Conventional wisdom says that buying a late model, gently used car is a better deal than purchasing a new car. According to this theory, your new car depreciates 20 to 25 percent the moment you drive it off the lot.
But while it may be true that you could only sell your new car back to the dealer at a 20 or 25 percent discount, you couldn’t buy that one-hour-old car at a 20 or 25 percent discount. And besides, why would you buy any car only to sell it the same day? Here is why a new car offers more long-term value than a used car.
The price of used cars is historically high. The Detroit News recently reported that the average price of a 3-year-old car is more than $19,200, the most in seven years. There are several reasons for the high prices, but the main one is that people have been holding on to their cars longer, meaning the inventory of late-model used cars is low. And if it’s hard to even find a decent used car, it’s going to cost a lot to buy one.
The expense of repairing a car is higher than ever. When a car gets to be four or five years old, major systems start breaking down or wearing out. And the cost of repairs has gone up much faster than the cost of new cars. Like your old TV or your old air conditioner, at some point it’s cheaper to replace it than it is to fix it. And it’s no bargain to buy a car just because it’s cheaper to replace it than to fix it.
There’s a risk that repairs will be more than you figured. Even if you get the vehicle history from Carfax or elsewhere, you don’t know how it was really treated. Was it garaged? Did the old owner change the oil on schedule? Did the original driver abuse the car with jack-rabbit starts and short stops? Then there’s always the question: If the car is so great, why is the original owner so eager to get rid of it?
[See 5 Things to Buy Used.]
New cars are cheaper than they’ve been in 20 years. A car is a manufactured good, and like most manufactured goods, the price goes down over time, when adjusted for inflation, because of the efficiencies of production. You can get a better car now, for less money, than you could 15 or 20 years ago. For example, I bought a new Volvo 850 in 1996. It cost me $28,500. Once you adjust for inflation the price today would be $41,000. The equivalent car today is the Volvo S60. But you can buy a new Volvo S60 for around $30,000. And it’s a better car, with more safety features, better lighting, and a more impressive sound system.
Better financing. Interest rates are low. It’s not hard to find an auto loan at 1.9 percent interest. Some dealers are offering 0 percent financing, but only on new cars. Used-car buyers typically pay 2 percent more for a loan than new buyers do.
[See Raise My Interest Rates.]
Of course there are always exceptions. Maybe you’re one of the few who really can buy a late model car from a trustworthy aunt who only drove to church. Also, some luxury cars depreciate faster, but enjoy better long-term reliability than typical vehicles, and can be a true bargain when bought used. But these days, for most people, the rule of thumb is reversed: a new car is a better deal than a used car.
Take it from my friend who purchased a new 2011 Ford Escape the last week in December 2010. After incentives and rebates, plus the dealer’s need to make a sales quota to bring up the yearly totals, the friend got the new car, with plenty of extras, for under $19,000 with 0.9 percent financing. That’s cheaper than the average price of a 3-year-old used car.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.