I've lost on my car already, and trust me, that's a painful amount. For you math lovers out there, that averages out to about $300 per month that I've essentially traded for the privilege of driving a clean, fast new car with all the latest safety features and no repair hassles to worry about.

As I've mentioned before on this blog, we're now a one-car family, which makes vehicle reliability VERY important to us, but even considering the trouble-free life of the car so far and the fun I've had driving it, I don't know if I'd buy a new car again. The numbers are just stunning when you think about them. Kelley Blue Book says that the average new car loses 65 percent of its value to depreciation after four years. I mean, imagine if a Realtor was showing you a house in Florida in 2006 and because he was both clairvoyant and unusually honest, he told you that without a shadow of a doubt, the house you were looking at would lose 65 percent of its value in four years. You'd get the heck out of there and go rent, right? And yet many people make this same decision with cars every few years.

The alternative tactic I'll probably take next time is buying a used car of a reliable make and model. There are just very few downsides to buying your transportation this way. For one thing, our resident rate guru Greg McBride says used car loans aren't any harder to get than your average new car loan. Sure, you'll pay a few extra points of interest to cover the risk that your used car will break down and become worthless and unable to secure the loan, but he says the amount you'll pay in extra interest is miniscule compared to the savings you'll get from some other schmuck taking the depreciation hit for you. You won't get the latest sheet metal or technology, but are those kind of creature comforts worth hundreds of dollars a month in burned up wealth? It depends on your situation, I guess, but for me, the answer is probably no.

Are you a new-car buyer or a used-car buyer?

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7 Comments
mathew
July 08, 2010 at 12:38 pm

I think it depends on what you buy. I bought a brand new Honda Civic VP(stands for Value Package) in 2005 for $14000. Today it is valued at $8200(KBB). $14000-$8200 = $5800 / 60 = $96.67 per month. If the gas prices go back through the roof it will climb back up in price. I might sell it then. Otherwise, I live in a midsized city and like the compact size as well as the 30MPG and will keep it until the wheels fall off. Hopefully that is forever. I do not know if I would have gotten as good of a deal if I would have purchased a used Honda instead, they really seem to hold their value.

Debra James
June 29, 2010 at 4:06 pm

Louie sounds like he is in a good and stable financial position. There is another viewpoint on spending, especially in today's economy when future earnings definately are not guaranteed. I'd hate for me or one of my loved ones to need money for medical or other urgent matter, and I can't pay for it because I spent a lot of money on a car.

I didn't mention it before, but if you have to get gap insurance, you are admitting at the time of purchase that you are paying too much for the vehicle or that it's not a good use of your money. At no time in the life your auto loan should you be upside down.

Adam
June 18, 2010 at 1:04 pm

New cars are a luxury regardless of initial cost. With a wife who scoots two babies around in the Las Vegas heat and traffic, it’s a luxury I’m willing to pay for. Me on the other hand, I’ve got an 8-year-old dodge with 150k miles that works fine. I’ll drive it until it’s kaput.

Claes Bell
June 18, 2010 at 9:20 am

Great comments, everyone! Thanks for reading. Louie, I think you've summed up really well the rationale for buying new. I think if it's a purchase that brings you a lot of joy relative to the amount of money you're going to lose on the deal, go for it. As you say, life is short. For that reason, I don't really regret my original purchase because I'd been a car lover for a long time when I bought the new car I wrote about, and I've had a lot of fun in it. But if you're kind of blah about cars and view them mostly as transportation, I think Richard and Debra's arguments make a lot of sense, too. Thanks for reading!

Louie
June 18, 2010 at 7:13 am

Nice article, but I have bought and will continue to buy new cars. I have one life to live and will not drive someone's used car simply to avoid the depreciation that comes with buying anything new, especially cars. Yes, I have purchased used before because I did not have the finances to purchase new.
I don't wish to save enormously and invest to die a millionaire.
When laying on my death bed and looking at my loved ones, I won't be saying, Gee I shoulda bought that used Toyota instead of the new Audi.

Debra James
June 17, 2010 at 7:53 pm

My first and last new car purchase was in 1986, and I was in my early 20's and in the military. I learned back then to never buy a new car again. My car was reliable, and didn't give me any trouble for the whole 6 1/2 years that I had it; it was a Subaru. It's just that I realized that I could get a whole lot more for my money by buy a car that was 1 or 2 years old. The other thing that I have learned is that by buying used cars I can pay cash for them, and totally save more by avoiding finance charges, and gap insurance. As for an extended warranty, unless you bought a lemon, you can probably don't need it, because with the money you saved you can afford routine non-warranty required maintenance. I say the best environmentally good move a person can make is buying used whenever possible.

Richard
June 17, 2010 at 3:50 pm

Nice points in this article. For those willing to be patient and do their due diligence, a 3-4 year old car with low mileage can provide you with a fantastic vehicle at a great value. Fact: most millionaires do not live luxurious lifestyles. They are millionaires because they did not spend their money away. The wealthy save and invest rather than spend and borrow.