Cost-effective to buy a new car?

[Incubus]

(Recap)

I am currently still hunting for a full-time job. Fortunately, things are picking up for me- my current part-time job has extended my hours to more or less full time (minus the benefits associated with working full time; I'll write a pit thread on that later) and I'm currently in the process of trying to get hired at a stable full-time job.

If all goes well (knock on wood), my income will almost double, jumping from $19,000/year to $36,000/year. Its still not that much, but for a guy living alone I'm optimistic since I've managed to survive on the lower amount for several years now. The major perks I see, though, are employee-covered healthcare and paid time off. Those will technically boost my cashflow even more. Right now I have to deal with the high costs of poverty- high deductibles on my car and health insurance (to even be able to afford them), credit card debt, and no renters insurance. In short, I'm living independently on borrowed time and I know it, hence the drive to get a better paying job to afford to build safety nets.

My goal is to pay off existing credit card debt (about $3,000) and maybe have about that much as an emergency fund. Once that is done, I want a new (affordable) car.

When I told some of my friends I really want a brand-new car when I get a new job, they told me it would be a bad idea- the increased insurance costs and intrest on car payments wouldn't justify having a brand-new vehicle. My current car runs okay, but it has 97,000 miles on it and if it died on me today I wouldn't have the money to replace it. I feel like having a new car (with a warranty) would give me more long-term reliability, since planned expenses seem less expensive than unplanned expenses.

If I did buy a new car, I'd get something <$20,000, with good mileage and reliability. But my friends insist on sticking with another used car.

[DrDeth]

Originally Posted by Incubus

(Recap)

My goal is to pay off existing credit card debt (about $3,000) and maybe have about that much as an emergency fund. Once that is done, I want a new (affordable) car.

When I told some of my friends I really want a brand-new car when I get a new job, they told me it would be a bad idea- the increased insurance costs and intrest on car payments wouldn't justify having a brand-new vehicle.

If I did buy a new car, I'd get something <$20,000, with good mileage and reliability. But my friends insist on sticking with another used car.

The CW used to be that buying a new car wasn't the best way to go, finance-wise. They used to say either buy a 1 yo almost-new car, or buy a beater that runs well.

But this has changed, and what has changed it the way cars are financed. If you have Good credit, you can buy a new car with 0% financing for up to 60 months, direct from the dealer, while your bank may want 7%.

On a used car, the finance rate is around 2% higher, an you are not going to get that 0% dealer financing. So, the CW is now wrong- but only due the the "price war" going on with car manufacturers.

The Honda Fit is very reliable and roomy, and runs around $14K.

[Sam Stone]

I think the 'sweet spot' in terms of value is found in vehicles that are 2-3 years old. New enough that they still have significant warranty left on them, and were most likely maintained according to the factory maintenance schedule (check the paperwork to make sure). A good one will still look new, and if placed beside a current model in a showrooom you might have a hard time telling the used one from the new.

And yet, these vehicles are typically 30-60% cheaper than a new car. The bulk of the depreciation on a vehicle happens in the first three years, so you can avoid that hit and buy a car that's still reliable and under warranty.

Six or seven years from now, the one you bought new and the one you buy that started out 2 years old will be roughly equivalent in value and reliability - no more than a 10% difference between them, most likely. Yet the one you bought used will have a lifetime expense much, much lower than the other. Not just in reduced purchase price, but lower financing costs and reduced insurance costs.

You can make the deal even sweeter if you take the lower price and use it to lower the amortization. i.e. If you could afford $300/mo for a car payment, buying a used car will cut the amortization time in half. The other option is to buy used, but spend the same money and get more car (instead of a new Civic, you could get a used Accord V6, for example). Then you won't save money on interest, you'll just have a better car. But if you buy the same class of car, the used one will cost you less, and by maintaining the same payment you would have spent on a new one, you'll save a bundle on financing.

That said... Sometimes you can find incentives on new cars that makes the used option not so good. The last car I bought came with a $5,000 factory rebate, plus 0.9% financing for four years. The equivalent 2-year old used vehicle was only a couple of thousand dollars cheaper, and financing was at 6%, which completely eradicated the cost savings, making it a no-brainer to buy new.

[LinusK]

The problem with buying a used car is you're too-often buying somebody else's problem. Dings and scratches are optional, but reliability is not Actually getting where you're going is the whole point of having a car.

Years ago I was in the same situation, and I went the new-car route. I'd estimate I'd have gone through 2, and maybe 3 used cars since then, and I'd have spent many more hours stranded on the side of the road, too.

[Harmonix]

36K Is NOT alot of money.

If your current car isn't on its last legs then stick with it for a year until you pay off your Credit card + build money for a downpayment. Then go looking at a new or new to you car. It sounds like you have no money for a down payment and 100% financing a car is a bad idea.

[A.R. Cane]

I think you'll find that 0% financing hard to qualify for, and probably not for more than 2-3 years even if you do. They might promise you low, or 0%, to get you to sign a deal, but then you'll get a call a couple of days later telling you you didn't qualify and they got you a sweet deal at a higher rate.
I'd suggest you keep your present car, as Harmonix said, for a year or two, until your secure in the new job, have your debts paid off and a healthy down payment, at least 20%. Then you'll be in a much better position to get a good deal.

[Incubus]

Originally Posted by Harmonix

36K Is NOT alot of money.

If your current car isn't on its last legs then stick with it for a year until you pay off your Credit card + build money for a downpayment. Then go looking at a new or new to you car. It sounds like you have no money for a down payment and 100% financing a car is a bad idea.

Well, that was the plan all along- get rid of the credit card debt (which, according to my FICO statements is working against me right now).

The point I was trying to make is that I want to get a car while I'm in a position to make a careful decision on my timetable. I don't want to wait until my current vehicle breaks down since there will be expenses associated with finding a replacement vehicle/transportation/repairs.

[Kalhoun]

My husband is a new car guy. I'm a "good used car" gal. I also bought a warranty with it, which was damn near the same as a new car warranty.

Our '92 Ranger, purchased in '96, is still running. And my car payment was only $150/mo. You can't beat it.

[A.R. Cane]

Originally Posted by Incubus

Well, that was the plan all along- get rid of the credit card debt (which, according to my FICO statements is working against me right now).

The point I was trying to make is that I want to get a car while I'm in a position to make a careful decision on my timetable. I don't want to wait until my current vehicle breaks down since there will be expenses associated with finding a replacement vehicle/transportation/repairs.

I think it depends on you making a realistic assesment of your present car. 97 K isn't a lot on most newer cars, all else being equal, your car should be good for 2-3 more years. Is the car giving you trouble? Do you maintain it well? Only you can make the judgement, but, given the info. you've provided, it seems logical to wait until your in better financial shape before considering a major purchase.
Buying a used car isn't as risky as some think, if you do your homework and choose wisely. Check Carfax and have it inspected by an independant mechanic before you buy. Buying used from a private party is probably smarter than from a car lot.
Don't buy a new car just because you want one, be smart.

[Dewey Finn]

I bought a two-year-old Honda Accord eleven years ago. After buying it, I looked at the prices of new Hondas and figured that I saved very little by buying the car new, since Accords hold their value so well. It seems to me that if you buy a car brand-new, you get the full warranty and if you hold it until it dies years later, who cares whether it depreciates?

But I agree that a $36,000 salary is not a lot, especially not in San Jose, so if you can postpone the expenditure, you should do so.

[Small British Shop Owner]

I would recommend that if you are concerned about reliability you buy a few bangers until you are earning the big bucks.

See http://bangernomics.tripod.com/

[Cheesesteak]

It's pretty much never "cost effective" or "cheaper" to buy a new car vs. a used car. If it was cheaper, everyone would choose new, and the price of used would fall until it's cheaper to buy used. The market only makes sense if used cars are less expensive.

You buy new because you want a car that's new, and there's nothing wrong with wanting a new car. If your primary goal is to buy cheap, buy used.

Cars, OTOH, are the only product where others will feel the need to "advise" you on purchasing used in order to save money. Of course, they have no problem spending their own money on all sorts of new stuff like clothes, furniture and food, instead of saving money buying cheaper used versions.

[Lunar Saltlick]

Originally Posted by Sam Stone

... The bulk of the depreciation on a vehicle happens in the first three years...

Is this always true, though? We bought a new Honda Civic hatchback in 2000, and we looked at used models that were two or three years old, and, frankly, there wasn't a huge difference in price. Used Hondas that were 12 to 36 months old were in such high demand they only stayed on the lot for an afternoon at best. I think you're generally correct with many makes of car, but there are some makes out there that defy generalization.

My only advice to the OP is to buy a car that historically retains its resale value. Whether you bought it new or used, you can always ditch it if necessary to buy something cheaper.

[DrDeth]

Originally Posted by Cheesesteak

It's pretty much never "cost effective" or "cheaper" to buy a new car vs. a used car. If it was cheaper, everyone would choose new, and the price of used would fall until it's cheaper to buy used. The market only makes sense if used cars are less expensive..

If you take a late model used car for $12,000, and the loan rate on that is 7%; compared to the new model for $14,000 and the loan rate is 0.0%, which is cheaper? You may assume either a 48 or 60 month payoff.

Now, really, it is cheaper for dudes with Good credit to buy new. It's those dudes without Good credit who can get a used car cheaper.

[brad_d]

Originally Posted by Cheesesteak

Of course, they have no problem spending their own money on all sorts of new stuff like clothes, furniture and food, instead of saving money buying cheaper used versions.

Used food?

[Small British Shop Owner]

Originally Posted by brad_d

Used food?

Oh, it exists!

In larger cities here many supermarkets will donate their just before out of date food to homeless shelters and the like. Pret a Manger even makes a policy out of it.

The other kind of used, not so much.

[Small British Shop Owner]

Originally Posted by Lunar Saltlick

Is this always true, though? We bought a new Honda Civic hatchback in 2000, and we looked at used models that were two or three years old, and, frankly, there wasn't a huge difference in price. Used Hondas that were 12 to 36 months old were in such high demand they only stayed on the lot for an afternoon at best. I think you're generally correct with many makes of car, but there are some makes out there that defy generalization.

My only advice to the OP is to buy a car that historically retains its resale value. Whether you bought it new or used, you can always ditch it if necessary to buy something cheaper.

It is true, and there is a very famous (and accessible) paper written about it. See Wikipedia @ http://en.wikipedia.org/wiki/The_Market_for_Lemons

[Harriet the Spry]

One thing to consider, since you will not have much of a financial cushion when you buy the car, is the prospect of being "upside down" for a while. This is more of an issue for a new car. Lets assume you buy it and finance essentially the whole cost. For a while, your loan amount will be more than the resale value of the car. This is a problem if you either wreck the car shortly after purchase or decide you need to trade down. You will be on the hook for the difference between the car's value and the loan amount. There is insurance you can buy for the wreck situation, but the trading down is still a risk, and no doubt the insurance costs money.

My recommendation is to buy a used car from a private party after having it inspected by a mechanic you trust. Car dealers make their money selling cars for more than they are worth. Private parties sometimes sell cars due to changing family circumstances, cash flow needs, etc. Allow yourself time to find one of those people. Avoid "informal, not-really-a-dealer" dealers like the plague.

[Hampshire]

New cars are pretty much maintenance free for the first couple years of ownership. All they really require is oil changes and tire rotations.

Buying used may save you money initially but you never know what the car is due to have replaced. Tires, brake pads, belts, system flush, AC recharge, etc.

New cars can be the way to go if you keep the car a long time. Buy a brand new Honda Civic or Accord, pay it off in 4 years and keep it for 10 years and it can be a down right bargain.

On the other hand, people who always like to be driving a different car every 3-4 years, new cars are a bad deal for.

[Velma]

Heh. I just bought a car with 160,000 miles on it. Mileage matters not to me, cars these days are designed to go on much longer than they used to be. Especially Hondas, like I just bought. Maybe buying a 2-3 year used Honda won't save you much, (they do tend to hold their value better than most) but buying a 5-6 year old one sure will. Get any car checked by a mechanic, and get a Carfax report. You can get a nice car for $10,000, half of your proposed budget. Do you think you will really spend $10,000 on it to maintain it? I don't. I previously had a craptacular Volkswagen that was just a really bad purchase, I bought it used and it was just a pain in the ass. Everything went wrong on it, plus parts and maintenance were at least double for it because it was a Volkswagen. I still only spent maybe $3000 in maintenance on it in 5 years.

I would do some research, and there is nothing wrong with buying new if that is what you want and you can afford it. But buying new to save money really doesn't make a lot of sense. Interest might be a little higher on a used car, but insurance and such is cheaper.

It seems a lot of people are afraid of what a used car costs to maintain, but having been the owner of very used cars in my lifetime, I can say used cars are not that scary. Even if you can shorten your car payment by say, just a year by buying used, taking that car payment and saving it yourself for 4-6 months will give you a very nice savings account that you can use for car fixing emergencies. The benefit is that if the car doesn't break down, the money is still yours, whereas on a new car it is guaranteed going to the bank.

Just my opinion.

[Sam Stone]

Originally Posted by Small British Shop Owner

It is true, and there is a very famous (and accessible) paper written about it. See Wikipedia @ http://en.wikipedia.org/wiki/The_Market_for_Lemons

Everyone should read this. Information asymmetry is a critical problem in the used car market. From the article:

as quality is undistinguishable beforehand by the buyer (due to the asymmetry of information), incentives exist for the seller to pass off a low-quality good as a higher-quality one.

The buyer, however, takes this incentive into consideration, and takes the quality of the good to be uncertain. Only the average quality of the good will be considered, which in turn will have the side effect that goods that are above average in terms of quality will be driven out of the market. This mechanism is repeated until a no-trade equilibrium is reached.

As a consequence of the mechanism described in this paper, markets may fail to exist altogether in certain situations involving quality uncertainty. Examples include the market for used cars, the dearth of formal credit markets in developing countries and the unavailability of health insurance for the elderly (that is, in the absence of government programs such as Medicare).

However, not all players in a given market will follow the same rules or have the same aptitude of assessing quality. So there will always be a distinct advantage for some vendors to offer low-quality goods to the less-informed segment of a market that, on the whole, appears to be of reasonable quality and have reasonable guarantees of certainty. This is part of the basis for the idiom, buyer beware.

So let's go over this again: Let's say you're selling a used car. You know it's of above-average reliability, but you just want something newer. So if an average car sold for $10,000, you'd value yours at $12,000, and that's what you want to sell it for. If someone offers you $10,000, you won't take it.

Now, let's say you have a lemon. You try to pass it off as average and sell it for $10,000. But to you, it's only worth $8,000 because of problems you know about but the buyer can't discern.

Now let's assume the buyer is only willing to pay the average price - he doesn't know whether your car is a jewel or a lemon. So what happens? The good car can't find its asking price, and drops out of the market. The only vehicle available to you is the lemon.

Now that this takes place for a while in the marketplace, it becomes known that used cars that are privately sold are more likely to be lemons than not. Now the buyers discount the price even more, driving the next-best vehicles out of the market. Eventually, you wind up with a market of nothing but lemons, selling for lemon prices.

How can you avoid this? There are several ways: One is to have the vehicle inspected, but this will only reduce some of the uncertainty. Another is to buy from a reputable dealer with an incentive to maintain a reputation. Here's what happens: When dealers take in trades or lease returns, they inspect them thoroughly. If the vehicles are above-average in quality, they keep them and sell them as used vehicles. This enhances their reputation, and allows them to charge more for the used vehicles, increasing their profit.

If the vehicles they take in trade or on lease return are below average, they'll send them out for auction. Some of these are purchased by private individuals who are willing to trade the lower price for the risk of reliability issues. Many of them are bought by agents of lesser car dealerships, or by 'curbers' - shady individuals or small companies who look for cheap flawed vehicles, cover up the flaws, and resell them as better than they are.

The result of this information asymmetry means that 'Cars for Cash' on the corner is likely to have a lot full of overpriced lemons, no matter how low the window sticker price seems to be. They have no reputation to protect, and they stay in business by appealing to the desperate and ill-informed. A BMW dealership in a 2 million dollar building is unlikely to intentionally sell you a lemon - but there will be a premium on their used cars as their price for assuring quality for you.

Now, you can find great deals sometimes if you're willing to look at private sales and do lots of work inspecting the vehicle, examining its service history, etc. But when buying an older vehicle, remember one thing: The person selling it is probably doing so because he's finding it increasingly unreliable and expensive to operate.

This is why I advocate buying a 2 or 3-year old lease return or car that someone traded in for a new model. Now you're in the area of the market flooded with cars that were returned for no reason other than that the lease expired or the seller likes to drive new cars. so the percentage of lemons should be about average. You have a warranty which protects you from hidden defects for a couple more years. And you avoid the bulk of the new-car depreciation.

To me, that's truly the sweet spot for car value.

[Sam Stone]

Originally Posted by Lunar Saltlick

Is this always true, though? We bought a new Honda Civic hatchback in 2000, and we looked at used models that were two or three years old, and, frankly, there wasn't a huge difference in price. Used Hondas that were 12 to 36 months old were in such high demand they only stayed on the lot for an afternoon at best. I think you're generally correct with many makes of car, but there are some makes out there that defy generalization.

That's why I expressed a range of 30-60% - really a very large difference. The best cars will have depreciations at the low end, and the worst cars at the high end.

For example, according to this cite, this is how a Honda Civic will depreciate in value:

2006 Honda Civic price range: $10,075 - $21,875
2005 Honda Civic price range: $7,275 - $19,175
2004 Honda Civic price range: $6,450 - $17,225
2003 Honda Civic price range: $4,250 - $16,150

Note that at the bottom end, a Honda civic loses about 35% of its value after three years, and almost 60% of its value after four years. At the high end, it's not so bad. After four years, the civic is still holding more than 60% of its value.

Originally Posted by Dewey Finn

I bought a two-year-old Honda Accord eleven years ago. After buying it, I looked at the prices of new Hondas and figured that I saved very little by buying the car new, since Accords hold their value so well. It seems to me that if you buy a car brand-new, you get the full warranty and if you hold it until it dies years later, who cares whether it depreciates?

Let's look at it this way: Let's say you buy that bottom-end Honda civic new, and drive it for ten years, at which point it's worth essentially zero. Cost per year: $1, 075.00. Now let's say you buy one that's four years old, and drive it for six years. Cost per year: $708. In the end, you have a car that's ten years old either way. But by starting used, you're saving more than 30% per year.

Let's make it worse: Let's say you financed the vehicle for five years at 7%, with $1000 down on both. In the first case, you will pay $1706 in interest. In the second case, you will pay $611 in interest. Now the new car cost you $1100 more over those ten years.

To make it even worse, the insurance on the new car will be more expensive, and you will have to maintain it to the manufacturers service schedule at your cost or risk losing your warranty. And since the manufacturers have an incentive to be conservative with servicing (since you pay the cost of service, but they pay the cost of warranty damage), you'll pay more for service, too.

[DrDeth]

Originally Posted by Sam Stone

2006 Honda Civic price range: $10,075 - $21,875
2005 Honda Civic price range: $7,275 - $19,175
2004 Honda Civic price range: $6,450 - $17,225
2003 Honda Civic price range: $4,250 - $16,150

Note that at the bottom end, a Honda civic loses about
Let's make it worse: Let's say you financed the vehicle for five years at 7%, with $1000 down on both. In the first case, you will pay $1706 in interest. In the second case, you will pay $611 in interest. Now the new car cost you $1100 more over those ten years..

BUT- Civics are getting bigger and with more features over the years. So comparing a 2003 Civic to a 2006 Civic and you aren't comparing the same car.

And, on a really late model used car, the dealer will sometimes offer those "way below prime" interest rates. A Honda dealer offered me 1.9% on a less than a year old Acura. Along with an extended warrenty.

[Sam Stone]

Originally Posted by DrDeth

BUT- Civics are getting bigger and with more features over the years. So comparing a 2003 Civic to a 2006 Civic and you aren't comparing the same car.

You can do the same calculations for other vehicles that are essentially the same. For example, a 2005 Ford Escape is virtually identical to a 2001 model. If you parked them side by side, you'd have to be an enthusiast to tell which one was the newer one. The black book value of a 2005 Ford Escape XLT V6 is $20,100. A 2001 Ford Escape Limited is 10,225. That vehicle lost half of its value in four years. If you find a low-mileage 2001 in good condition, it will be significantly cheaper to own over the next five years than if you bought new.

And, on a really late model used car, the dealer will sometimes offer those "way below prime" interest rates. A Honda dealer offered me 1.9% on a less than a year old Acura. Along with an extended warrenty.

Sure. Every situation is different. As I said in my first message, I bought a new car last time precisely because the factory rebate and financing incentives actually made it cheaper to own than an equivalent 2 year old vehicle. So you need to do your homework. But in general, buying new always costs a premium over buying used. It's simply a more expensive way to own a car.

[Giraffe]

Originally Posted by Incubus

My current car runs okay, but it has 97,000 miles on it and if it died on me today I wouldn't have the money to replace it. I feel like having a new car (with a warranty) would give me more long-term reliability, since planned expenses seem less expensive than unplanned expenses.

From a purely financial standpoint, by far the most cost effective thing you can do is drive your paid-off car into the ground and stick the car payment into a savings account. Every month you drive that car, you're making $300-$400. When it breaks down and costs more than a couple of hundred bucks to fix, that's when you junk it and go buy a new one. If you're lucky, this will take a few years and you'll have saved yourself thousands of dollars by then. The trick, of course, is to force yourself to save that money and not just spend it on something else. (I recommend automatic withdrawals into a savings account every payday.)

If you want a new car simply because you want something new and shiny, go ahead and buy it, but do it with your eyes open. (And by new car, I mean new to you -- the new vs. used decision is all about the model, the price and the financing.)

The biggest financial mistake most people make is increasing their lifestyle along with an increase in their salary. If you can make yourself live on (e.g.) $25k/year and save the difference, you'll have more and more money, as you go from paying interest to earning it.

[Lunar Saltlick]

Originally Posted by Sam Stone

... But in general, buying new always costs a premium over buying used. It's simply a more expensive way to own a car.

I guess you're convincing me, but I still maintain (albeit based on my anecdotal evidence and not your stats) that with the Civic, that premium is smaller than with most makes and isn't tough to swallow, especially since I know the car is brand new, and it has exactly the color, trim and options that I want. I also don't have to search and wait (as I said, in my area, used Civics disappear as soon as they're listed). I'll also freely admit that I'm not at all a car guy; I have no intention of trying to figure out whether a 36-month old car has been well-maintained, etc. I know there are inspectors for that, but my experience with inspectors has never been great.

In the end, you're right -- all things being equal, buying used is cheaper. But all things are never equal. With a new Civic, the premium isn't huge, I get exactly what I want, I don't have to wait, I don't have to wonder about the inspector, and I don't have to know any more than necessary about the car, something I see strictly as a means of going from A to B. I realize that attitude sounds sad-ass pathetic to many people, but there it is. When it comes to cars, I'm willing to pay extra for the convenience.

[Hello Again]

Normally, I would say that a 1-4 year old used car is a good value if you have a trusted independent mechanic to inspect it.

However, some of the Korean car manufacturers are offering some pretty amazing warranties to the *first buyer only*.
For example Hyundai's first-owner warranty includes: 10yr/100K on powertrain + 5yr/50K bumper to bumper + 8yr emissions + some other stuff
The second buyer gets 5yrs/50K starting when the first buyer bought it. Theoretically, you should have it completely paid off by the time the bumper-to-bumper expires, and still be shielded against a transmission/engine problem for another 5 years.

So, if having a comprehensive warranty is important to you, there is some advantage in buying a new, inexpensive Korean make. I have a Hyundai Accent GS hatchback, its a cheap getabout with great milage and has been very reliable, easy to park and inexpensive to insure. I paid $5k when my 2002 was 4yrs old. New, the Accent GS hatchback starts at $10,500.

[Sam Stone]

Originally Posted by Lunar Saltlick

I guess you're convincing me, but I still maintain (albeit based on my anecdotal evidence and not your stats) that with the Civic, that premium is smaller than with most makes and isn't tough to swallow, especially since I know the car is brand new, and it has exactly the color, trim and options that I want. I also don't have to search and wait (as I said, in my area, used Civics disappear as soon as they're listed). I'll also freely admit that I'm not at all a car guy; I have no intention of trying to figure out whether a 36-month old car has been well-maintained, etc. I know there are inspectors for that, but my experience with inspectors has never been great.

Hondas hold their resale value better than most cars, because they are built so well. So that means the premium for buying new isn't as high (your gut instinct is right). But it also means that there's less risk in buying used, because the cars are so well built that 2 years of use won't affect the car as much (which is why they hold their resale value, of course).

I guess this just means that the decision is closer with respect to buying used or new, so other factors are more in play.

If I were you, I'd probably buy new as well. I'm willing to pay a modest premium for knowing I'm the first owner of the car and that nothing crazy was done to it. I just won't pay a fortune for the privilege.