Used Car Sweet Spot

Buying a new car is always a bad decision. It doesn’t matter which brand or make or model. You will always lose money. It’s just a question of how much.

All new cars bleed value like the Titanic took on water after it hit the iceberg. Even the least-“leaky” ones, from brands with high resale value — Toyotas and Hondas, for instance.

Both make great cars, but that’s not the issue.

Depreciation is.

And even the cars with the highest resale value — Toyotas and Hondas — lose about 20 percent of their value during the first 12 months you own them. If you bought the car for $35,000 — which is the average price paid for a new car — you took a $7,000 haircut on the car during that first year.

Not counting the money you spent on full coverage insurance (based on the replacement cost of a new car) and property taxes, in states/counties that get into your pocket that way, too.

After six or seven years, that $35,000-when-new car will probably have lost about half its value, $17,500. That’s not a haircut.

It’s a scalping.

If you buy used, you only get trimmed.

Maybe not even that.

There is a sweet spot for used cars — the point at which they’ve depreciated so much they won’t depreciate much more and so are now very affordable — you can probably afford to pay cash — but aren’t anywhere near the end of their days as reliable transportation.

That sweet spot is generally located about 10 years from new — at which point the average new car will have shed about two-thirds of its original retail value. In our example above, the $35,000 when-new-car will have depreciated by about $23,000 — possibly even more.

You should have no trouble picking it up for well under $10k.

But will you have trouble?

Enter the Fear.

The main reason — after New Car Fever — people sign up for debt servitude by purchasing a new car is the reassurance of the new car warranty. That they won’t have trouble with the car — and even if they do, the repairs won’t cost them anything.

So instead, they pay a fortune for the new car. Plus the insurance and taxes on the new car.

That’s guaranteed “trouble.”

The used car will have miles on it; will have been used. This does not mean it will need repairs. It may, of course. But not necessarily.

A risk of possibly having to pay for a repair — vs. the absolute certainty of a fat car payment every month, for years and years to come. During which time you are absolutely guaranteed to lose money on your “investment.”

And, there’s this to consider:

A well-treated, well-maintained used car of fundamentally sound design can be less prone to trouble than a brand-new but poorly designed car. The used car will have a track record. If it has been reliable and largely trouble-free in the past, then it is a sound bet — based on actual experience — which it will continue to be a sound bet going forward.

Particularly if you have maintenance records for it, or knew the previous owner — and in either case have had the car thoroughly checked out before you buy it.

A new car is intangible in this respect. Unknown. Precisely because it is new. It may prove to be reliable. But it may not be. New cars are sometimes not reliable. They are warranted, of course. But you still pay — in terms of the hassle of owning an unreliable car. And for the car itself.

A used car can be a better bet.

Especially if it’s a known “good” make/model. Like the Toyota Camry or Honda Accord mentioned earlier. Earlier examples (both cars have just been redesigned, are “all new” — and so will have to establish a track record for reliability which the older cars already have) are safe bets, like going to a familiar restaurant. They were built in the millions — several hundred thousand every year — and most of the ones built during the past ten years are still going strong, with much more to go.

You’ll just pay a lot less to get there.

There are many such “good bets” out there.

The fundamental financial beauty of the used car sweet spot is that once it gets there, it largely stays there; it won’t lose value at the same rate — or to the same degree — ever again.

It has plateaued.

The car you paid say $8,000 for this year will probably be worth about the same next year — in stark contrast to the new car, which loses 20 percent of its original value during the same span of time. And even if it loses half its value after a few years, you’ve only lost $4,000 — as opposed to the $23,000 in our example above, not including the higher cost of insurance and taxes.

I’ve been driving a 2002 Nissan Frontier pick-up with the four cylinder engine (avoid the V6!) since 2007 without it needing more than the usual things all cars — new or used — need, such as oil and filter changes, tires and brake work.

I paid $7,200 for it 11 years ago. It’s still worth about $4,000.

If you paid cash — as I always do — you also won’t have paid the opportunity cost of having your money tied up in monthly car payments — and a rapidly depreciating appliance which is worth less and less the longer you own it.

You’ll be functionally richer with each passing month you didn’t have to make a monthly payment. Put that money in savings and you’ll have money for any repair that comes up.

And if it doesn’t come up, you’ll still have the money.

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One Response to “Used Car Sweet Spot”

  1. Bruce Liddel says:

    To be sure, I’ve only ever purchased two used cars, and both were Chevy Vegas, but OMG they had all sorts of hidden problems from worn rings to cracked blocks, to hidden body damage to rolled-back odometers. Never again, I swore, in 1977.

    I seriously considered a used Toyota Camry in 2000, but then took it to a mechanic who found it needed about $4,000 in repairs. The dealer would not budge on the price, so it was actually cheaper to buy a new Camry, with a warranty. We still have that new car – now 17 years old, with 130,000 on the ODO. It is amazing what proper Preventative Maintenance can do for the life of a vehicle. I put over 300,000 on a 96 Honda that I bought new – and then still sold it for $1,200.

    If you keep a car forever, like I do, that depreciation cost disappears into the noise.