Purchase New Car or Used

June 11, 3:44 PMSan Diego Personal Finance ExaminerJerry Troyer

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Purchasing a car can be an analytical, cerebral, practical, emotional or material decision-making process. So many models, so many choices. All the while knowing that vehicles are a depreciable asset and therefore an investment that will be disposed of at some future time. Because vehicles are one of those necessary investments for us, we need to make prudent decisions rather than emotional decisions. That is what this article is about.

First of all, let’s look at it from an investment perspective. Investing in a vehicle is about like investing in an aggressive stock, except there is no upside potential. The only opportunity is to limit down side risk. The downside risk protection comes from routine maintenance, care and detailing of the car. Also, tracking resale values before you purchase is wise. Resale can vary greatly by model of vehicle.

Some of you sports car enthusiasts are saying “Wait a minute, some sports cars and luxury cars increase in value.” I concur. Yet, they increase in value only if you don’t put miles on them. If you store them and they are blemish free you may be able to have them appreciate in value. But that is certainly not the norm. The vast majority of us buy vehicles that we take up and down the highway everyday. We drive them in the sun, in rain and snow and foul weather. The vehicles depreciate in value, due to the wear and tear and miles we put on them. Additionally, vehicles depreciate based upon what “the market” will bear over time.

When do vehicles depreciate the most? Right at the time when we buy the new, high tech, thrills “ride” and drive it off the lot. New vehicles historically have the greater first year depreciation. Not that used vehicles do not depreciate. They just depreciate at a different rate after they are one year old.

My wife and I went to the Auto Show this last December. As your might imagine, we both saw our next dream car(s). The cars had a lot of features our cars do not have. Made us wish for one or two or three. With that said we both left a little sad knowing that we do not buy new cars and it wasn’t time for a different car. Yet, it was still fun to see what will be used models in a couple of years when the time to buy is right for us.

Back to depreciation. Below is an example of how much it costs to buy and finance a new vehicle. On the side-by-side comparison you will then see the cost of a used car when you have trade-in and enough cash to buy the used car outright. You will note that maintenance, loan cost, depreciation and resale value are included in the calculation.

  
You can see that the total four year investment for a used car is $16,000 less. The used vehicle still proves to be a much less costly investment. As for resale value you can see that both vehicles decline by about 50% over four years. Obviously if you buy new you will need to think of keeping the car for a minimum of four years. If you take out a five or six year loan you will need to keep the car at least that long. You will also observe that I have included a savings program where you invest the loan payment amount when you buy a used vehicle. That means you will be saving for your next vehicle while you are driving your current used vehicle. I calculated an investment return of 10%. Of course you couldn’t get that return last year, but in other years that is a reasonable expectation.

When you purchase the used vehicle, and save the payment amount each month for your next vehicle, you will actually have enough cash to decide if you want to buy a new vehicle at the end of four years. At that time there will be some model of vehicle that will once again smack your senses and make you think you can not live without. Yet, you must remember that any new vehicle will depreciate 20-30% in the first ear. Also, remember you will need to keep the vehicle for at least the length of your loan.

If you are in a position that you can not pay cash for a car right now, I encourage you to buy a used vehicle with a loan payment that you can afford. A payment that won’t be more than 5% of your take home pay and all your debts do not total more than 35% of your take home pay. Then keep the vehicle for two years after the loan is paid off and keep paying your monthly payment into your savings/money market account. After owning the vehicle for two years after loan payoff you should have a sizable down payment for your next vehicle. If you repeat that process three times you should be able to pay cash for a vehicle. That may seem like a long haul to be able to pay cash for a vehicle. But it is better than the alternative. The alternative of course is being continually in debt for a depreciating asset. Debt really means that you are pledging your future income to a creditor and you have no option as to whether to pay or not. You have made a written promise to pay. Your lender will be able to use all legal leverage to collect the payments because you have promised to pay.

My wife and I have lived by the principal that we keep vehicles for 8 years. When we buy another vehicle it is a one-year old model so we do not face depreciation to the same magnitude as if we would buy a new car.

When you buy your next vehicle be diligent. Investigate the model for maintenance and repair issues. See what models are most efficient in your climate. Check the resale value of a 7-8 year old model of the vehicle your want to buy. When you are ready to buy, make certain you know this purchase is a mid-term investment. After all that, go buy it and enjoy it.