Should I Buy a New or Used Car? Pt 1
Your current vehicle is getting old. It’s time to upgrade. But should you get a new vehicle? Or a “new used” vehicle? How does that play into our financial planning? What are the pros and cons of each, and how do we best decide?
New Car Pros & Cons
Pros
Cons
Used Car Pros & Cons
Pros
Cons
Math vs. Values
Financial Planning is aligning one’s use of capital with their values. Part of that is emotion. Part of that is math. Let’s look at the math of the decision in this episode, and in part two we will look at how it affects the financial plan.
The Math of Operating a Vehicle
Suppose you are looking at getting a new-to-you vehicle and are examining three versions of the same make and model:
The math should not be done on the purchase price alone. The math should be calculated on the total operating cost of the vehicle over the time you use it. This includes:
Net Cost
A new vehicle will lose about 60% of its value in the first five years. If you buy it for $40,000, it will likely be worth $16,000 when you sell it or trade it in at the end. That’s a $24,000 net cost. Most of the depreciation happens in the first year or two. A used vehicle won’t depreciate as quickly. The next person who buys the vehicle for $16,000 and holds it for five years may be able to sell it for $10,000, about a 40% loss in value. This would be a $6,000 net cost. The next person may be able to sell it for $6,000, etc.
| Cost | New Car | Used Car | Very Used Car |
|---|---|---|---|
| Net Cost | $24,000 | $6,000 | $4,000 |
Financing
Financing costs will add up. Buying the $40,000 vehicle using an auto loan at a 2.99% interest rate will create a $718 payment. After 60 months, you will have paid $43,114. So that’s $3,114 of interest over the five-year “lifespan.”
Used vehicles get higher rates. It might be 3.99% for a five-year-old car, and 4.99% for a vehicle that is ten years old. It’s a higher rate, but on a lower amount. So there will be less interest overall.
You may have other fees for financing, but let’s ignore those for now.
| Cost | New Car | Used Car | Very Used Car |
|---|---|---|---|
| Net Cost | $24,000 | $6,000 | $4,000 |
| Financing | $3,100 | $1,700 | $1,300 |
Repairs & Maintenance
Maintenance will often be covered under new car contracts, which is an attractive feature. We’ll assume some basic expenses for the used car: $120 per year in oil changes, tires once during the stretch, and other costs. Double it for the next owner.
Repairs scare many people away from getting a used vehicle. They love the warranty on a new car. On that topic, don’t buy the extended warranty. It’s not worth it. In general, the repair costs of used cars aren’t as bad as people think. If you get a good vehicle (one known for reliability, such as a Toyota or Honda), the repairs are not bad. They just surprise people who aren’t budgeting for them.
| Cost | New Car | Used Car | Very Used Car |
|---|---|---|---|
| Net Cost | $24,000 | $6,000 | $4,000 |
| Financing | $3,100 | $1,700 | $1,300 |
| Maintenance | $0 | $2,000 | $3,000 |
| Repairs | $0 | $2,500 | $5,000 |
| Total Cost | $27,100 | $12,200 | $13,300 |
Based on these numbers, you can see that buying a new car is more than twice the cost of buying a used car. But if a very used car is as too much more in repairs and maintenance, it can be even more expensive to buy a very used car than a slightly used car. At least, it is if you ignore the opportunity cost.
Opportunity Cost
What else could you use the money for? You could always invest it.
Let’s say you’re planning to use an auto loan and make payments as above. Your payments would be as below. Then we take the total maintenance and repair costs and average them across the sixty months to get our total monthly cost.
| New Car | Used Car | Very Used Car | |
|---|---|---|---|
| Monthly Payment | $720 | $295 | $190 |
| Total Monthly | $720 | $370 | $323 |
Let’s also assume that you “need” to get a car. Thus, a very used car is the minimum you could buy. Not only are the others more expensive, but that cost is also keeping you from investing more.
Assume you have $720 to spend. You can spend it all on a new car or part of it on a used or very used car and invest the difference to grow tax-free at 8% in a Roth IRA. The table below shows the results at the end of five years. Below that is the result if you left that sum invested for another twenty years (twenty-five years total) at 8% without adding anything to it.
| New Car | Used Car | Very Used Car | |
|---|---|---|---|
| Investments (5yrs) | $0 | $26,000 | $29,000 |
| Investments (25yrs) | $0 | $128,000 | $143,000 |
Thus, the opportunity cost of buying a new car, or even a used car vs. a very used car is as follows.
| Cost | New Car | Used Car | Very Used Car |
|---|---|---|---|
| Net Cost | $24,000 | $6,000 | $4,000 |
| Financing | $3,100 | $1,700 | $1,300 |
| Maintenance | $0 | $2,000 | $4,000 |
| Repairs | $0 | $2,500 | $5,000 |
| Opportunity (5yrs) | $29,000 | $3,000 | $0 |
| Opportunity (25yrs) | $143,000 | $15,000 | $0 |
Thus, the total cost of each decision would be the following over 5 and 25 years.
| New Car | Used Car | Very Used Car | |
|---|---|---|---|
| Total Cost (5yrs) | $56,000 | $15,200 | $13,300 |
| Total Cost (25yrs) | $170,000 | $27,000 | $13,300 |
It would cost you $170,000 over 25 years to drive this new car for the first 5. If you repeat this process every five years, your cost of owning new cars starts to balloon into millions of dollars.
Buying new cars when you shouldn’t is one of the main reasons middle-class Americans don’t achieve wealth. Most people shouldn’t buy brand new cars.
But does that mean no one should? How does this math square up with our values and the rest of our financial picture? We’ll look at that in the next episode.
This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are the opinions of the people expressing them. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. RetireMentorship is not affiliated with any Registered Investment Advisor, Broker-Dealer, or other Financial Services Company.
