Depreciation on New Cars Can be Very High

Here's a quick fact from Bankrate that says depreciation on new cars can be quite steep:

New vehicles usually fall as much as 20 percent to 25 percent after they are sold. In the case of SUVs in this era of high gas prices, depreciation can be even more.

I usually buy new cars, but I drive them forever, which is really the only way buying a new car makes sense to me. Most personal finance advisors will suggest buying used, but I'm just not that sort of buyer. I'd rather research a vehicle (via Consumer Reports) to make sure I'm getting a reliable car, buy it new (for cash), and keep it until repair bills start to come due. Then it's time for a new model (which for me is about eight years.)

I don't see how people who buy a new car every few years can make much financial headway -- they're losing too much in depreciation.

How about you? What's your car-buying philosophy?

Comments

[TC]

I'm of the same philosophy. I am 30 years old and I have owned 2 cars in my life. My first car was a used Dodge Shadow that I bought for about 2 or 3 thousand dollars. I drove that for about 2 or 3 years (repairs kept popping up on it every couple months) until I bought my current car, a new (at the time) Honda Civic. I've been driving that for almost 12 years now and it's great not having to worry about car payments and the car is very reliable (knock on wood). My wife drove her first car, a Ford Escort, for almost 11 years when she got a new Honda Pilot a few years back. We plan on keeping that for at least the next several years. I, too, don't understand how people can buy new cars every few years. For us I think we'll stick on about a 10-year plan for each car we own.

[Amy]

Why wouldn't you just buy a car that's 1 or 2 years old? The savings are hard to argue with, and you're still getting a car that's in prime shape (esp. if it has less than 20K miles). The only way I would ever buy brand new is if we had to finance it, and we could take advantage of a 0% or 1.99% special rate (usually only available for new cars). Otherwise, buy a car 2 years old with low miles, save a fortune for virtually the same car.

[Niranjan]

Hey,

I buy used cars. The last car I had was in an accident and was totalled.

I have bought a new used-car.

If you look better, you can find a very well maintained used car which will need little or no repair work.

My second used car is better than the first and so I think I am getting better at finding and also I was lucky... :)

Let others buy new car and take the hit for the depreciation!
Then you can buy it from them.

Internet is a best place to search for what you are looking.

Steps involved are:
1. Finalize what you want and your budget (stick to it).
2. Search on websites (Google, cars.com etc)
3. Look for the vin car history report even before calling the seller.
(almost never go for a dealer as tax and their profits will rip you off)
4. Set up a test drive
5. Buy a used car! :)

:)

[savvy]

I prefer to buy used and drive for a while. My last car was a '95 Accord that I bought in '99 and drove until '07. I bought an '04 car last year and will probably drive this one until 2011 or so. I've contemplated just paying cash but the return on my investments is greater than the interest rate on my car loan. Therefore, I prefer to make a down payment and finance the rest vs using all cash.

[Kevin]

FMF said: "I don't see how people who buy a new car every few years can make much financial headway -- they're losing too much in depreciation."

They don't - that's why people are regularly upside down on their car when they trade it in for a newer model. So that loan gets rolled into the new car and the snowball gets bigger.

I love buying 2-3 year old cars. My 1998 Jeep that I bought in 2002 is paid off (a year early) and I've had no major repairs on it, just new tires, oil changes, etc. I plan on driving it until it dies, since it still looks great and has a timeless design. We just paid off my wife's 2003 Protege we bought in 2005 and it too has been great so far.

Funny story - when we went to buy the Protege there was a lady in the next salesman's office negotiating to buy a brand new Trailblazer - I'm sure it was over $30k. They were haggling over financing and she asked if they had any loans longer than 72 months because the monthly payment was too high! Bells were going off in my head, but clearly not for her. We later found out she was trying to roll her old loan (from a car just purchased a few months ago) into the new loan. Yikes.

[Ken]

I have a 12 year old car now, that was bought by my parents and only driven by people in our family. I have had it for the past 9 years. I like the piece of mind of knowing where the car has been and how it has been treated and maintained. And can only blame myself for things that go wrong.

Buy a used car is a little sketchy for me. The next car i plan to buy will be knew and will be a family car that should last me 8+ years at minimum. As it is right now, my truck has few repairs although it could use about $1k into it right now to fix some things and should last plenty long after that.

As it is now. The car was less than 10k new, and i have put in about $3k. So it has only cost about $1k a year to operate. Which is pretty nice.

[cory]

Depends what you're buying. Some cars hold their value pretty well, and if you're in the market for one of those, you may not be saving much buying used--I'm looking at you, entry-level subcompacts.

[Dave]

I have been looking at buying new vs used vs leasing. The numbers below assume buying a Honda Pilot and keeping it for 4 years. I estimated $1k for warranty on the used car and factored in the residual value of the new/used car after 4 years.

2008 New: $2200 a year
2005 Used w warranty: $1800 a year
2008 Lease: $3800 a year for three years

So it appears buying new is still a much better option than leasing. Also, you could factor in low interest rates (i.e. 0%) for a new car, which would narrow the gap a minor amount (~$100 a year).

There's a price for that new car smell!

[Borealis]

I wanted to buy a used Honda CRV, but the used ones were only $2,000 less than a brand new one. They hold their value very well. So I bought a new one, expecting to hold it for 10 years or so.

[JACK]

I agree, the notion that a 2 to 3 year old car has gone down in price because of depreciation isn't as true as it once was.

My car is hitting will be seven years old in the fall. I think I can get another three years out of it. In the meantime, I'll save cash for the new car. I'll probably buy another new car, but I have an advantage as I always pay less than dealer's cost on a new car, so it takes some of the sting out of the price differential.

[budgetsaresexy]

I'm pretty sporadic on my car purchases all depending on my mood that year :)

If i'm feeling fiesty and want something reliable and nice to look at, I'll do what other fellas on here do and buy a used car that's 2-3 years old. Having one brand spanking new doesn't really matter to me, but having a great warranty does for sure.

Other years, I go retro and pick a car that i've always wanted when i was younger but that my dad always said wasn't very "economic". Think Cadillacs, Cammaros, and El Caminos 15-20 years old. I'll buy it with cash and then enjoy not having car payments, w/ the occasional mechanic visits.

[Mike H]

I buy them old and run them into the ground!

I'm still in the under-30 crowd, and I'm comfortable doing some minor maintenance and repairs myself. This has allowed me to be minimalistic in the cars I buy. For example:
-In 2000, I bought a 1989 Dodge Spirit with 127k miles and kept it until this past summer, at about 195k miles. Initial Cost: $2500

-This past summer, I bought a 1997 Saturn SL2 with 108k miles. I'm hoping to make it to 200k miles with this car.
Initial Cost: $2000

If the car gets me where I'm going, I'm content. With an older car, you're more likely to have to do some work on it, but that expense has been more than compensated for by the up-front benefits of buying used.

This approach lets my wife and I focus on paying down the school loans and mortgage, rather than having to shell out for car payments.

[Foobarista]

I think the financial approach to cars is every bit as important as the financial approach to houses, and can be even more so. In a previous thread about well-off people living paycheck-to-paycheck, the thing that stood out like a beacon was huge car expenses due to long commutes and a perceived need to drive newer cars.

Our approach: buy new(ish), pay cash, over-maintain, and drive 'em forever.

[D Claus]

I just paid off my wife's 2003 Acura MDX which we purchased used in Nov 04, so it was a 1.5 years old with 25K miles on it. We paid $28K versus $42K for a new one. After making payments and a half each month, it was paid in full in just over 3 years AND the car is still worth $22K on kelly blue book with 75,000 miles!

My philosphy is to buy nice cars (generally imports such as Acura, Lexus, Honda or Infiniti) - they maintain their value pretty well after the first 2 -years.

I'm selling my 8-year old 2000 TL this fall and plan to buy a 2006 Lexus GS430 used (<30K miles). After using my money from the sale of the old car and throwing in about $2K, I'll take out a loan for $20K and have reasonable car payments for a $48K car new!

The reason I'm a big fan of buying slightly used is that car dealers will negotiate more with you because they want to get it off the lot. You start with TRADE-IN value of the car you're interested in as a starting point and go up slightly - of course the dealer wants you to pay "Retail Value"... which is ridiculous, especially knowing they probably didn't even pay trade-in value at the auction to buy it back.

[Rob]

We've got the same philosphy, although we're still early on in our lives. We did have to take out a loan for the new car we bought this summer. But, we'll have it paid off before we need to replace it again. Hopefully we'll be able to pay cash for our next new car, or at least a very significant down payment.

[FS]

In short, here are my recommendations:
- drive current car into the ground, until you can
- pay cash for a "new to you" used car (2-3 yrs old)
- plan to drive 6+ years
- save monthly for replacement cost
- don't buy next car until have cash for total cost

For the 2-car family:
- continue "cash only" policy
- rotate "new to you" used car in every 3 years, (if drive each 6 years)
- (or rotate every 4 yrs, if drive each car 8 years)

Ideal:
- get a job with a company vehicle, that's available for personal use

[Big Cheese]

When I bought my first car I had it for 6 years before selling it to take a job abroad. It was starting to get high in the maintenance at that point (it was a VW Golf GT). During that time I was always considering my total cost per mile (including depreciation, fuel, maintenance, insurance) in making a decision what to drive & buy.

Now I get a company car that is replaced every 3 years and all expenses (fuel, insurance, maintenance, etc) are covered. It's so nice not worrying about any car problems, the Europeans really have the Americans beat in this regard. Hopefully it'll be a while before I have to worry about the challenges with the car ladder. In the meantime I'll enjoy getting a new BMW 5 series (current car) or something equally nice every 3 years, aaah. Hopefully, this gig lasts.

-BC

[Odnal]

I think that 20-25% is a pretty accurate estimate for depreciation on a new car during the first year or two. Personally, I wouldn't buy something that depreciates that fast.

My philosophy is to do some research and avoid models that have a history of major problems. Then be patient and wait until you find a 5+ year old vehicle that has been well maintained. At that point, it has taken most of the depreciation hit, and it can last for another 5+ years pretty easily.

[Mike S]

I buy new cars only. Pay cash, never finance. Replace after 10 years or 200,000 miles, whichever comes first. Works for me.

Last year, I replaced my Nissan pick up (205,000 miles) and my wife's Subaru Outback (11 years old). We bought a 2007 Honda Civic for me, and a 2007 Honda Accord for my wife. We're set for a while.

[Big Cheese]

Odnal,

I seem to remember that the depreciation + repair curve is least steep between 2 & 5 years old for the car. Between 0 & 2 years depreciation dominates and after 5 years (if you drive a lot) maintenance kills you. Therefore buy your used car at 2 years old and sell it at 5 - 6 years old. Make sense?

BC

[Ralph]

We used to buy used but the last four cars we have bought new. The first we financed but the last three we have paid cash. We keep driving the 99 Odessey which has 160,000 miles on it but still runs good. We have had some repairs but not bad compared to replacing it. As our kids got ready to go to college we wanted them to have a reliable car to drive. While I agree that a car depreciates early on it is a smoke and mirrors game. If you attempt to trade it in you will get much less for it but the dealer will sell it for almost new price. When I researched out latest purchase I found that the asking price of a car with 20K miles was only $1000 - $1500 less than new. I can put the 20K miles on myself and have it for another year or so for the savings. Like anything it is negotiating and I can get as good of a deal on new as used.

[kitty]

Buy new Honda Civic or Toyota Corolla, pay cash, drive until it starts costing me too much or gets unreliable.

To me a car is a mode of transportation, not an investment, so I don't think about it in terms of a "depreciating asset". I don't include it in my net worth either. To me - I pay to get to work every day; and if I buy a car that can do it reliably and for a long time, it's fine.

[Tim]

depreciated value only matters if you are planning on selling. if you are buying and drive to the ground, then it really doesn't matter at all.

i buy new because i like knowing the history of the car. i simply do not trust people who hold cars for only 1-2 years, because they are either leased or program cars and people simply don't take care of their vehicles when they aren't their vehicles. there may still be warranty left, but those 1-2 pre-owned years do matter, and i like the security in knowing how a car was treated during that time period.

[Daddy O]

I bought a 2005 Jimmy 4x4 with 80.000 clicks on it for $ 8.000
(That is all my son was going to get for it at the dealer)

Although expensive on gas (in comparison with them tuna can imports) the Jimmy is an excellent
vehicle for the money.

I am sure I could get $ 5.000 in 3 years for it, making it a solid investment

Be patient (let someone else buy new) get what you want from a friend or relative at a fraction of its original cost

BE HAPPY, life is short!