It (Still) Doesn’t Make Sense to Buy Used Cars

by JT McGee

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:

  1. 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.
  2. 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%.
  3. 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.

{ 13 comments… read them below or add one }

Mark from PersonalFinancely July 18, 2013 at 13:17

Your premise that a used Camry will cost you $19000 is wrong, I see it’s $15000.

I checked two different parts of the country on yahoo used cars, lexington,ky and orlando,fl and both had a handful of Camrys (2009 or later) with less than 50000 miles and a price tag of $15,000 or less.

Assuming a gently used camry is $15000 or brand new is $23000 it seems the better deal is the used one. $8,000 is a high premium just to drive the first 50,000 miles in the exact same car.

I think the best investment is buy used and do your own repairs when possible.

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JT McGee July 18, 2013 at 15:59

$8,000 covers:

1) Low cost miles (few, if any repairs…the first 50k are substantially cheaper than the last 50k).
2) Depreciation (assume you drive it to 300k miles, 1/6th of its life is gone. 1/6th of $23k = ~$3844, which is half the premium already)
3) Better warranty
4) Potentially longer life if you take better care of new car vs. other person who owned the used car.

Also, I used all-in price for the new car and used car. If you search popular used car sites (like Yahoo Autos) dealers list a price then, on their website, include big “processing fees” so they can be the cheapest on the aggregation sites.

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Kayla July 18, 2013 at 14:33

I like this post a lot. I still don’t really have any regrets buying new (if I could’ve seen into the future that I would have moved jobs to a location a 4 minute walk away from my house, I wouldn’t have bought new, but who can predict the future?). You do make a lot of good points. I like my new car because of 1) The gas mileage (after 35 km put on the car in its first year, it’s running at about 14.4 km/L and the tank holds about 700 km worth of fuel… AWESOME!). 2) The bells and whistles part. I like my heated seats. I like that Sirius satellite radio is just built right into the car. I like all the voice activation stuff because it makes changing songs and answering phone calls a breeze. I’d definitely miss all that stuff if I would’ve bought used. Yeah I financed, and not quite at 1% but low enough that I’m content with it and can afford the payments while still being able to save and I can lump sum payments on to the loan any time I want to at no cost to me.

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JT McGee July 18, 2013 at 16:07

Google says 14.4km/L is 33 MPG, which is pretty great. I’d love heated seats in the cold winters here, but not enough to pay for it. Maybe one of these days.

Is the voice activated stuff as cool as it looks?

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Kayla July 19, 2013 at 11:39

Oops I noticed a typo, I meant 35,000 km in first year, not 35… LOL.

Well I don’t think it gets as cold there as it does here…. 😉 The heated seats definitely help in -30C temps. They heat up quick too. It’s a nice feature to have in the Canadian winters.

It is actually. You only have to set up your phone’s bluetooth with the car’s bluetooth once and it will remember it and all your contacts. You can also set up multiple devices (my brother’s phone is remembered too). As long as the bluetooth is on, any incoming calls will interrupt your iPod/radio, and outgoing calls is as simple as stating “Call ___” .. And with iPods for example, it’ll take all of a few seconds to “initialize” and then you can state pretty much anything. “Play artist ___”, “Play track ___”, “Play album ___”, etc. So handy.

Except she’ll get it wrong sometimes… The most frequent mistake she makes for me is I’ll say “Play track ‘Lies'” and she’ll respond “Playing track ‘Ice'” or vice versa … I mean those words are pretty identical when spoken so I don’t blame the technology. It’s funnier when I say a certain artist or track and she completely gets it wrong and starts playing something way off. 😛

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Grayson @ Debt Roundup July 18, 2013 at 14:59

I have a new car and so does my wife. We saved a lot of money by not dropping a huge down payment and for keeping our money for investments. When you can finance for less than 1%, you are winning the race.

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JT McGee July 18, 2013 at 16:07

High five for financing!

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Darwin's Money July 18, 2013 at 22:09

What about the whole 30% depreciation when you drive it off the lot thing? I’ve been buying new cars for the past few years for many of the reasons you cited, but if I had the bandwidth to track down a 1 year old car in good condition, wouldn’t that be a better buy? (still under warranty, etc)

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Thomas | Your Daily Finance July 20, 2013 at 05:45

Havent bought a new car in years. Don’t think I will be buying one anything time so. There are pros and cons to doing either or. We buy used cars that I can pay cash for and will send my long time mechanic there to look at them first. If a car is going to cost me 1.5k-2k way not buy it out right and get a tune up. But thats what works for me. I would never spend 15k cash for a car. There are more things to do with the money. However we are also assuming people have the money in the first place and that if they finance the car they are going to be smart and invest the money.

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Felix Lee July 20, 2013 at 09:23

I am not really a fan of bargains or using used items especially on cars. Buying a new car that is quite priced higher is still much more practical rather than going for the used ones.

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Miiockm July 20, 2013 at 23:31

Good points, luxury cars do depreciate at a much more signifcant rate than lower end models.

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Kari July 21, 2013 at 13:32

As a 1st car I wanted a Freelander Discovery 4×4 for around $5000 with around 70,000 miles on the clock. After a couple of weeks of wanting a different car every day (like the 1 series bmw) and researching all the insurance costs, I think $5000 for 70,000 miles is not as good a deal as something else I could have done. $5000 for 70,000 doesn’t equate to $2500 for 35,000, the depreciation isn’t so linear and I think that instead of spending $5000, it might be better to spend $8000-$9000 to reduce those miles to around 30-40,000, because then you are getting a car that will last a good 5-10 years in mileage terms. To further reduce the mileage from 30-40,000 to 0 miles would be ideal…but it’s too costly as you pay new car prices at that point and to shave off 30,000 miles costs an extra $10,000, instead of the extra $5000 you paid to go from 70,000 to 35,000.

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Roger @ The Chicago Financial Planner July 21, 2013 at 15:56

Good post and I agree. Over the years we’ve bought a far number of used cars and I think this has been a solid practice for us over time. However it seems like things have changed in recent years and I agree that the cost differential is so small that buying used doesn’t really make sense. We just bought our daughter a new car for grad school vs. used for just the reasons that you enumerated.

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