Automobiles are among the biggest ticket items you’ll ever purchase. In fact, the average person buys 13 cars over a lifetime. The average cost of a new car in 2018 is approximately $35,000 according to Kelley Blue Book. Therefore, it’s really important to make good financial decisions when buying cars. The biggest decision is whether to buy new or used. Buying a 3-year old used car each time can save you as much as $100,000-$150,000 over the course of your lifetime.
Nearly twice as many people buy used cars than new cars each year. Last year (2017), approximately 40 million used cars were sold in the United States and about 17 million new cars. The average price of a used car is just under $20,000 while a 3-year-old used car (the most common age) is $22,685.
Depreciation: The Largest Expense in Car Ownership
Used cars may have higher maintenance costs; however, the total cost of ownership is still less due to lower depreciation, insurance, and registration expenses. Depreciation is by far the biggest expense. Depreciation is simply how much the value of your vehicle falls each year. Naturally, the value falls the most in the first three years and by as much as 15-20% the first day you drive it off the lot. Ouch!
Suppose you bought a new car for $35,000 and sold it three years later for $20,000. The car depreciated $15,000 over the three-year period or an average of $5,000 per year. Instead, let’s assume you bought the car when it was 3 years old for $20,000, kept it for 5 years (till the car was 8 years old), and sold it for $10,000. The depreciation expense would have been $10,000 spread over 5 years or $2,000 per year. The difference in depreciation expense in our example ($5,000 per year for the new car vs. $2,000 for the used car) can make a real difference over a person’s entire adult life. You can buy a lot of lattes with an extra $3,000 a year. 🙂
Certified Pre-Owned Cars:
You can usually get a certified pre-owned car if you buy from a dealer. Certified pre-owned (CPO) programs are usually available for late-model (2-3 years old), low-mileage used cars. Slightly used cars are more reliable than they were in the past because new technology has led to less maintenance and repairs compared to older vehicles when they were new. Another way to buy used cars is through websites that offer various guarantees, or vehicle inspections before purchase. I was really happy with my last used car purchase, which I found through Cars.com.
Researching Used Car Purchases:
There are a number of great websites to research used car prices, total cost over ownership for different models, reliability ratings, and how well a different model/brand holds its value. The three most popular automotive research sites are Edmunds, Kelley Blue Book, or Consumer Reports. Also, check out these two excellent articles: Is It Time to Replace Your Vehicle? and Better to Buy or Lease?
Why Buy New?
There are definitely some advantages to buying new, such as:
- You can get the latest safety, comfort, and entertainment technology.
- The car-buying process is much easier because you don’t need to worry about how the previous owner maintained the car.
- Less maintenance, better warranty, and more peace of mind.
- More financing options and lower interest rates.
- Your neighbors will be jealous.
The two scenarios that make the most sense to buy new instead of used are: 1) You are a business owner who leases your vehicle through your business and can write off the expense, or 2) You plan to keep your car for a very long time (10 years or more). I bought my last mini-van new through the Costco auto-buying program, which I highly recommend.
Final Thought on Buying New vs. Used:
Sometimes you can find great bargains on used cars, such as during the last financial crisis. Times are different now. Many folks thought that used car prices would be falling based on record numbers of cars coming off 2-3 year leases. However, the opposite has happened. Used car prices are setting records and are up 5% over last year, according to Manheim, the largest car auctioneer. Used cars are selling in an average of only 41 days, down from 55 days in 2005. Reasons for the higher costs include a strong economy, more Uber and Lyft drivers, and new tariffs on steel and aluminum.
Have a great week and feel free to email me with any personal finance questions: [email protected]