Buying a car – why it makes sense to buy used.
I have recently been considering trading-in my car, which I purchased new, for a used SUV. Yesterday, I was reading Ramit Sethi‘s blog, I Will Teach You to be Rich, and came across his post on why to buy a new car versus a used one.
Initially, the thought of buying a new car versus a used one flies in the face of my own reasoning. I have thought that it was common knowledge that a new car loses value as soon as you drive it off of the lot; but this post made me reconsider the validity of this logic.
Ramit’s main reasons for buying a new car were simple: “Reliability,” “A decently-nice-to-pretty-nice car,” and “Insurance.” His argument is that there is more value in a new car than a used car. This should be pretty easy to verify.
So to purchase a new 2009 model Honda Civic EX-L Sedan, one would ostensibly need $21,470. To purchase the same car in a 2008 model in excellent condition with 15,000 miles from a private party, one would only need $17,240, a savings of $4,230 or 19.7%:
If one were to buy the same car in “Fair” condition, they would save almost 30%!
Kelly Blue Book takes new car information one step further and estimates resale value:
According to this graph, if you buy a new Honda Civic, you will lose 39% of its resale value in the first year, 8% in the second, and 5% in the third and fourth.
Edmunds.com presents this data in a slightly different fashion:
While this data is addressing the different respective model years (completely different cars) what it shows, is that for the most recent full model year, 2008, one would lose approximately 19% in the first year.
I cannot think of a single investment, other than a new car, that someone would willingly purchase with the knowledge that they are going to lose 19% to 39% of their principal in the first year! (I know a car is not an investment in most peoples minds, but it should be treated as one.)
Ramit addresses one other aspect of purchasing a car: the cost of ownership. Edmunds displays this in an easy to understand, year-by-year comparison:
This chart shows, once again, that a buyer will save $2,698 (31%) in the first year by buying a car that is one year old. While this doesn’t address financing, the financing number would need to be more than double the above estimate in order to make a new car more attractive. This is unlikely to be the case, based purely upon the model year (your own creditworthiness is another matter).
This data makes it clear that a car buyer can save up to $6,928 (savings on purchase price + maintenance costs) by buying a Honda Civic that is just one year old and in “Excellent” condition from a private party. In this case, most cars will still have a factory warranty to address any major & unforeseen problems, not taken into account in the above analysis (the types of problems most new cars will have too!). Not to mention, they will often look like a brand new car.
If you’re considering a new car, forgo the new car smell and buy a one-year-old vehicle. You will be immediately saving yourself well over 20%!
When buying, be smart and avoid bright colors, unpopular options, after-market stereos, and high levels of customization. This will ensure that you have the highest resale value of your vehicle.
(Note: the Honda Civic retains its value upon resale better than nearly all of common car models I researched. If you are considering a different make and model, you will likely save even more by buying a one year old car.)