A guy I used to work with had, what I thought was, a pretty good idea for car purchasing/ownership:
Buy a new car, financed for 5 years.
At the end of the 5 years, sell it and use the money to buy another new car, financing the difference for 5 years.
Rinse and repeat.
The logic is that you always have a relatively new car, meaning it should be reliable. But the car you’re selling is still fairly high in value thus helping to finance your next car.
It beats a lease 'cause at the end of the term (self-imposed, albeit), you still own something with value. As opposed to paying money to give the car back on a traditional lease plus having to come up with even more money for the next one.
The two drawbacks I can see are a) your driving during the highest depreciation years and thus losing that value and b) you don’t get to drive the car for awhile without making any payments.
Well, my opinion is that if having a new or new-ish car is important to you, than this is probably a better idea than leasing. Especially since, if circumstances are prevailing, you can always just keep driving the car for a while before trading up.
As for me, both my cars (96 Saturn/02 LR Freelander) are paid off and I’m really enjoying not having car payments. I tend to be the “drive it until it doesn’t drive anymore” type.
I agree with Rhiannon8404. The plan isn’t a trick and it is as advertised. However, the best way to save the most money is to just take care of your car and drive it as long as possible. For people that want a compromise and would like a new car every five years.
An even more finacially beneficial plan is to start off with a used car one or two years old in great condition, drive it for a few years, put the remaining value down on another used car etc. That is what I do and I haven’t had a car payment in five years. My cars are nicer than most people’s too IMHO.
I think the degree to which these drawbacks affect the viability of the plan strongly depends on interest rates and the resale value of the five-year old car.
Say you buy a car for $20,000 at a 5% APR. At the end of five years, you paid $22,645 for it. If the resale value at the end is $10,000, you go into every five-year period after that borrowing only $10,000, assuming you keep buying the same level of car.
Not too bad, although if interest rates go way up or you buy a car with a lower resale value after five years, you end up paying a lot more in depreciation and interest.
Contrast that with keeping a car for ten years. You lose the difference between the value of a five year old car and a ten year old car, but gain the cost of financing the price difference between a new car and a five year old car. Again, it really depends on how the car depreciates, but no matter what you’ll save thousands of dollars. It’s hard to make general statements without specific numbers.
Yeah, I gotta agree with this. The premium one pays for a new car is simply not worth it when, with just a minimal amount of work, one can find a used car with one or two years on it and pay 50-60% of the going rate for a new one.
My minivan is one of those. It’s in excellent shape and a 2002 model. And I got it for $15,000 when the new one of the same model lists for $28,000. Buying new is a mugs game. There are always plenty of good condition used cars out there.
Food for thought, Shagnasty and Jonathan Chance. Thanks. And the interest rates would make a difference, Giraffe. I hadn’t taken that into account.
I know the greatest depreciation occurs in the first two years. However, I’d be really leery of the reason someone got rid of a car after only two years. Was it a lemon? And no matter how old a used car is, you just don’t know how it was taken care of.
I realize I’d be paying a “mug” tax for buying new cars, but I think I might be willing to pay that premium in exchange for peace of mind.
You do realize that the resale value of your leased car affects how much you have to pay when you give it back? That’s why the lease payments are lower than finance payments would be–you’re not buying the whole car, just the portion of it you “used up.” Your scheme sounds basically like leasing a car to yourself, which might work out I suppose, but I don’t see any advantages it has over simply buying a car and maintaining it indefinitely.
It’s all a matter of what you’re looking at. Look for one with low miles that’s between 1-2 years old. It’s probably a rental car returned to the market after it’s first year. And if that’s the case it’s almost certainly been well looked after and handled well.
Again on the white minivan of pleasure that I bought. 15,000 miles on it and it was 2 years old. And a savings of $13,000? I’ll take that 10 times out of 10.
I wouldn’t do it myself, I’d rather not have the car payment. Have you ever tried to sell a used car? It’s more trouble than you might think. Plus modern cars are reliable enough that you should be able to go ten years without any major problems.