Sunday, December 31, 2006

Buying a car - new or old?

I'm not sure why there is ever a discussion on this topic. I've run through the calculations many times and there is never any way that a new car can be financially justified. One of the more important ways people get into financial trouble is buying depreciating assets. A car is the largest depreciating asset that most people buy. The worst financial decision is to buy a depreciating asset with credit.

Now some very smart people will try to convince you otherwise. A young man named Ramit who writes a blog called Iwillteachyoutoberich does just that. He tries to justify his decision with various reasons but in the end gives himself away when he talks about the "new car smell". This means in the end he made an emotional decision, not a financial decision. (The ironic thing is that "new car smell" is a mix of VOC's including benzene which can be harmful.) New cars depreciate quite rapidly - often 30% right off the lot. Add to that the interest nearly every purchaser pays and the cost of owning that car can double.

Now some people claim that they need a new car for business credibility. I don't buy that logic either. Confidence comes from within - not from external things. Now when I was young I too feel prey to the idea that I needed a shiny red RX-7 to impress the women. Fortunately, I've grown out of that phase although many middle aged men think they suddenly have to buy a new Vette for the same reason. My car strategy at the moment is to buy cars with good repair records that are 5-7 years old which I can pay all cash for. Typically my cars have close to 100,000 miles on them (cars today when maintained will easily go over 200,000 miles - everyone of my 12 cars has.) I keep them well maintained so they don't break down unexpectedly. My typical maintenance costs are less than $1500 a year including routine maintenance.

Let's assume you buy a new car for $25,000 with $3000 down and I buy a $3000 car cash. Now I don't carry collision or theft and carry a $1000 deductible - you'll have to carry collision and theft insurance. Here's a simple spreadsheet:

After 3 years the typical new car buyer is upside down in their car loan so there is no re-sale value per se. The new car buyer is out an extra $14K Vs my strategy.

I have grown tired of buying cars from dealerships. Even with the advent of kbb and other services, the dealers want to play a game of giving me far less than my car is worth and asking over kbb average retail values. Instead, the last 3 cars I have bought have all been on E-bay. I research the cars and history and only bid when I can get close to the wholesale value. So far this strategy has worked extremely well and I have no plans to change it. Even a sudden windfall would not tempt me.

UPDATE: an interesting link from AllFinancialMatters - The Real Reason You Are Broke

4 comments:

Draknor said...

I recently bought a car (60k miles) from a friend for $4k cash. I knew the friend, trusted him, and the car never had any major problems when we had it. I did some research online and found this particular model had a history of engine sludge problems. I took my chances and bought the car.

Now, less than 6 months later, I've put $2k into repairing the engine (yep - sludge), $500 new tires (not unexpected), and a couple hundred on shifter cable and brakework. Now the engine light is on (bad O2 sensor), the driver's side power window is off the track, and the trunk lid doesn't stay open.

Do you have a point in your history of used cars where you reach and say "No, this is costing too much to own"? At this point I've sunk nearly $7000 into it, with probably another $500 or so to go to fix the current known issues. Am I just throwing good money after bad? Or are random repairs like this par for used cars, and I'm still really coming out ahead?

Paul said...

Outside of the engine problems your maintenance problems don't seem out of line. I read recently where the run-flat tires on the Honda Odessey last only 32K miles and cost about $500 apiece to replace. I like to buy 80k mile tires and rotate every 5k miles (Dunn Tires does it free for me)

I've had a couple of bad experiences with cars. A big Ford van got to be too expensive to maintain. I also had a Dodge Intrepid with a fuel system that failed while on long distance trips 3 times.

If the car is what I call a "lemon" class (made poorly with lots of history of repairs needed, I'd get rid of it.

If you investigate a car and find a known problem - don't buy it (even if from a friend)! Do your homework before you buy.

zack said...

Hi Paul, I looked for a contact link but could not find one, so I will post a comment in the hopes that you will see it.

While I am fairly good at finances and investing, I am very bad at auto ownership. I'm totally sold on the buying used argument, but I don't want to screw it up. Do you know of any resources that teach a person how to identify a car with a good record and how to do basic maintenance or how to get professional assistance? I.e., when are mechanics too expensive, etc.?

Many thanks,
zack at hiwiller.com

Paul said...

I would check out Consumer Reports for the most impartial review of car reliability data.

My job is in the quality field and the company I work for sells about a third of our products to the auto industry. I can tell you that by and large the Japanese car companies are far more focused on producing a good quality product than are American based car companies. Toyota and Honda have led the pack in terms of quality for over 20 years now.