Buying a New Car vs. a Used Car

Two well known car buying tips are that 1) they are indeed not investments, but expenditures and 2) their value depreciates greatly the minute they are driven off of the lot.

But, the question remains, if you can afford either a new or used car, which should you buy?

To help us figure out this questions, let run through a couple quick examples cases – Bob and Larry (both 30 years old).

According to the article below, in the first year of ownership, a new car can lose up to 20 percent of its value, and by the fifth year, your car will depreciated by over 65 percent. On average, the life expectancy of a new car is 7 or 8 years.
Depreciation of a Car, Years 1-5

Bob’s Situation
Bob only buys new cars. So, let’s assume that he buys a $20,000 fully stocked Honda Accord every 7 years, as the website states.

Larry’s Situation
Larry only buys used cars. In fact, he is so particular, that he only buys 1 year old fully stocked Honda Accords. Applying the 20% depreciation rate during this first year and assuming for simplicity that his Honda Accords were originally worth the same $20,000 price that Bob’s are, Larry will buy a $16,000 Accord every 6 years (still assuming the 7 year life of the car).

Let’s now assume that this pattern continues until the guys retire at age 66. At the end of this period, Bob has bought 6 new Accords, and Larry has bought 7 used Accords. Suming up the totals for each person, it can be seen that Bob has spent 120K on new cars, and Larry has spent 112K on used Hondas.

This is a difference of $8,000, or an average of $222 per year that Larry saves. This amount is not overly impressive, especially when you take in to account that Larry will have slightly increased maintenance costs with the car being used.

However, if we look back in our example, we are assuming that Larry actually can afford a new or used car, but just opts to purchase used. So, let’s assume that each year he buys a car, he takes the $4000 that he saves by buying a used car, and invests it in his retirement account at an interest rate of 12.4% until retirement at age 66.

What does the total come out to now? The result is much more impressive. Larry will have $471,588.79 in his account due to the miracle of the Time Value of Money!

What’s the morale of this story? Well, if you can find a good used car, and don’t mind the extra headaches of getting it repaired a little more often, your pocketbook will sure benefit!
Keep on learning!

Jacob

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