Here is a secret that I am going to share.
For better or for worse…I like new cars.
They smell nice and I like the luxury aspect of it rather than having an old beater.
What I like most about having a new car is the fact that I don’t have to worry about anything going wrong with it for at least 3 years or 36,000 miles. Best feeling in the world knowing you aren’t going to have to shell out for a new transmission or anti-lock break system in the near future.
So let’s get realistic about this.
There are a lot of financial experts out there that say to never buy a new car. Always buy used because of depreciation. Granted, new cars depreciate a lot faster than older, used cars but either way you are losing value in most cars. However, there are some cars that don’t lose value quite so quickly and buying used doesn’t save you much money.
So let’s look at some things to consider before you decide whether or not a used car or new car is better for you.
- Are you the kind of person that needs something new to drive every couple of years? Do you get that itch? If so then buying new cars is going to be a huge financial hit unless you are making millions of dollars a year.
- You have to consider the possibility that if you purchase a used car for two or three thousand dollars there is a good chance something will go wrong shortly after. If the transmission on the car decides to drop all its parts that will run you on average $2,000 to replace. That brings your $3,000 car up to $5,000. Also consider a possible $1,000 bill to fix everything wrong with the emission system on the car so it can pass an emissions test. That cheap used car is starting to look more expensive.
- So what if we skip the beater for a couple grand and get a better used car, perhaps one with not so many miles and a little newer? Let’s look at a specific example. A 2010 Chevy Malibu with 45,000 miles on it runs about $15,000 adding $1,825 for tax, title and license fees. Let’s put that same $2,000 we were going to use to buy a beater down on this Malibu. That brings the amount financed to $14,825. Assuming good credit and being able to find a good interest rate, based on current markets we will go with a 60 month loan at 3% interest. Not too shabby. That brings us a monthly payment of 266.39. Not too bad at all.
- Now let’s look at what a brand new 2013 Chevy Malibu will run us. A 2013 Malibu brand new is going for $22,805. Now another thing to consider since we are looking at good credit is that most of the time you can find a 0% interest rate on new cars. This is a huge amount of interest saved but let’s run the numbers to see how that translates to our monthly payment. At $22,805 total plus the $1,825 tax, title and license fees, plus our $2,000 down payment, and at a 0% interest rate our monthly payment is at $377.17 per month. That’s $110.78 per month extra than our used car. That’s $6,646.80 extra over the life of the loan for a new car as compared to our used Malibu. Not too bad at all.
The last thing we have to look at is how long you are going to keep the car. That’s why I put point number 1 up there. I buy new cars because I keep them for 12 years. Statistically speaking it is about 12 to 13 years on average that a brand new car can last with proper maintenance. So if we consider our beater that is $2,000 and already 10 years old it will only last us on average about 2 years. If we buy the same type of car then every couple of years we are spending two to three grand. That’s $12,000 for the 12 years you would have kept a brand new car, or $1,000 a year. That is quite a bit cheaper than our almost $23,000 new Malibu.
We also have to consider there is a chance that a beater won’t last you the full two years until you buy a new one. Unfortunately, there is no way of knowing for sure if the person or persons that owned the car before you have taken care of it and kept up on all the maintenance. In a worst case scenario you will be plopping down another $2,000 for another car in just 3 months because the one you had destroyed itself. This doesn’t include other scenarios where you may have to replace something on the car to keep it running. That $12,000 for 12 years of buying beaters can add up quickly.
Now let’s look at that same length of time for our cheaper, used 2010 Malibu. Including interest the total price of buying the car for 5 years is $15,983.40. Not too bad. Again that is assuming a good interest rate and good credit. With that being only 3 years old let’s assume that you can do all the maintenance on the car that you would to a new car. That way there is a good chance it will make it the full 12 years of life. That gives us a total of 9 years in your possession and only a small chance that something will go wrong. With some basic calculating we find the cost of ownership per year is $1,775.93.
Last but not least let’s do a quick calculation for our brand new 2013 Malibu. At $22,630.20 after all of our 0% payments and dividing that by 12 years of ownership, we get $1,885.85 as the cost of ownership per year.
So what do we get from all of this? Well first off buying a car a few years old is hardly cheaper than buying a new car and keeping it for the life of the car. It’s only about $110 cheaper per year!! Potentially however you can have a much cheaper cost of ownership on a beater if you buy them every couple of years and have nothing go wrong with them but there is a lot more risk of something actually going wrong with them.
Obviously you need to do what feels right for you but even just doing these calculations has opened my eyes a lot. If you really want to save money on a car the only way to really do it is to buy beaters every 2 years and at cheap prices. It doesn’t make sense to buy a slightly used car and buying a new car with 0% interest is just like paying cash for it anyway. Plus, if you are financing a used car every 9 years instead of 12 after a 5 year loan then you are only NOT paying a car payment for 3 years at a time instead of 6 or more years.
For me, unless something happens that completely changes my mind, I will continue to buy new cars every 12 years or hopefully even longer. Obviously anything can happen to any car but the peace of mind in a new vehicle is what tips me over the edge. I don’t have to worry about being stranded on the side of the road with a brand new vehicle as opposed to one that is already 10 years old.
Hopefully the numbers make sense to everyone. What do you think is the best decision? Which car would be better to buy for you?
Notes: As I was watching the news and writing this a report came on saying that the average car or truck in america is not 11.5 years old. That’s very good! Also Dave Ramsey has an alternative to car payments that you can find here. While I don’t agree with his thinking that it is NEVER ok to buy a new car, I do think this method is sound, especially for people in not so good financial situations, and thought it was worth a mention. In a near-future post I will go into some detailed calculations of how this works and how it can be extremely beneficial. In short though, it is the best of both worlds of buying a new car and not having a car payment.
One last thing worth noting. I have heard of but have not researched Gap Insurance. I hear it is very cheap to the tune of about $4 a month and if anything were to happen to your car, they would pay off the loan. Worth it? If anyone has any insight please comment. Thanks!