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 both 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 useful and wise such as a child’s college fund, your own retirement, a worthwhile charity? Or if I didn’t have the cash laying around, why double my debt for the sole point of 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, or a net liability. It makes sense for careful buyers to reduce exposure to losses by not buying new.

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