I’m a natural contrarian. If you tell me the sky is blue, I’ll start looking for tornadoes turning the clouds green.
Maybe I’ve been hanging around the personal finance community a little too much, who all agrees in unison that a new car is the fastest way to the poorhouse. Hell, I’m kinda guilty myself.
So of course, while shopping for a replacement car, the contrarian in me soon found myself asking, “Are used cars really as great of a deal as everyone cracks them up to be?”
How to Tell if a Used Car is a Good Deal
For my upcoming car purchase, I sought to tackle this question using a pretty common sense approach.
If the old axiom is true, which goes something along the lines of:
- “A new car loses half its value the moment you drive it off the lot.”
- “Used cars are always a better deal than new, because cars depreciate so much up front.”
- “Anyone who buys a new car might as well light all their money on fire.”
Then we should expect to see something obvious: Purchasing a new car and driving it for a few thousand miles should see a huge decline in the car’s value.
For example, a new car driven for 1/10 of its useful life should lose far more than 1/10th of its value, since common knowledge says that cars lose the most value during their first few miles.
To test this theory, I will make a few assumptions about my preferred car, the Mazda 3. The assumptions are:
- The car can be bought for $17,500 new.
- The car’s useful life is 150,000 miles.
- The car’s salvage value at the end of its useful life is $2,000.
Doing some basic accounting style straight line depreciation, we can go full-board Mathlete and say:
(New Car value – Salvage Value) / Useful Life in Miles = Depreciation per Mile Driven
For the Mazda 3, this depreciation cost equaled 10.4 cents per mile.
Now, if ye ‘ole saying is true about new cars losing their value so quickly, we should expect some accelerated deprecation during the beginning of the car’s life.
In other words, over the first several thousand miles, we would expect a new car to lose its value much faster than 10.4 cents per mile. This accelerated depreciation is the discount used car fans tout as the real money maker.
After all, there should be some sort of discount for a used car, above and beyond the normal rate of depreciation, to account for the risk of the previous owner using the car as a Dukes of Hazard jumper.
Plus, the cheaper sticker price isn’t exactly free money on a used car, since used cars have shorter remaining lifespans and thus need replacing sooner. This all makes the accelerated depreciation discount vital in order for the used car to pull away as a great value buy.
So let’s look at some actual cars. We will pull up a combination of Mazda 3 used car dealer listings, personal craigslist postings, and recent ebay sales, then compare those prices to a new car losing its value at 10.4 cents per mile.
Hey look, a fancy table showing just that:
Those red numbers show that for Mazda 3s, there is actually NO discount for purchasing a used car. Even crazier, the used cars are actually priced HIGHER than the rate of straight line depreciation.
This is pretty shocking.
In other words, the new car buyer is actually getting a better deal if he buys new and drives the car to any mileage point in the above table.
(Note that haggling prices should be a non-factor here, since the new and used car prices were based on internet listings prior to any negotiation. Factoring in negotiation would likely tip the scales in the new car’s favor, since there is often more negotiating room on new cars.)
Repeating the same process for the Hyundai Elantra GT shows a used car market more in line with what we’d expect to see:
The Elantra is actually showing used cars which are discounted more than a new car driven for the same number of miles. But the discount is nowhere near the multiple thousands of dollars that common wisdom says used cars provide.
At only a $1,000 to $1,500 discount, is it worth it?
Imagine a car with 30,000 miles. You are already halfway to needing new $500 tires, and you’re notably closer to the routine servicing milestones. In a best case scenario, accounting for these expenses closes the gap to about a $1,000 discount, for the unknown risk of buying a used car. Which may or may not have been abused for years in a rental car fleet.
In car-dollars, $1,000 is about one to two mechanic visits. Plus by buying used, the original manufacturer’s warranty is likely either reduced or no longer honored, so the chances of having to pay in full for any problems is higher.
The fact that nearly every one of the 10+ used cars I took for a test drive gave me some sense of unease, whether it be a strange clicking noise in the engine or mysterious rumble in the floor boards, did nothing to ease my concerns about such a narrow margin of safety.
How Cars Really Depreciate
Since we’re getting all scientific on this post, here’s a fancy graph of my findings:
So, why are used cars so damn expensive all of the sudden?
There was a time when the used car was feared, and for good reason. Cars just didn’t last. Over 100,000 miles on a car was a death sentence, and once a car got north of 50,000 miles, breakdowns weren’t just dreaded; they were expected.
Back in those days, used cars really were discounted heavily, and there’s no question that driving a new car off the lot meant you took a massive hit in resale value.
Today, cars are lasting longer than ever, and the pendulum has swung wide in the other direction. Used cars are widely considered to be the wisest financial decision, and the average buyer is no longer afraid of their risk. The result of this changing consumer preference? A used car market which doesn’t offer nearly the deals that it used to.
For certain cars, like the Mazda 3, I believe we’re seeing a sort of used car bubble, where a pre-owned car is so many buyers’ default decision that the price is being bid up relative to their new models. Used cars are popular, and their discount has been completely smashed.
Why I Bought a New Car
With all that’s been typed into this cartlicle so far (car-article, get it!?) it probably comes as no surprise that this is the conclusion where I announce these findings were enough to sway me to buck the conventional personal financial advice, and purchase a new car.
Now, I’m not so bold as to come out swinging with the claim that new cars are cheaper to own than used cars.
That goes against quite a bit of common sense. New cars come with increased insurance costs, increased taxes and registration fees, and the lost investment income from the bigger cash outlay at the car’s initial purchase, even if you come up with a bunch of fancy tables showing how driving the new car is technically a better deal.
A new car is more expensive, just not by nearly as much as the conventional wisdom would have you believe.
In my case, I’m confident the difference was so negligible that my new car decision will hardly impact my financial goals. For your case to be the same, there are three huge keys:
- You have to start your car search with one of the cheapest cars on the market. I was looking at the Mazda 3/Hyundai Elantra/Honda Fit sort of dirt cheap rides. The depreciation hit on cars any more expensive will be too large to ignore.
- You must be patient enough in your savings to essentially purchase the whole thing in cash. If you stretch yourself too thin to reach the price of a new car, you will get destroyed by the interest payments.
- You should intend on driving your new car into the ground. This means holding it for a minimum of 150,000 miles. Replace your car much sooner than this, and the cost of the larger initial cash outlays and higher sales taxes will drain your savings.
No, a new car is still not the most perfectly optimized decision. Play your cards right though, and it can be pretty darn close.
At the end of the day, I purchased a car at less than half the cost of the average car purchase in America, and I expect it’s 40 mpg to cheaply propel me into the era of fully electric cars powered by solar paneled houses.
Maybe by then, the used car market will start looking a little more appealing. •
Want to see the exact strategy I used to pay $2,000 less than the average sales price on my car AND get $500 over KBB excellent value on my trade in? There’s a carticle for that:
The Car Negotiation Strategy I Used to Save $3,000
- How to Choose the Right Type of Car (Without Wasting Your Money)
- Go Figure: 11 Fun Facts about Car Buying
- Remembering to Love Your Old Car
Ms. Montana says
There are so many variables. And with good maintenance and a little love along the way, cars can make it into the 200k range for miles. We spent about $3,500 for a honda civic over 10 years ago and still are driving that little car. Plus we never had full coverage, because really, it was only $3,500. We could have forked out $20,000 but I cringe to think about all the growth we would have lost due to having so much of our assets tied up in one car. That one choice provided all the cash that we used to travel through 27 countries. She looks a little rough these days, but I have a soft spot in my heart for that car.
The Money Wizard says
Awesome to hear! I’m planning for mine to reach a similar age one day.
I agree that opportunity cost might be the biggest sacrifice when buying new.
Thank you for saying this out loudly.
Lately I have to face with the problem of a probable and slowly inevitable car replacement (our car turns 20 year old early next year and started to show some serious problems). As a person who really have to focus on finances I have read a lot of articles about the topic on several PF sites and I was really decided that I will save the money and search for a used Honda Fit or similar reliable and reasonable car. Then I saw a special offer at local Fiat website and so my struggle began. I could buy a brand new Fiat Tipo hatchback for little less than 15k. Also they run a recycling program so I could trade in my 20 year old Fiat Punto and lower the price to 12k. The current sale price of our car is around $6-700, plus the hassle so lowering the starting price by $2500 seems a good deal. Unfortunately I could only buy the car using a loan which would add another $800 in interest to the price through the 3 year repayment period. Adding to the equation the local car market, the prices, the distance of the potential cars, the untrustworthiness of the dealers and my own incompetence it seems a very unlikely scenario to find a good reliable used car at reasonable price on an easy way. So I am considering to go for the new car when the time will come. Just for your information I am family man with around 10k km/annum need, and I plan to use the new car as long as possible (probably another 15-20 year until the EVs will be affordable and reasonable for everyday people). What do you do in my situation?
The Money Wizard says
Going new probably won’t be the worst thing in the world, although it will be more expensive. Opportunity cost, increased taxes, higher insurance costs, etc. are all very real. I recommend running the numbers yourself and seeing how comfortable you are with the increased costs.
I’m not a fan of car loans and doubt I would have gone new if I couldn’t pay off the loan before racking up any interest.
Good luck with the search! Sounds like you’re planning ahead which is always good!
Go Finance Yourself! says
Very insightful post. Your graphs comparing how people think cars depreciate and how they actually depreciate are very true. I agree that the increased life of cars today makes a big difference. I bought my current car brand new (Acura TSX) just out of college almost 11 years ago. It now has about 145,000 miles on it and still runs great. I believe I can get at least another 100,000 miles out of it. For that long of a time frame, the small savings you could potentially reap from buying a slightly used car really isn’t that much.
But, as you mention, the biggest savings comes from buying an older car and investing the difference. Or if you can buy a cheaper old car with cash and invest the amount you would be paying monthly on a new car. Of course if you go this route, you’re putting a lot of faith in the previous owner(s) taking good care of the car.
The Money Wizard says
Yeah, going the slightly used route definitely seems to zero out in the end, especially if you plan on holding the car for a while. The best deals definitely exist in the “extremely used” range which, as you said, requires putting a lot of faith in the previous owner and/or having car repair skills. Of which I have neither.
I really liked your “depreciation cost per mile” so I did something similar for my car, Toyota Matrix 2005 with 90,000 miles (150,000km) on it. It depreciates 400-500USD per year (at most), so taking the upper 500USD. I drive it about 3 oil changes per year, which is 15,000 miles (24,000km here in Canada). That gives me 500/15,000 = 3.3 cent per mile.
For my fiancee’s car it’s even more fun, she’s got a Toyota Echo 2003 automatic, bought last year for 1100USD (1500CAD) in perfect shape, except for external rust, unavoidable in Quebec where we use salt on the roads in Winter. No repairs done since purchase, except new battery (75USD), none needed. 2 oil changes. Depreciation? About 150USD per year. She drives is about 6500miles (10000km) per year. So 150USD/65000miles is 2.3 cents per mile.
I also find that (my) life moves so fast that every 2-3 years I move to a new place (hence no mortgages for me) and my transportation needs change, so I need a different vehicle anyway. So used works fine for me.
Back to you. To play a tongue-in-cheek psychologist, I think you came up with a good financial justification for an emotional decision to buy a new car that is 3 times more expensive than a used one (at least in this manner of comparison).
Financially, you’ve proven that getting the reasonable new car as you did “is not so bad as people think” and it makes you happy, I am sure. (yeah, Toyotas are not known for their dynamics)
Thanks for the article and have fun with your new toy!
You’ve earned it!
The Money Wizard says
Those are some awesome depreciation numbers! Especially when compared to say, the average new car purchase of $30,000+… how good do you feel knowing that your vehicle choices are probably depreciating somewhere between 3-10 times as slowly as most other cars on the road? You sir, are beating the system.
To the tongue in cheek psychologist, he very well could be dead on. 🙂 There’s no doubt an old beater is the wisest financial decision. But I don’t claim to always make the wisest financial decision… rice and beans every night is definitely more financially responsible than my weekly dinners out, for example, and my 2-3 yearly ski trips can’t be financially justified, period.
My philosophy isn’t about spending no money, it’s about eliminating the waste and making sure the things I am paying a premium for are really worth it to me. I am definitely paying a premium for the new car, but the premium was close enough to the used competitors that I think it’s worth it.
Always happy to see you in the comments,
That’s a really useful Carticle (ahem) – I’ll be buying a car when I move back to the UK in a couple of months and am starting to do the research that comes with it.
I don’t trust my mechanical knowledge to spot a duff used car but I also am not swayed by the showmanship of the dealership (there’s another word merge there surely?)
Thanks for the contrarian view on this issue.
The Money Wizard says
Glad you enjoyed the carticle Craig!
Thank you so much for putting some math behind what I’ve always observed. I recently thought, “Wait, if used cars depreciate 50% in the first year, why can’t I buy them for roughly that?” Why am I looking at 2 year old Toyota Highlanders with 30,000 miles for only $3,000 less than the sticker on a new one? And the hardcore thrifty will say, “Well that’s $3,000 you’ve saved!” But your bumper to bumper warranty is almost up and you have no idea how the car was maintained or driven. Plus like you said, you’ll be replacing it roughly 2 years sooner than you would’ve on a new one. So really rudimentary math would be to divide the cost of the car by the number of years you think it’ll last (and then maybe even divide it by 12 months to figure out what it cost you per month to operate). So if you divide a new car by 15 years, you have to divide the used one by 13.
I also played around with one of those depreciation calculators a lot and was discovering there was hardly (if any difference) and once you accounted for a higher/sooner maintenance cost, you could save money on a new car.
David Houston says
at 3 years new cars depreciate by about 46%
David Houston says
your right used cars are getting a lot of hype. I think to win at a used car it helps a lot if your handy and mechanically inclined to see if what your buying is ok. Also if you can do your own repairs or at least some of them you can do ok with a used car. If not may as well just bite the bullet and buy new.
With me I just can not justify paying almost $20000 on a new car. And thats a small new car. The tax and other fees on a new car is a killer to the pocketbook.
But I can see where if you have the cash you can get a trouble free car and then hey go for it. If it wasn’t for new car buyers I wouldn’t be able to buy a used one
Thanks for the wonderful guide
One thing for sure on a new car milleage will not be roll back like many of used car.
J R Spikeston says
I am not sure why you would set the “useful” life at 150,000 miles. We never buy cars with fewer miles than that, and they last us for years–quite usefully I might add. That’s about when cars get “broken in” and the lemons are filtered out due to survival of the fittest.