Saving on a Car Purchase, Buy Used

Over the next couple of days, I have two posts on saving when you buy a new car. Today's post comes from an article on MoneyCentral (scroll down to the last half of the article) that talks about saving by buying a used versus a new car. The article says:

The same people who bemoan the fact that they can't save are driving around in a new car and making monthly payments on a 48-, 60- or 72-month loan. But you'll be amazed by how much you can save by buying a used car.

Here are the two options:

Buy a new car and finance it. You put $6,000 down to buy a new car worth $26,000. You finance $20,000 at 6% interest for 60 months. Your monthly payments are $386.66. Total interest costs are $3,199 making the total cost of the car more than $29,000.

Buy a used car outright. You pay $6,000 cash for a good used car. Invest that same $386.66 a month for the same 60 months with an average 9% rate of return. At the end of 60 months, you would have roughly $28,000 in your investment account after paying 15% tax on about $800 of long-term capital gains. Even if you subtract the cost of whatever additional repair costs you may have for your older car, you still come out way ahead. (Editorial comment: There WILL be extra repair costs for a used versus a new car. Count on them.)

In addition, now is the perfect time to buy a used car. Just food for thought for those of you in the market for a new car.

Comments

[mbhunter]

There's another article on MSN.com about the most dependable older cars.

[Guest]

Whoa....wait a minute. How about we look at things a little differently. If you buy a new HYBRID vehicle which saves you $2400/year in gas AND gives you a $1500 tax credit then maybe things don't look so bad. Not to mention the fact that new cars typically have 5 years (or better) warranties in which you're unlikely to need to pay for repairs. Some dealerships offer free maintenance for the first year (4 oil changes x $30 = $120/year saved)

So let's add up. 2400+1500+120 = $4020 off that 20,000.

Earning 9% is fairly generous no?

There are also other benefits to new cars:
1. New cars have full air bags with "curtain" technology that protect you from all angles in an event of a car crash. How is this factored into the equation? How much do you value a lesser head injury in new car vs. old car?
What price do you put on safety. Don't all people statistically end up in a car wreck at least once per car?
2. New cars have more pollution control elements in them. If you live in a city/state with strict emissions control and testing then you know how much extra you have to shell out to "fix" the "environemntal" problems with your car during that dreaded yearly inspection.
3. For an older car that may need to be repaired, it just isn't the cost of the repair but the cost of the time off work to go drop it off, the cost of a rental, and the potential cost of a tow truck if needed.

I know these theories very well because I've lived through both of them - owned many used cars and owned a new car and both have their advantages/disadvantages. Now that I have kids, safety is of much greater concern to me - I don't want my spouse and kids stranded on a freeway with cars going 70 mph whizzing by. The extra air bags and safety features have recently swayed me toward buying a new Toyota Hybrid Highlander (if I could ever find one).

[albert]

Have to agree with some of the comments of the previous poster. I prefer to look at cost per mile over the useful life of the car. Based on the numbers I've run, late model used cars end up being the best value, new cars are only slightly more expensive, and old beaters actually end up being the most expensive to own.

The best way of minimizing cost is to keep a car for its entire useful life - until it becomes unreliable or unsafe. The CPA's advice about at least 6 years is conservative, but on the right track. Actually, with careful maintenance 10 years should be easy. Just be sure you really like the car before you buy it!

[Mike]

I think it depends on the car ... and the price paid. For those who'd like to explore a new car purchase, here’s an excellent article that should help in getting the best price … and without having to go to the Dealer.

http://www.auto-broker-magic.com/newcarpurchase.html