Why Should I Buy a Used Car?

When I first started driving, I drove a real beater car; one of those 80s American cars. The power steering didn’t work too well, the passenger side floor had a hole in it, and the head gasket blew after only a few months of driving. After repairing that, one of the pistons melted, and after repairing that… I got rear-ended, so that was that.

The second car I got was an old Toyota Corolla with a manual transmission. The engine was a lot more solid (and it was carbureted! Just to show you how old the car was…), and I was able to beat the heck out of it without any problems with the drivetrain. The body, on the other hand, was falling apart, and so were some of the mechanics.

When I bought the car, I had to replace the radiator right away since the one it had was leaky. I had to change the brakes since the ones I had no longer worked. One of the rear wheels was hanging on by only one suspension arm, since the other one had rusted completely through. The tires were literally worn down to the metal; you could see the wires through the rubber. I drove that car until one day the tires exploded; it was to the scrap heap from there.

After that point on, I had a bit more money, I was working, and I decided to stop playing with my life and buy a new car. I also didn’t want people to be scared for me (or themselves!) because I was driving around in a scrap heap. While the new car was a lot more secure and a lot more reliable, it wasn’t the greatest financial decision; my insurance skyrocketed, and I now had car payments to pay!

I compounded the mistake by exchanging it for another car 4 years later. Let’s face it, it is almost too easy to buy a new car these days. Whereas some banks will turn you down for financing a used car, almost nobody will turn you down for financing a leased vehicle.

I’m in a different phase of my life now, and I’m realizing just how expensive car ownership is. Since I’ve already paid most of the depreciation on my current car, I’m considering sticking with it for the long haul. How about you? I’ve prepared an analysis below to compare three different situations with the same type of car:

• Lease a new car every four years, for twelve years.
• Buy a new car and keep it for twelve years.
• Buy a used car every four years, for twelve years.

Before we get into the analysis, let’s look at a couple reasons why people buy new cars: status and reliability.

Reasons not to get a new car

People (especially young people) often give silly justifications to themselves in order to justify spending money on a new car. They can include the following:

“A new car will help me get the girls!” (status)

Not necessarily. A new car might impress a girl into getting into your car, but it doesn’t necessarily mean that she will stay around, or that she’s the right type of girl for you. Also, there are plenty of older cars that will impress a lot more than your standard everyday new car. For example:

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  Source: http://musclecars.howstuffworks.com/classic-muscle-cars/1969-chevy-camaro-z28.htm/printable

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  Source: http://naeomi.livejournal.com/

Which car do you think will impress a girl more? Or, to ask it another way, which car do you think will impress your guy friends more?

“A new car will give me less headaches and cost less in maintenance!” (reliability)

Not always true. This is what I thought, but you don’t have to buy $500 beaters like I did, and don’t forget that many new cars have recalls or manufacturing defects that also cause problems. It’s said that new cars can help improve gas mileage, but one must consider the total costs of car ownership and not solely the costs of gas alone.

Many of the older Japanese cars are very reliable and require little out of the ordinary other than regular maintenance, and can also be had for a cool $3000 to $5000. They will also cost significantly less in insurance than a new car. If you live in a region with strict emissions controls, then you do want to verify that passing inspections won’t cost you a fortune in order to get the car certified.

So, still think it’s worth it to buy a new car? The conventional wisdom says no. The conventional consumer says yes. I say… it depends on what you’re looking for. A new car can bring emotional joy that you just don’t get with a used car, not to mention that you can customize it how you like with your own color and packages (on the other hand, you can spend the same amount of money and get a really nice luxury or sporty used car). This emotional satisfaction does come at a price though, and the buzz does wear off after a couple of months.

If you don’t care about any of this emotional stuff, then a used car makes more financial sense. A good chunk of depreciation happens right after the car is driven off the lot, so you can often find a good deal on an “almost new” car.

Certain cars (i.e. Honda Accords, Toyota Corollas) hold their value well over the years, so you can drive the car for many years and still sell it for a decent chunk of change. Why? Well, these cars have a reputation for being reliable, and the reputation is usually deserved, so you will have less headaches over the long run. For someone who really knows their way around cars, a cheap American car might be a better purchase, as the parts are cheaper and the cars are sometimes easier to work on.

The analysis

Here are the assumptions:

• New car purchase price: $24 000
• Depreciation: 20%/year, 10%/year after 8 years.
• Maintenance & repairs: $600/yr for the first 4 years, $850/yr for the next 4 years, and $1100/yr for the last 4 years.
• Tires cost $800/4 years.
• Insurance costs 8% of the current value, with a minimum price of $500/yr.
• Financing costs are ignored.

Here are the scenarios:

• Lease a new car every four years, for twelve years.
• Buy a new car and keep it for twelve years.
• Buy a used car every four years, for twelve years.

And finally, here are the numbers:

Lease a new car every four years, for twelve years

Year	Value, end of year	Maintenance	Insurance
1	$19,200	$1,300	$1,536
2	$15,360	$600	$1,229
3	$12,288	$600	$983
4	$9,830	$600	$786
5	$19,200	$1,300	$1,536
6	$15,360	$600	$1,229
7	$12,288	$600	$983
8	$9,830	$600	$786
9	$19,200	$1,300	$1,536
10	$15,360	$600	$1,229
11	$12,288	$600	$983
12	$9,830	$600	$786
Total cost, car				$42,509
Total cost, maintenance				$9,300
Total cost, insurance				$13,603
Total cost				$65,412
Total cost/year				$5,451

Buy a new car and keep it for twelve years

Year	Value, end of year	Maintenance	Insurance
1	$19,200	$1,300	$1,536
2	$15,360	$600	$1,229
3	$12,288	$600	$983
4	$9,830	$600	$786
5	$7,864	$1,650	$629
6	$6,291	$850	$503
7	$5,033	$850	$500
8	$4,027	$850	$500
9	$3,624	$1,900	$500
10	$3,261	$1,100	$500
11	$2,935	$1,100	$500
12	$2,642	$1,100	$500
Total cost, car				$21,358
Total cost, maintenance				$12,500
Total cost, insurance				$8,667
Total cost				$42,525
Total cost/year				$3,544

Buy a used car every four years, for twelve years

Year	Value, end of year	Maintenance	Insurance
1	$4,027	$1,900	$500
2	$3,624	$1,100	$500
3	$3,262	$1,100	$500
4	$2,936	$1,100	$500
5	$4,027	$1,900	$500
6	$3,624	$1,100	$500
7	$3,262	$1,100	$500
8	$2,936	$1,100	$500
9	$4,027	$1,900	$500
10	$3,624	$1,100	$500
11	$3,262	$1,100	$500
12	$2,936	$1,100	$500
Total cost, car		(car sold for $2,642)		$4,155
Total cost, maintenance				$15,600
Total cost, insurance				$6,000
Total cost				$25,755
Total cost/year				$2,146

Summary

As you can see, for the same type of car, it is more economical to keep driving the same car for 12 years rather than to replace it three times. It is even more economical if you buy the same car 8 years used instead of new.

Disclaimer: The numbers here are a general extrapolation from my own experiences, and they can work out differently for different people. Andrew Hallam, for example, has a story to share about selling used cars at a profit instead of eating the depreciation, which makes the case for buying a used car even more compelling. Of course, it’s not always about the numbers. I’d love to hear what you think!