Tuesday, 15 March 2016 22:42

Think Twice About That New Car Purchase

Time for a shiny new ride, or not?

The time has come for you to take a sizable chunk of your hard earned money and use it buy some shiny new wheels and you’re looking for advice on which ones to get. Nice work being a responsible adult and doing your homework before you open your wallet. So here is the answer: don’t buy a new car. Sorry kids, sometimes the internet tells us what we don’t want to hear.

I’m stating the obvious: new cars are expensive. But it’s not always obvious, especially to those new to car buying, why new cars are so expensive. Yes it’s hard to overlook the number of zeros on the window sticker. And if you’ve already done some homework, or already own a car, you are aware of the substantial fees that come with car ownership: insurance, registration, interest on the auto loan, maintenance, and the occasional (hopefully) repair. All of these costs matter and need to be considered carefully before you buy any vehicle. However if you need to buy a car there really isn’t a way to avoid any of these expenses, so why am I telling you not to buy a new car? Because of depreciation.

Depending upon your perspective, it is either a sad or awesome fact of life that cars are a depreciating asset: as a vehicle ages it loses value. Furthermore cars depreciate at a much greater rate early in their life than when they are older. How significant is this depreciation? Let’s start with pretty typical new vehicle purchase price of $30,000. As soon as you sign your name on the dotted line at the dealership that $30,000 car is now worth about $27,500. It lost $2,500 in the hour of life you lost signing your name 100 times with the dealer’s finance guy. Over the next three years your car is going to lose close to $10,000 in value. This rate of depreciation will slow substantially as your car gets older which leads us to why this can be a good thing if you buy a used car.

If you buy a used car that is just a few years old (lets say four years as an example) you can buy the same vehicle for about half of what it costs to buy it new. Half! Plus by buying used you can easily get a much nicer version of the same vehicle with a sunroof, butt massaging leather seats, and a stereo louder than God after learning Donald Trump is going to win the GOP nomination. How much extra will you pay for all this luxury? Just about the same used price as the stripped down model which has shed its hubcaps and laughs at you when you try to find the USB port on the FM/AM radio. This is the other fun part of depreciation: all those expensive new car options you covet depreciate to basically zero after just a few years. After three years a car with the $3000 premium package is about the same price as the model without it. Even better the version of the car which allows you to go zero to jail in 4.7 seconds, that would have cost you an extra $8,000 when new, is only worth a couple thousand dollars more than the one with electric toothbrush for an engine.

In short: buy a used car because you can get a much nicer version for a whole lot less than the new one.

A used car won’t have that new car smell and it may have a scratch courtesy of an overeager child exiting the car like he was escaping the grasp of his aunt with incontinence. But most of us don’t care about these things. You get to skip that first scratch on the new car pain that makes you want to cry and kick a puppy. If you’re worried about the reliability of a used car you can get a certified pre-owned vehicle with a manufacturer warranty or purchase from a vendor like CarMax who provides an excellent first party warranty.

Now if you think I’m boring and still don’t care about depreciation, you would like an answer to your original question. Great, that’ll come next time.


Benjamin Ferreira

Ben Ferreira is a stereotypical resident of Boulder, Colorado who is overly enthusiastic about bikes and cars. Don't discuss sportsball with him, he won't understand.

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