Optimum car buying strategy to minimize total ownership costs

Factual Questions
41

Been devoting some time to this question lately, as my GF needs another car soon (tranny is on the way out).

My personal strategy seems to work (buy a 5y used car in reasonable shape, drive it for another 10-15y more), but is it optimal?

I happen to live with a big car auction site in my town (where I got my most recent car), last month they sold 1800 cars.

Pumping the auction data from November 2013 into Excel, the median used auction car (lots of these are trade-in’s) is 10y old, 150k miles, and auctions for $2k with a mostly bell shaped distribution.

Based on my analysis there’s not much difference in the strategies really. I personally try to shoot for $0.10 per mile driven for capital cost (incl. maintenance)of the car on a daily driver.

For example, buy a car that is “near death” for $1k and grind 7k extra miles out of it, then junk it for $300 when something significant (engine/tranny) breaks.

Or get a somewhat used car for $10k with 30k miles on the clock, then get another 100k miles more with minimal maintenance and some small resale value. Cars these days can last 200k, but the “issues” usually start showing up about the 130k mark.

Buying new is generally more expensive than used, but not by as wide a margin as people think. When fuel is factored in it is pretty close, about $0.30 a mile driven with fuel cost baked in for a new shiny thing vs. an old beater for the long run projection. The beater has less capital cost, but higher fuel cost and conversely for the newer car it saves on fuel and repairs which compensates well. Don’t forget insurance, taxes, and safety. Insurance costs are higher in a new box usually, but an old box can be more dangerous in an accident. Where I live the yearly registration tax is pretty flat.

But still, buying used wins out - by 5-10 cents a mile depending on how new and how used. Seems that the “last gasp” cars actually have the best economics if you can afford to miss a day here and there when they finally give up the ghost. But like I said, you’re talking 25 cents/mile vs 35/mile for the extreme comparisons, it’s not all that stark really. Seems obvious really, if there was a universally good strategy everyone would do it.

The kind of cars I’ve been analyzing are unpretentious daily driver sedans - Ford, Nissan, Honda, Toyota. Hummers need not apply. :smiley:

Hope this helps? Obviously, your mileage may vary… Bad luck can happen with any car and an unscrupulous seller can really take you for a ride, figuratively speaking.

42

The current episode of the public radio program This American Life is called 129 Cars. It basically follows the sales staff of a car dealer over the course of a month as they attempt to sell 129 cars. That’s the sales goal set by the manufacturer and will qualify them for a bonus check. At the end of the month, the dealer is really willing to sell cars cheaply, even below cost, if it means making the goal. So it really is true that car dealers will give a better discount at month end. The transcript is here.

43

I usually assume I’m getting taken on the purchase, so for me, buying a new vehicle and driving it 15 to 20 years seems best by minimizing the number of purchases. I’m always amazed by people who claim to get great deals on vehicles. That dealer sells more cars in a month than you’ll buy in a lifetime, and you got the better of him in a deal? I buy new, and I’ve never kept a vehicle less than 15 years, and that was in upstate New York, where road salt kills more cars than Hal Needham.

44

iming belts can be killers, and show up as early as 80,000 mi. (I tried to put the $700 repair off as long as possible. Luckily, that stretch of 101 was heavily patrolled). It died at 100K*

I’m going to be bold and suggest you decide at least make and one or two models.
Find the maintenance schedules, and work backward - a fleet car which has had impeccable maintenance and JUST finished the last big work for another 80,000 miles may give you 80,000 of the cheapest miles available

*-The car was an '87 Acura Legend coupe. The routine to replace the belt involved disconnecting just about every connection to the engine, then (partially) hoisting the engine to get to the lower bolts. This is insane.

45

But 90% of the replacement cost for timing belts is maintenance. A belt, pulley, and tensioner can usually be had for less than $100. If you’ve got a jack and basic tools, you can probably find a how-to video on youtube that covers what you need to do for your specific make/model. The most difficult thing to do is ensuring the cam(s) are aligned correctly with the crankshaft, but even that is not difficult. By the way, if you’re looking into cars with a timing belt, it’s important to know if it’s an interference or non-interference motor. Non-interference motors can be run until the belt goes without worry for engine damage. With an intereference motor, you MUST stay on the manufacturer’s recommended maintenance schedule or risk junking a motor if the belt goes. Normally, the car will start running like hell before the belt completely goes.

With timing chains, I couldn’t care less if the motor is interference or non-interference.

46

Thrasymachus, thanks for the good info and analysis, but you left out your data, which leaves me with some questions.

  1. Did you take costs for insurance/repair/maintenance/financing or anything else into account in your cost/mile calculations?
  2. If you took repairs into your calculations, how did you determine average costs? This is something I struggle to find data on for model years more than a few years old as edmunds true cost of ownership doesn’t allow you to select 10+ years old cars.
  3. What fuel mileage data did you use for your comparisons? EPA? I use fueleconomy.gov. I don’t see a huge difference in gasoline engine fuel mileage from the late 90s through today. For example in a comparison between model years 2002 and 2014, the base model manual transmission focus got an EPA rating (adjusted for modern ratings) 25/32mpg for MY2002, and 26/36 for MY2014. Their figures show a $150/year annual fuel cost differential for the focus. The same comparison for the Toyota Corolla shows a 28/37 vs. 28/38 for the Corolla with no cost differential.
47

Thanks Chris42163. To help elucidate:

1. I used a total cost model, but with two key simplifications. No financing (all cash basis 2013 dollars), and no assigned cost for my time (I do my own work, and figure on a Saturday every couple months for maintenance time as the working limit)

I’m unfortunately one of those people that doesn’t need a loan for a new car (a reasonably sized one anyway) - although I could have factored the differential between spending and investing the dollars I didn’t bother with this explicitly. E.G., buying a cheap car and earning dividends with the leftovers rather than spending 1000’s more all up isn’t considered, but the tax/ins/fuel/maintenance dollars are all included.

  1. Plug in knowns, solve for unknowns. Obviously maintenance cost has to be a a bit of a guess, but that’s how you solve this sort of future problem - get all the stuff you know about into the model, then plug in numbers that seem plausible for the stuff that isn’t known and judge the reasonableness.

After 2 decades of car ownership I have a fair number of receipts and used this as a starting point - a new car is about $50/y for maintenance; basically oil, filters, wiper blades, maybe a “rock chip kit” or something each year; then brake pads and tranny fluid every few years, etc… I’m not a 3000 mile oil weenie, used full synthetic always for 10k+ oil changes. I just checked the timing chain & tensioner on my ~215k daily driver (one of the first things that goes on that particular engine) a few weeks ago and it looks great.

An old beater (like my 215k, 22y old daily-driving box) is more like $250/y - in the last two years I bought a half-shaft, battery, O2 sensor, alternator, various belts and bulbs, sparkplugs, blower motor, and of course some Bondo! :smiley: The year before that I hardly bought anything, just wiper blades since they were getting kinda streaky.

In between those two endpoints I figure it’s more or less linearly increasing. You can get “surprises” but most of the time modern cars just run. Big stuff like tires, cat converter, new heater core, etc., gets spread out over YEARS of not really doing anything much at all. Plus, this conservatively guards for bad luck, I don’t think the “bathtub curve” of maintenance cost is real.

Also, I do my own work (this is key!) - it’s much more inexpensive and I have a vested interest in not screwing it up either. Unlike the shops, whose business model is charge to “fix” it, then charge again to fix it some more! If you go to convenience lube places and AAA shops or conversely get free dealer maintenance for the first five years or something then obviously that’s a different story each way.

At some point you do hit the “dead transmission” bugaboo with automatics which is basically a wall in the maintenance cost trendline. But my GF won’t drive anything else, so I’m stuck there.

  1. For fuel I use the “official” EPA #'s since it seems to be the least biased, but be aware that those are posted for when the model was new, i.e. “in its heyday.” On my aforementioned daily box I have low-ish compression and probably aging sensors, which is taking my efficiency down a healthy notch; used to get mid-30’s mpg, now it’s mid-20’s. I used to track that in a spreadsheet a few years ago, but now I just do a little mental math after noting how many gallons went in as I reset the trip OD. So I used real numbers for my cars and posted EPA #'s for new ones, and then a fudge factor deduction for the used ones (-10% at ten years, -20% for 20 years from the EPA#'s).

Still not bad, but that becomes a stiff penalty function for taking on long commutes with old cars. Which reminds me - I figured $3.50/gal in 2013 dollars for gas for the future average. It’s cheaper right now, but it can and probably will go up again even though inflation will make it not hurt as much. How much is hard to say, seems reasonable to plan defensively though.

Hope this helps!

48

Virtually all modern car engines are interference engines, are they not?

49

I’m a service manager for a car dealership. Dealers have several streams of income. Profit from the actual purchase (invoice on car vs sale price) is just one stream.
I have seen dealers take some pretty good sized losers on this part of the sale, because they can make it up in other places.
People have asked when they can get the best deal on a new car. I tell them shop on a month that ends on a Tues or Wed, and it has been raining or snowing for several days. Go in about 7pm.
The sales manager will be going nuts trying to make his quota and there is a better than even chance the factory has called and put a couple of grand in cash to help the dealer make sales quota. At this point they will bend over backwards to get a deal done.

50

All appropriate assumptions, but I think your point about the opportunity cost of pulling out of investments is actually a very valid reason not to buy a new one. Buying a $2k car instead of a $20k car means you don’t pull $18k of investments. Assuming a conservative average of 8% growth in a simple mixed domestic/international/bond index fund portfolio, you should earn $1,440 in your first year, which is certainly enough to cover way more than the maintenance of the reliable daily driver you’ve chosen, and it would more than offset the value of a factory warranty.

Other than that, I think you’re $250/year assumption for maintenance & reliability is really low. I do my own work too for the most part, and I usually figure $3,000 for my three cars, though the majority of that goes to pay for parts and repair on my Corvette, which everything is expensive on, it’s been problematic, and I usually buy new OEM parts for it. I also a hell of a lot of miles on my beater. I think I’ve gone 8-9k miles in the last 2 months. I’m sure I’m on the high side of things, but driving 50-70k miles/year means I know I’ll spring for a new set of tires & brakes + 8 or 9 oil changes in an average year.

Funny you said that! I change it every 10km (6,200 miles) on my beater for the simple fact that it’s easy to remember with regular oil. On the vette, I change it at the factory recommended 7,500 mile intervals with synth. I know guys that’ll run synthetic 15k+ miles. They’ll change the filters at regular intervals, but recycle the oil.

Thanks for elaborating on everything. I really appreciate your insight.

51

Can’t speak to brand new cars, but in the 10-ish year old category, there are plenty of cars that are non-interference. There are a lot of unreliable products out there that will tell what they are. I recommend just going to an appropriate car forum and searching or asking around.

Just as an example, I’m considering a 2003-2005 focus as my next “beater.” In '03 & '04 there were 3 different 4 cylinder engines with 4 different derivations altogether. The economy motor was SOHC 110-hp 2.0L that was an interference motor with a timing belt. It was known as the “SPI” motor. The next level up was a sportier DOHC 130hp “ZETEC” that was also a 2.0L with a timing belt, but it was non-interference. Stepping up a bit there was a 140hp 2.3L engine they put in the top end models that was built by Mazda back when Ford owned a large % of their company. This motor was known as the “Duratec 2.3.” It came with a timing chain and would be my motor of choice during those model years. Finally, they had a performance version of the ZETEC motor that made 170hp and was an interference engine. They put that one in the SVT Focus.

I can also say off the top of my head that the old Ford 302 (5.0L) motors came in both interference and non-interference versions. But, they were all timing chain driven.

I just prefer timing chains because they last damn near forever, and the risk of failure or engine destruction is extremely low.

52

I have no proof, but it seems that buying anew car (cash) and running it into the ground (20 years life) would be about the same as buying used and running it into the ground.
We are in the middle to a similar experiment…my wife’s car (bought new). Is now 10 years old-it has 141,000 miles. I’m hoping to keep it to 200,000 miles. We are doing OK with it now-no major repairs yet. If the engine or tranny fails, we will scrap it.

53

I don’t think that there is a single answer to this question. It is all in what each individual considers a “value” from a car. I don’t see a problem with the depreciation on a new car. When I buy a new car I feel secure in the knowledge that nobody else has screwed with the car previously. I know for at least the next 3 to 4 years, all I have to do is turn the key and it will get me where I need to go.

Others will think that is a ridiculous price to pay and that their 7 year old car runs just fine and transmission repairs are just a part of life. Others still have no problem driving $1000 beaters and calling a tow truck 4 times per year.

Each consumer has to decide what is important and pay appropriately. I will second what a previous poster said about getting one over on the dealer. I laugh, and laugh heartily when my friends tell me what a great deal he got from the dealership and how he skillfully negotiated a steal. The dealer does this dance several times per week. He has all of information; knows the tricks, the add ons, everything. Although there are several tips not to get completely taken at the dealership, you will not outfox the salesperson with your US-Soviet summit style negotiation skills.

55

Not that it has any relevance, but citing experience from outside the US…

  1. For cars older than 10 years here, the road tax increases by 50%
  2. We also have inspections - new cars is 3 yearly, then it moves to 2, but for older than 10 years it is annual
  3. The major determinant of depreciation here is the “license” to own a car - this can vary from $1,000 per year (which I paid for mine, but which is expiring soon) to the current $8,000 per year. This licence is pegged to the car. What it means is that a 3 year old car, with a licence purchased for $4,000 PA can be sold for a profit right now - as the “replacement cost” is a car with an $8,000 PA license.
56

No matter what the situation, buying new will always be the worst strategy. As soon as you drive off the lot, you owe far more than the car is worth. Always buy used - whether it’s 1 year old or 10.

Would help if you said where this was.

57

That’s often repeated, but it’s just not true. If it was, the whole new car business would tumble and prices would come down. The fact is that millions of consumers are willing to pay a premium for a new car for several reasons I can think of off the top of my head:

  1. You know that nobody tried to clean up the spunk stains in the rear cargo area.
  2. Nobody tried to play “Dukes of Hazard” in the car because it was a rental.
  3. Nobody ran it 20k miles without changing the oil.
  4. For at least the next 3 years, I won’t be spending a weekend in my garage fixing the latest mechanical problem.
  5. It has the newest safety features that the car market has developed.
  6. It has the newest cool toys integrated that the car market has developed.

Now, you or others may look at the price and come to the conclusion that the price for a new car simply isn’t worth the benefits. That’s fine; consumers make that choice all of the time in any market, but it is incorrect to say that “no matter what” it is the “worst” strategy.

We all use the (little) extra money we have for the stuff that makes us happy whether that is eating out, saving, booze, drugs, giving to church, new cars, or rare coins. Just because a new car isn’t high on your list doesn’t make it waste.

58

I don’t think this is true. When I drive it off the lot, I don’t owe anything. It’s paid for in full. True, the sale value of the car will be lower than what I paid for it, but the sale value is irrelevant because I’m not selling it. I’m never selling it until I get all the value I can get out of it and drive or to it to a pick-n-pull place to sell it for scrap.

59

Have you tried shopping for a nearly-new car lately? I think the “always buy used” conventional wisdom has been the conventional wisdom for so long we’ve hit a bit of a tipping point. There’s still obviously some depreciation simply from going from new to used, but it’s not like the old days where the car would lose 1/3rd of its value the day you buy it. These days you’re saving next to nothing buying a 1 year old car versus a brand new one. (Sometimes you’ll even see high-demand used cars selling for MORE than new.)

Another smallish issue is that in this the day of CarFax, when you do go to sell the car you’ll possibly get a little more for it being one owner car.

I’m fairly sure it’s Japan. Those rules that gently encourage Japanese cars to be taken off the road when they get older has made 10 year old Japanese used cars the lifeblood of the developing world’s car fleets.

60

I agree, and further NOBODY is selling new cars that just rolled off of the lot. For example, let’s pick a percentage that people can agree on, say 15%. Our friend Joe the car buyer picks out a new car and pays $30k for one. He drives it four miles to his house.

Does anyone in this entire world think that Joe will now sell his new car to a buyer for $25,500? Or even $30,000? He just exchanged $30,000 for the car; why would he want his money back?

The market price for a car or any other item is what a willing buyer and a willing seller will agree upon without coercion. Since NOBODY in this world is in the market to sell a brand new car that they invested time, effort, and money into procuring, it is simply false for insurance companies or anyone else to place such a depreciation on a new car. It’s an accounting maneuver that has no relevance to anything real in life.

The only exception would be if Joe totaled his car on the way home. I would love to take a case to the insurance companies that their 15% (or whatever) depreciation bullshit is just that and make them pay full price. But in any event, gap insurance can be purchased at a very modest price to protect against this eventuality.

The old “a car depreciates X% when you drive it off of the lot” is certainly bullshit now and in my mind has always been that way.

61

Right. Sure, there’s accelerated depreciation right after you drive it off the lost, but unless as you (as **jtgain **mentions) total the car (and have cheap insurance) that’s a paper loss. Once you drive a new car 3-5 years, it’s meaningless.

This is a old canard, oft repeated and as often wrong.