Buying Used vs Buying New

One of the prevailing wisdoms floating around the internet is that your best value when buying a car is to get one that is only a few years old The idea is that you avoid most of the first years depreciation, and the car should still have a number of good years left with minimal repairs and factory warranty left. This enables you to extend the warranty with a number of warranty companies to a 7 year 160.000 mile comprehensive warranty and not just the basic power train.

There are many different situations out there and the fact is that most people dont necessarily want to save as much money as possible on cars they just want to get the best value for their money.

Car Depreciation Amounts Per Year

Research on this shows that as a general rule, your car will depreciate about 20% per year. Now, Ive seen some ridiculous depreciation estimates like 30-40% as soon as you drive it off the lot. If this is the case, find this person and offer to buy their car and this ridiculous depreciated price.

This is just a rough estimate and given how great new car sales have been, its not surprising that Ive heard a number of stories that the difference in price between new cars and late model cars isnt that large. This is not a measurable number or exact science as every car differs, so Ill stick with the 20% number for my examples.

How long do you keep the car?

I think the length of ownership is just as important if not more so than the age of the car when you buy it. If you buy a car that is only a few years old and keep it for only a short period of time and keep buying more cars of the same age do they pay less depreciation than someone who buys a new car and keeps it for the entire time?

I found a couple of scenarios, and I have to admit the results surprised me I always thought that a new car buyer who kept the car a long time would pay less depreciation than someone who bought lightly used cars but didnt keep them very long. In fact, I was wrong sort of.

Scenario I

Depreciation rate is 20% per year.

New car is $30,000.
New car buyer keeps the car for 9 years.

Used car buyer buys the same car when 3 years old and sells at 6 years old he does this 3 times.
New car buyer pays $3486 more in depreciation (16% more).
This scenario doesnt include potential repair costs

Scenario II

Depreciation rate is 20% per year.

New car is $30,000.
New car buyer keeps the car for 10 years.

Used car buyer buys the car when 2 years old and sells at 4 years old he does this 5 times.
In this case, the used car buyer pays $7781 more in depreciation (29% more).

This scenario does not include repair costs as well. It is unlikely that a used car buyer would keep the car for only two years and repeat this 5 times, however this scenario offers an interesting comparison on new vs. used depreciation costs.

Other Factors to Consider

Reliability of the Car

This is part luck and part design you can research which cars are more reliable and buy one of those. You will probably pay more for that car than one that is less reliable so it could be a trade off. I dont have any good advice here except to say the less expensive cars usually North American are cheaper to maintain, no timing belts usually, parts are cheaper.

Gasoline Costs

This cost is hard to analyze because it is so variable. The price of gas alone is quite variable and of course some people drive very little others will put many miles on their each year. Some people drive more on the highway and some more in the city. Winter driving uses more gas. I would also like to add, due to the class action lawsuit against an unnamed automaker whose claims of gas mileage were not true. It is important to always check your own gas mileage and only use what the manufacturer says as a guideline.

That said, if you use drive the car a lot then you should factor in the gas costs into your analysis but only if you have the option of buying different cars which get very different mileage. If you need a certain amount of space for the family and have to decide between 2 similar vehicles, then dont worry about the gas costs since the difference probably is negligible. If you are deciding between two totally different types of vehicles, and you are going to use it a lot, then you better factor in the gas when determining the cost of ownership.

Needs and Wants

Larger vehicles tend to be more expensive in cost and operation. Are you buying a larger car by a want or need (i.e. large family)? If it is by want then you should try to compare your large car options with possible smaller (and cheaper) car possibilities. If you have already decided on the larger car, because thats what you need, then there is no point in this part of the analysis but it doesnt hurt to know how much your choices are going to cost.

Luxury models are the same thing obviously if you are shopping for an expensive BMW then comparing the cost to a Honda Civic that is pointless.