Because not all of us can afford to hire someone to carry us on a rickshaw, it’s the Financial Uproar guide to buying cars. And I would know, since I’ve bought exactly one of them.
It’s been repeated so many times it’s practically cliche. You should buy a late model used car rather than the same model new. Vehicles lose a full 25% of the value once you drive them off the lot, didn’t you hear? Of course you have, since it’s been repeated by every person in the history of ever. And while you’re at it, you better buy a Toyota or a Honda, since they’re 749% more reliable than their North American brethren.
I’ll admit, I used to buy into these rules as well. I would have bought a Toyota Corolla, but my crappy little town has no Toyota dealership, and I wanted something that was new enough there’d still be some warranty attached. I also bought a leaseback, because the 4 year old Ford Focus was something like 60% cheaper than the new one. My car had low mileage, meaning there was lots of life left in it. The intent was to drive it into the ground. It’s 6 years later and I’m still driving it.
However, a lot has changed in 6 years. Those hard and fast rules I mentioned earlier? Throw them out the window. Stuff is all messed up – with one big caveat. It all depends on the model.
The difference in price between a new and a used Toyota Corolla is only a couple thousand bucks, which is only 10% or so in depreciation over a year or two. The same thing applies for all sorts of other models too, mostly the in demand foreign cars. If you’re looking for a couple year old North American car, most models can be found at a 25-40% discount compared to a new one. The reason why comes all the way back to the principles of economics. Foreign models are in demand right now, and Honda and Toyota just haven’t caught up to the demand in North America. Plus, all the various Cash for Clunkers programs took a crap-ton of used cars off the road.
If you add in super low financing rates, you get an equation that makes it awfully tempting for people to buy a new car. So they do it. For most people, buying a car involves two variables: what model and how old. If in demand models only depreciate by 10% a year, they’ll probably choose new over used. If their model of choice depreciates 25% a year, used probably has the inside track. When we look at these variables, people are logical when it comes to buying.
But then, as soon as they start to get all logical about buying, most people abandon that logic faster than North Carolina banned gay marriage. (SORTA TOPICAL!) There are two things people really screw up on when it comes to buying. One is getting stuck on a specific model, and the other is limiting their search to stuff only a few years old. Let’s start with the model.
These days, crossover SUVs are more popular than beer at a frat party. Everyone has one, including my cheap, cheap Dad. (He doesn’t read my blog because HE DOESN’T LOVE ME!) They’re like an SUV but smaller and better on fuel. They’ve got enough space to drive the rugrats to soccer practice and enough space for that one time a year your wife makes an IKEA run. (Swedish for crap, amirite?) It’s all great, except one thing. Crossovers are just minivans. If you’re willing to suck it up and buy a minivan over a crossover, you’ll save thousands of dollars. But nobody does, because it’s unmanly for a guy to drive a minivan. And because crossovers are cool.
Because we get hung up on certain models, we unnecessarily pay thousands of dollars more for a car just to buy something cool. When you shop for your next car, do some research on what models just aren’t moving. Car dealerships hate having crap on their lot, so they’ll price it to move.
Secondly, we need to stop with this fallacy that new or next to new cars are the only vehicles that are reliable. Cars aren’t like that older lady who used to be hot but now isn’t – they don’t deteriorate simply by existing. They deteriorate from being used, not from sitting in the garage. Which means, from a mechanical point of view, a car with 70,000km is the same, no matter if it’s 2, 5 or 10 years old. It’s the amount of wear and tear on a car that matters, not the age. As creepy 30 year olds who want to date 19 year old girls say, “age is only a number.”
Yes, older cars with very few kilometers on them are hard to find. But there’s huge advantages to buying one. Assuming 20% depreciation, here’s what a $25,000 car would be worth over a decade:
Look guys, I made a spreadsheet. Tell everyone.
Even if you buy the proverbial lemon, you can still fork out thousands of dollars in repairs (and rent a car in the meantime) and still be tens of thousands of dollars ahead of the guy who bought the same car new. You’ll pay a premium for a car with low kilometers, but it’s still considerably cheaper than the alternatives.
Look for cars that old people used to drive, but they’re now dead. This sounds bad, but hear me out. Old people drive rarely, at a very low speed, maintain their cars well, and are likely to have the resources to store the car in a garage. That’s the golden ticket of buying an older car that’s barely been used. Just be respectful and wait until the funeral is done before you ask to test drive Grandpa’s ride.
The advantages don’t stop there. If you drive an older car, you don’t feel the need to make every single little repair. If your car gets a small dent, you’ll just keep on driving. Plus, you can save all sorts of money by not needing collision coverage on your insurance. All you have to insure is the other guy, since your car will be cheap enough that you can afford to take that risk.
I haven’t touched leasing, because that’s the equivalent of lighting your money on fire. Don’t do that, unless you have a way to write it off. Even then, I’m not entirely sold on the benefits of leasing.
To summarize, buy something old with low mileage. If you really want something newer, a brand new car might be better than a used one. If you do buy something new (or close to new) though, can you just admit vanity plays a big role in that decision?