Buying a new car is a poor financial decision

Today I thought more about my views of car buying. I came up with the following as a response to someone who suggested that if you’re going to hold on to a car for 10 years, it’s smartest to buy new. In fact, it’s probably smartest to buy used regardless of your time horizon.

According to http://www.bankrate.com/brm/news/auto/20011226a.asp, a typical new car loses 15%-20% of its value each year in the first three years.

Honda AccordLet’s take the case of a Honda Accord LX V6. Based on friends’ experiences and Consumer Reports reliability ratings going back to 1996, I think it’s reasonable to say that this car will go at least 180,000 miles before requiring costly repairs or becoming unacceptably unreliable.

This chart is based on if you purchased the following cars right now:

Year Current Miles Value (NADA) Depreciation from new Percent of miles “used up” Relative cost per mile of remaining miles

(180000 – current miles)

2004 0 (still on dealer’s lot) $23,850 0% 0% 27% higher than 2000
2003 15000 $20,300 15% 8% 17% higher than 2000
2002 30000 $16,925 29% 17% 8% higher than 2000
2001 45000 $14,875 38% 25% 5% higher than 2000
2000 60000 $12,650 47% 33% baseline

It should be noted that Accords are in demand, limiting your ability to negotiate, and don’t depreciate as badly as many other cars.

Notice how much higher you pay per useful mile for the new car than for the 4-year-old car.

Look at this differently: suppose I had $23,800 sitting around. What is the smartest investment: $23,800 all sunk into a car, or $12,650 sunk into a car and investing the remaining $11,000 in something like a child’s college fund, your own retirement, or a charity? Or if I didn’t have the cash laying around, why double my debt just for the new car smell? What does it say about one’s values when he maximizes his deprecation losses (and debt?) at the expense of better choices?

See http://moneycentral.msn.com/content/Savinganddebt/Saveonacar/P37267.asp another perspective.

Cars are depreciating assets, a liability. It makes sense to reduce exposure to losses by not buying new.

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