14 January 2008 8 Comments Print This Post  Email This Post

A lot of people buy a car every five years or so, and there are some who swear by buying new cars while others prefer to buy used. I’m a proponent of used car buying simply because they are a better value. I’m basing my stance on pure numbers. It’s smarter, financially, to go used in most cases. Of course there are some perks with buying a new car, besides the smell. For one, you get lower financing rates. You’ll also get a warranty and the assurance that the car has not had any previous problems. However, if you buy the right used cars, you’ll be fine. All in all, a used car just makes more sense. I’d rather pay $20,000 for a used BMW then $35,000 for a new one. Here’s why.

What? It’s only worth half of what I paid?

Thats what you’ll be saying if you try to sell or trade in a new car after four years of ownership. Most new cars will simply lose half their value after the first four years. This is the biggest depreciation hit of the vehicle’s life. This is the single, most critical reason you shouldn’t purchase a new car. You want to get in at the mid to bottom point of the depreciation curve. Why lose money for nothing? Let the other person take the big hit.

That’ll be $20K in Opportunity Costs Please.

That’s the fine print hidden in the sales contract of a new car. We’re investors right? Therefore, we need take into account all costs, including opportunity costs of buying a new car. If I spent $35,000 for a new bimmer rather than $20,000 for a used one, I would be paying higher monthly payments and insurance costs. I could be saving hundreds each month and investing it instead. Of course, we know about the power of compounding returns over the years. Thats why I said $20K in opportunity cost in the heading rather than 15. If you’re a cash buyer, that’s even worse. You’d be tying up $15K of your money in a car.

More Bling For Your Buck

Most people think that if you’re buying a used car, you’re giving something up. There is a notion that somehow a new car must be better than a new one. I don’t think so. If you’re buying a used car, you actually get more car for your money. Let’s take my example above. You can buy a brand new, nicely equipped BMW 3 series for about $35,000. Thats the sports sedan on the right. However, if you spend $20,000 and buy used, you can pick up a sweet, loaded BMW 5 series. If you want to get flashy, you can even get yourself a nice 2004 Z4 convertible like the one on the left. So if you go used, you would pay a lot less, take a smaller depreciation hit when you sell, and drive a nicer car. What more can you ask for?

Buy Intelligently

Now of course there are concerns about breakdowns, previous accidents, haunted cars, bodies in the trunk or whatever, so you have to buy intelligently. Generally, modern cars are built and engineered very well. They are meant to last and they will if you take care of them. However, certain models are plagued with more problems than others, so you have to do some research on sites such as edmunds.com. Keep in mind, when it comes to poorly built models, buying a new one won’t save you much headaches in the long run. If you want a warranty for peace of mind, buy a certified pre-owned car, which comes with a warranty. If not, you can buy a third party warranty through sites such as warrantydirect.com. A lot of used cars will come with a carfax report but if it doesn’t you can easily order one at carfax.com, so you can check out the car’s history. If there are still concerns, then I suggest you get a private vehicle inspection from independent companies such as SGS. Buy yourself the right used car intelligently and you’ll be enjoying it, along with your fatter wallet for years to come.