I’ve previously written about the used car fallacy. Given a shortage of used cars, new cars in a lower trim design are much more affordable than used cars.
This can be verified with any number of makes and models. In the earlier article, I noted that a new Camry cost $22,000 whereas a used 2009 Camry with 50,000 miles cost $19,000. A new car is an obvious choice.
How new cars save you money
The thesis that new cars are a relative bargain vs. old cars relies on the presumption that you are shopping for a base model car. The used car market values getting from A to B. It does not value getting from A to B with luxuries like a 7-disc CD changer, heated seats, or headlight wipers.
Those who would prefer to have all the bells and whistles are likely better off getting a used car, because the things that depreciate the most are not the parts of the powertrain. The stuff that depreciates is the stuff that is demanded by the fewest number of people – the bells and whistles.
Sidebar: Notably, a better trim package is virtually all profit for the automaker. If you think fold down rear seats, ambient lighting, overhead consoles, and 17” aluminum rims actually cost $2,500 more to add to a base model car, you’re out of your mind. Before shopping for a car, note the depreciation differential between a new and used high-trim package cars, and new and used base model cars.
There are three ways to save with a new car:
- Risk savings – You have no idea what a used car went through. Those 50,000 miles on the odometer may have been 45,000 miles with old motor oil. A new car does not carry this risk.
- Financing savings – All rational people should finance a car, even if you intend to pay with cash. Dealers and manufacturers subsidize financing like credit card companies subsidize balance transfers. They figure you’ll end up paying longer than you should, and hopefully pay fees along the way. Paying cash for a car you can finance at less than 1% is the definition of stupidity if you have existing debt (even a mortgage) at a rate above 1%.
- Time – Shopping for a car is time consuming. If the average car lives to 200,000 miles, one purchased with zero miles lasts 33% longer than a car purchased with 50,000 miles. Used car purchases require even more investigation than new car purchases.
The risk savings explain themselves. While risk does not always mean financial loss, it does come at a cost – you have to bake this in as an option.
The financing costs are fairly straightforward. Using 0.9% interest on a new car loan from a car loan calculator, I find a monthly payment of $341.01 per month. A used car at the same price would cost you $354.95 for 60 months.
The difference obviously grows with poor credit. Because used car values are high, rates on new cars for people with bad credit are much lower than rates on used cars. Poor credit means you’re more likely to default, and the lender would like to repossess a car worth the principal amount, not $1,000 to a scrapyard.
The roadmap to used or new cars
Anyone who plans on doing all of the following inclusive of their choice for a new or used car should buy new:
1) Carrying comprehensive and collision car insurance.
2) Driving a car without the bells and whistles
3) Driving a car until it dies
4) Paying for any and all maintenance work
Anyone who plans on doing all of the following should buy used:
1) Carrying only liability insurance
2) Driving a car with a sweet trim package
3) Driving a car for a few years
4) Shopping for a new car every few years
5) Doing their own maintenance
If you don’t fit in one or the other category, you might not be getting the best value for the buck.
Just as an anecdote, my mother recently purchased a brand new car. She wanted something fuel efficient, slow, and boring because she puts a substantial number of work mileage on her cars. (Really – try 10,000+ miles in one year…she’s a traveler.) She settled on a $17,000 car, brand new. The same model two years older with 55,000 miles, lesser warranty, and same trim package was…$15,000 all-in, pricing each mile of depreciation at less than 5 cents each.
The point is that sometimes it makes sense to be a contrarian. When everyone else buys new, you should buy used. When everyone else is buying used – like they are now – you should buy new. Economics rewards the minority.