Follow the lead of the wealthy: Buy pre-owned cars

Bankrate Logo

Why you can trust Bankrate

While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .

How does an extra $1,500 a year sound? That’s how much one auto expert says a person can save by keeping a pledge never to buy a new car again.

“No one in this world needs a brand-new car to get to work tomorrow,” said W. James Bragg, author of
The Car Buyer’s and Leaser’s Negotiating Bible.

A hard sell

That’s a hard sell and Bragg knows it. So does Jack Nerad, host and editor of
Driving Today.

“It’s kind of like people pledging never to eat a doughnut again,” Nerad said. “Most people like the new-car smell. They want to go into a dealership now and then and experience the joy of having a new car.”

Still, a car’s wholesale value drops to 60 percent to 70 percent of its original sticker price in its first two years, so it’s not long before the value of a new $20,000 auto plummets to $14,000 or even $12,000. Anyone who buys a used car lets the car’s first driver take the big depreciation hit.

So, go ahead and purchase a car every four years, but make it a two-year-old car coming off a lease rather than a new one, Bragg advises. Even with interest rates running about 2 percent higher on used cars, the savings are impressive.

Invest rather than spend
With the auto leasing business booming, there are plenty of cars to choose from, including luxury cars. Bragg estimates that people can save $1,000 to $2,000 a year.

“I don’t think there’s any reason to buy a new car except for the fact, you can afford it,” said Leon Burke, a car dealer in Southern California and author of
The Insider’s Guide to Buying a New or Used Car.

During a commentary for the program
Marketplace, which airs on
National Public Radio, Bragg suggested a never-buy-new pledge for people in their 20s and early 30s who are wondering how they’ll ever save enough for retirement.

He urged them to invest the money they would shell out on new-car payments. A 25-year-old who plunks $1,500 a year into a tax-deferred mutual fund for 40 years would have $322,000 in the retirement kitty if the fund averages an annual return of just 7 percent after taxes. If the fund averages a 10 percent return, the total jumps to $732,000.

Tough advice

Bragg knows just how tough his never-buy-new advice is to follow. His son heard the argument plenty of times and still bought a new Ford Expedition.

“There’s a lot of things we have in life because we want them, not because we need them,” Bragg said. “A new car is at the top of the list.”

Only the people who can most afford to indulge themselves with a new car don’t. The book
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy reveals that only 23.5 percent of millionaires own new cars. Almost 37 percent said the last car they bought was used.

“These millionaires get more satisfaction from acquiring used instead of new,” write Thomas J. Stanley and William D. Danko. “They often plan to resell their used acquisition in two or three years and recoup much of their initial payout.”

One millionaire profiled in the book was Dr. “Bill,” an engineering professor whose annual income never exceeded $80,000. Over the years, he figured, he had saved enough buying used cars to completely pay for college and graduate school for one of his children.