A little math on new cars vs. used cars

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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?