Are Used Cars Really Worth It?

The following is a guest post from Free Money Finance reader Spencer Mayes.

Financial experts everywhere constantly espouse the virtues of buying a late model used car because they’re the best way to avoid the huge hit of depreciation while still being new enough to provide peace of mind. After working at a car dealership for five years I’ve come to believe that this guideline isn’t always what it’s cracked up to be.  Here’s why.

• Used Cars Still Depreciate:  A 2008 Ford Fusion has a suggested retail value of $15,020, a trade in value of $10,850 and a private party value of $12,870. While most people don’t pay full price for a used car, most dealers don’t give people full trade in value. Dealerships can usually buy the same car at an auction for wholesale prices that are well below trade in values, this is especially true on domestic automobiles. So if you buy your “new” car from a dealership you will still lose value the instant you drive it off the lot. I can’t count how many people I saw come into the dealership upside down on the used car they bought.

• Warranty Issues: The average American car sees about 12,000 miles per year; therefore the average 2008 model would have roughly 24,000 miles on the odometer. Most warranties are for 3 years, 36,000 miles. By buying used you only get 12,000 miles of warranty coverage, once that runs out you’ll be paying repairs on your own dime. It’s hard to predict reliability, but one expensive repair could easily wipe out the savings of buying used. Yes, there are certified pre-owned models that come with an extended factory warranty, but there is typically a premium charged for these models. Aftermarket extended warranties are another option, but that also adds to the price of the car.

• New May Be Cheaper:  When I worked at the dealership I was amazed to see the dealer asking and selling used cars for more money than new ones. Brand new “loss leaders” often advertised in the paper were often thousands less than better equipped used models. While these “loss leaders” were often base models that lacked many features, they offered an excellent value compared to a used model. If you can live without certain options these cars can be the way to go.

These are all just things I noticed while working at a car dealership and buying my first car. My examples may not apply to every situation, but I think it is silly to say that buying a late model used car is always the best bet. 

Comments

[Jack]

The other thing that I think about is a used car already has wear and tear and will need work like new tires and brakes, fluid changes, etc. Part of the equation is if you are able to perform the maintenance yourself or are you going to bring it to a service shop. The cost to do the normal repairs required at the higher mileage can add up quickly.

[Tim O'Brien]

Another part of the equation is the cost to insure the vehicle. Liability only insurance on 10 years and older cars, saves thousands a year on my three. I use AAA for it's roadside assistance and retail discounts as added coverage to my liability insurance. We also occasionally rent a vehicle for extended road trips and reduce wear on our own vehicles. Even with AAA and rentals we still save a fair amount in my estimation.

[jim]

This is really interesting.

I agree that there are sales/marketing tactics that can take advantage of the gullible.

But if you really do your homework, in my opinion, you won't get burned.

Here is one thing I've done in the past, buy from a person who's already bought the next model of what they were selling. Gave me confidence he liked the model and brand.

I bought a 5 year old volvo sedan from someone who just bought a new volvo sedan.

[Eugene Krabs]

This is interesting. It confirms something that I've always suspected for a while. That an used car may not always be a better deal than a new car. That in the end, it's up to us to shop around and find the best deals possible to suit our needs, regardless of whether it is a new or used model.

Thanks for sharing this!

[cmadler]

"The average American car sees about 12,000 miles per year". I've seen this number thrown around an awful lot, and I know that 12,000 miles/year matches up with most warranties (e.g. 5 years, 60,000 miles), but I'm dubious that this number has any current basis in reality. Can you point to a recent survey supporting this?

[theCase]

I agree with cmadler AFA miles per year. Personalty I'm cranking on about 33K/year, but I think the average is probably closer to 20K than 12K. But I don't have any supporting figures either!

[sasper]

It really depends on where you live and what kind of driving you do. A lot of my coworkers put less than 3,000 miles on their cars per year, since we live in the city and the office is <2 miles away from where they live.

[Scott]

In my experience this can be true. A couple of years back I bought a new Ford Focus. My intent was to get a used one that was 1-2 years old. At that time I could buy a used one for about $12k but I could get the new one for about $13.2k. This was because of the fantastic rebates they offered at the time on new. The actual sticker price was $17,600. For me, paying $1,000 or even $1,500 extra for new with zero miles was worth it.

Just my experience on the topic.

[Strick]

Last year I intended to buy a used late model. I compared the per year price of keeping a new car seven years or a two year used model for five years and they were extremely close, so I couldn't figure out why I wouldn't buy new. And buying the most stripped down base model does save a whole lot more than I would have thought (I'm more than willing to miss out on the automatic seats, the only option missing from the next level I would even notice, for $4K).

All that said, the best value I ever get out of a car is to buy a $7K camry/civic, drive the heck out of it, and then sell it years later for $5K.

[Mark C]

Sorry, but there's no way using funny math that you save money over, say a 10-year period, by buying new vs. used.

Depreciation costs are not linear. As soon as you drive the vehicle off the lot, you lose up to 15%. Don't treat a vehicle as an asset. It's a daily expense, but with a physical entity, rather than a transaction. If you're planning to trade your new car in 5 years for another new car, you'll never win because the first few years of depreciation are always higher than the remaining years.

Insurance is required when financing a vehicle. Non-deductible interest is paid on car loans. Most people don't pay cash for new cars. Those that can pay cash, buy used. If you are really concerned about depreciation costs, and you like new cars, LEASE a new car with a high resdidual, then sell it before the lease is up. You'll find the balance you owe on the lease contract lower than a similarly-financed loan at a bank, because from day one you are just paying depreciation cost, NOT interest. That allows you to list your leased vehicle at a lower price than comparables that are still being financed, and you'll sell your car quicker. Just be sure to negotiate the same incentive deal as if you were buying.

Every vehicle, new or used, will require ever-increasing cost of service over a 10-year period. Buying new just delays the inevitable. Factory warranties are great, but extended warranties and service plans are a total waste of money.

There will always be recessions like this one. You will see more rebate deals, incentives, and zero interest offers, and if you can buy new cheaper than used (I don't believe this is widespread), then go for it. Don't expect this to last for long.

[Josh Stein]

A lot of older people with cars don't get anywhere near 12K miles a year. My wife's grandparents with their two cars combined probably hit about half that, and that's only because they are driving up here to see our two kids more often (about 50 miles one way).

[penny]

You must get out there and do your homework figure out the facts so you won't get burned. some people just don't put in the time, and therefore are susceptible to these practices and techniques. Knowledge is Power.

[Mark C]

If you want to save money on used cars, DO NOT buy from CarMax! They have a huge inventory, and most give free transfers, but in general their cars are way overpriced for the mileage.

You can find great prices by shopping online and buying from private owners. If you're concerned about warranties and maintenance of used cars, then try a new car dealer. People trade in their older models for new ones, or the dealer gets in a few rental fleet cars that have all their service records, and the dealer has to get rid of them. They are competing for sales of their newer models. If you can catch them with a recent trade-in, BEFORE they send them off to auction, you'll find the dealer willing to negotiate. This can't be done at CarMax.

Another thing about CarMax that has changed the whole concept of used vehicles, is their no-negotiation policy. People assume from all the ads and claims that CarMax has the best prices, then they walk in and pay the sticker price, with few questions asked! In my experience, I've NEVER found a better deal for similar or same model used cars at CarMax than at a new car dealer. Don't be a sheep, learn how to negotiate and walk away if you're stonewalled.

[Mike B.]

A simple web search will show a good graph of US mileage--it is around 12K/yr.

http://www.project.org/info.php?recordID=146

IMO, the original post is pretty spot on. When I've thought about buying a 2-3 year old car as opposed to new, I've never been able to see a huge savings. That huge depreciation when the first guy drives it off the lot never seemed to make it into the price of the car, for whatever reason. Now, I think if you buy a 6-7 year old car, you will end up with more money in your pocket in the long run if you shop for reliability and drive the thing into the ground. Not that I do that--but of course I always pay cash for a new one anyway.

[mike z]

not liking this article too much.

1) no one pays "retail" on a used car. retail on my certified used car when i got it was 22k, i got it for 15.9k.

2) many companies provide 5+ years of powertrain warranty. 3 years is the typical bumber to bumber. that said, get a certified car. that adds more warranty. lexus, for instance, has a 3 year bumper to bumper from the day you buy the car on their certified used cars.

3) new will not be cheaper. yes there are times when dealers are incentivized to sell a car quicker so car manufacturers can give them a few thousand in leeway but with regards to depreciation, you INSTANTLY take a 30% hit on a new car. with a used car, it loses value off the lot but will see a steady decline and never that instant 30% hit.

[Apex]

I think this post is exactly right. I have never understood the advice to buy a 1 or 2 year old used car with relatively low mileage. You don't save much doing this. I thought about doing this 15 years ago when I bought my second car and found that the prices were not much better than new.

The way you save money is you buy a 5 year old car with 100k miles. Now you have saved about 2/3 of the price of new and you can still drive it for 8-10 years (if you buy a car with a good reliability record).

If you need the peace of mind of relatively new and a warranty, then just get new. If you want to save money, get 5 years old with 100k miles. 18 months old with 20K miles is often times not saving you any money, especially if you buy that used car from a dealer. From a private owner maybe, but at a dealer, you will not have saved much of anything doing that.

[mike z]

sorry, i meant "bumper to bumper"

[Nate]

Ummm - seriously disagree with Apex... You are assuming you buy that used car from the dealer. I purchased a 3 year old model from private party (many people buy new and swap it out in a couple years) -- The book was 20k -- I bought it for 9k... I guess it depends on the kind of work you want to do... Mostly it begins with looking on craigslist and asking people who buy new cars frequently to check with you before trading it in to the dealer for pennies...

Honestly it is moves like this that allow you to retire (Financial Independance or whatever you want to call it) MUCH sooner than those around you...

[Peter]

If you do your homework and don't get taken in, you can almost always do better buying a used car. Lower insurance, lower cost, less depreciation hit.

When I bought my current car it was about 2 years old with under 30k miles on it. Buying the same car new would have cost me close to 15-16k at least. Buying used? 10k. The car is still basically new, and while it doesn't have the 36,000 miles bumper to bumper warranty anymore, cars are so well made these days that I don't expect any major problems from this car for years to come as long as I properly maintain it. Even so, I've got an emergency fund saved to cover it in case there is a major problem. Problem solved, and thousands saved.

[jim]

12k miles /year is indeed average. Another source for that figure:
http://www.eia.doe.gov/emeu/mer/pdf/pages/sec1_17.pdf

[Liz]

Just a note on those that say an extended warranty is a waste of money and useless. Well, it probably is, until your vehicle dies on you. I purchased a used vehicle from a dealer years ago, and was "sold" the extended warranty for around $1K I think. Then, I ended up dating the guy who sold me the car (weird, I know, but that was a stipulation of him letting me "think about it" overnight) :) Anyway, my car needed a new transmission within the first 6 months and he told me they actually lost money on my sale because that's usually where they make money... but it obviously worked great for me.

Then, when I bought my next car from CARMAX (yes, I actually felt like I got a good deal on a low-miles car despite what a previous commenter said), I purchased the extended warranty again for about $1200. Guess what? Yep, the car is in the shop now getting a new engine that the warranty has to pay for, not me. So, in my case(s), buying the extended warranty has worked out in my favor. It's just like a little extra insurance for me now and I will probably always get that if I continue buying used.

[BenC]

Just another anecdotal story, we bought our minivan used and saved a bundle. New Honda Odyssey's start at around $30K. In late 2008 we bought a 2004 model with 70K miles on it for $9600 at a Lexus dealership of all places. I had it checked out by a personal mechanic ($50), had the dealer replace all of the tires for free, and bought it. It's purring like a kitten still at 102K miles and it's paid off. We originally financed the $9600 over 3 years at like 3% interest but just paid it off a year early with a larger than expected tax refund (thanks Obama!)

[Apex]

@Nate,

You will notice I specifically said "especially if you buy that used car from a dealer"

Most people buy their cars from dealers, used or otherwise. When this advice is given out, I have never heard it qualified by saying only if you buy it private party and scour craigslist looking for a deal where you get a 20K book value car for 9k. Seriously, if you buy a 20k car for 9k (private party or otherwise) then either there is something wrong with it that makes it worth no where's near 20k or the seller is an idiot.

Obviously, anytime you can negotiate any good deal, regardless of the age of the car, then that will make sense.

I think the main point is that if you think you automatically get a cheaper cost of ownership by buying a 1 year old car the answer is most of the time no. If you think you automatically get a cheaper cost of ownership by buying a 5 year old car with 100k miles the answer is almost always yes.

[Mark C]

@Liz: I'm glad you "felt" like you got a good deal at CarMax, but did you actually look around a bit at dealers and online before you bought? Do you enjoy haggling over prices, or do you just work on instinct and emotion? The reason so many people are getting ripped off at CarMax is because their business model is set up to take advantage of a younger generation that has lost the art of negotiation. They know their customers have already been sold on CarMax, and for many the shopping experience is geared more towards instant gratification. Some people just don't want to put forth the effort to negotiate, or to shop around. That's the hook--"No Haggle Prices".

I'm glad you got the car fixed under the extended warranty, but as one poster said, recent model cars are built to a higher standard, and over the decades, prices have actually come down adjusted for inflation. A basic new car is not the financial risk it used to be. A basic used car is even less so. If you want to play the odds, I guarantee most people win even if you have to replace that $8000 used car with another similar one. Your old fixer-upper can still be sold to someone for something. Now if you're buying a 2008 Lexus or BMW, getting the extended warranty might not be a bad idea, but if you can afford one of those makes, it probably doesn't matter.

If you try harder shopping around, you might even be able to buy a manufacturer's extended warranty on a used car for free, because the lower price of the car pays for the option.

Also, buying a 1-year old car with 15K miles is probably not going to be better than buying 5-year old used w/50K miles, or buying new with incentives & rebates. You have to start at the point where depreciation curves flatten out on an annual basis. That's usually more than 3 years.

[Jerry]

I think so. We bought a used Volvo station wagon that was in great condition. Right off the bat our insurance was cheaper. It does lead to some additional repairs sooner than later but if you have it checked out beforehand, you can get a great deal.

[Mark]

I just bought a 2006 vehicle with 75K miles in excellent condition for approx. 1/3 of the new price, and a 2007 with 38K miles for about 1/2 of new. Hard to believe maintenance costs will eat my savings. These were expensive cars - my total outlay for both was $50K instead of around $110K.

I bought them from reliable local used-car dealers - not a major dealer (i.e., new car franchise or CarMax) and not a fly-by-nighter. I found that the major dealers ask much higher prices, but will come down at least 20% if you know how to negotiate. CarMax is great for the 80% of people who don't or can't negotiate.

The internet-oriented dealers tend to start at more realistic prices and drop less in negotiating. You can usually pick up a vehicle from a dealer for not much more than the Kelly Blue Book Private Party price.

I needed these cars in a bit of a hurry. Usually I buy from private parties - preferably people who need to sell quickly for whatever reason.

By the way, I have heard it said that only rich people can afford used cars. If you don't have funds to pay for unplanned repairs, you're better off buying new. You'll pay more, but it is more predictable.

And finally - most people haven't realized how much better cars are now than many years ago. These days, a car with 100K miles isn't worn out. Buy one from someone who disagrees with that statement!

[Matt]

I just bought my wife a new car CASH!!! 2010 Malibu. Best car I ever drove. I always buy new and keep a car at least 5-6 years. Never could make the lease numbers work for me in that the wife puts on an average of 15k a year in miles. When the car is approaching the 100k mark I trade it in IF I SUSPECT MECANICAL ISSUES. Main reason why I will not buy used.
Plus a guy at work who leases said he would never buy one of his cars off lease. He is too hard on his car. Remember that unless you know who you are buying from you may be buying a ragged on lease car or someone elses problems.

There is intrinsic security / reliability of having a reliable car safe car for my wife who drives way to much to work and myself is more important to me than depreciation and other factors.

My one exception for the 100k rule for the car is for my son. A 16 year old can drive a 100k car because it doesnot need to be as reliable as someone who needs to drive in a freeway and school is only 4 miles away. He can handle a breakdown.

Why do I trade in? I only trade in cars that I think might have future problems. One was a suspect transmission issue that I could not sell to someone I know.

All other cars if I feel confident selling to someone then I will sell.

Cars are the biggest rip off in the world.

[Ron]

I disagree that new is a better deal, particularly when buying a premium car. I bought a Ford Explorer Limited that stickered for $45K in 2006 for $16K in 2009 with 38,000 miles on it. It looks and drives brand new (in fact, I parked it next to a 2010 model the other day and my wife couldn't tell any difference). I payed less than 50% of its original price with no where near 50% of the life of the car left.

I maintain my cars religiously and drive them well into the high 100's and low 200's. Today's cars are just made better. A domestic car purchased in the 70's would be on it's last legs by 80-90K miles. If taken care of, a car with similar mileage today is barely at half it's design service life. Granted, you have to be patient and shop around for those kinds of deals. But they are always out there ... and usually worth it.

[Spencer Mayes]

I should clarify that when I say late model used, I'm talking about cars that are less than 3 years old... People who buy a 2006 with more than 36,000 miles will definitely pay less than a new car, but in most cases a 2006 model will not have a factory warranty still in effect.

All the financial experts I've heard talk about this say to buy a year or two old car that is off-lease or off fleet duty... That's where I disagree with them. I think the savings is not always what it's cracked up to be.

[Lurker Carl]

Late model used cars are not worth their price, you still lose thousands of dollars for depreciation over time.

I look for models closer to 10 years old with time-tested reputations for good reliablity. I purchase most of my vehicles from estate sales, one-owner cream puffs with low mileage and complete service histories.

Typical price I pay, $2-3K. Typical time I own them, 10 years. Typical odometer reading when I sell, 200K miles. Typical selling price, $500-1000. These automobiles have the same maintenance costs as late model vehicles without an inflated price tag.

Only one lemon and the junkyard bought it for several hundred less than I paid for it a few months earlier.

[KC]

It comes down to the math. My numbers are:

5,000 miles per year
10% of the price per year

I find the new base model to be say $15,000. So, if I can find a car one year older with 5,000 miles or less AND at a cost of $13,500, then it is break even at time of purchase. The goal is to beat those numbers.

90% of the time the only way to beat those numbers is to buy used. Eventually we always find a car below the 10% per year. We always drive our cars until they drop which is at least 10 years. And we never finance, always cash.

The roll of the dice seems to determine repair bills, so I throw that out of the equation. Each time a repair is needed a different formula is used since it will 'add on' the length I must hold the car past 10 years.

I'd rather risk $1,500 and hope to get 12 months out of a car then risk $15,000 and hope to get 10 years. This is just calculating your risk.

Feedback?

[Tyler]

I make six figures a year from my hobby buying and selling used cars. Some are classics so it's a bit different. For my daily driver I own a volvo I bought from someone in financial trouble that was one year old with very low miles.

1 it always depends. Every car and deal is different.
2 buying a used car at the right price is always better. Most dealerships make their money on trade ins and used cars for a reason.
3 cars are black holes of money so the best thing to do is minamise the absolute cost of ownership. The only way to save money is to own a cheap car that doesn't cost you anything to operate.

This is a cost of life, it's not an asset. People make this purchase with emotion and that costs them in the end. Take the emotion out and minimise the cost and you'll be fine. Buying new is rarely better.

[The Simple Machine]

I don't agree with the article as buying a base car over a 3 year fully equipped higher model can't be better. There is no history on this newer car in terms of malfunctions. At least a use car model has been tried and tested.

[Tim]

* I've found the "sweet spot" for used cars is just over 50k miles. Dealers usually automatically auction a vehicle if it has 50,001 miles.
* I've found great deals on "consignment" at dealerships. Look for the vehicles off to the side away from the majority of vehicles. It is a good way to sell also, if you can convince the used car place to let you.
* I've found that the dealer of a particular brand values trade ins of other brands less than their own. A Lexus trade in will be worth more at a Lexus dealership than if it was traded in at a Ford dealership. When buying, I look for "off brand" trade ins and can usually get for a better price.

[Budgeting in the Fun Stuff]

To all the Car Max commenters, I will never ever enter one of their lots again. They offered me $200 for a 1997 Mazda Protoge that was indeed crap, BUT was bought for parts by a lovely gentleman 2 weeks later for $1400. Car Max can suck a lemon in my book.

They also tried selling me a 2004 Aveo for $11,000...I bought a brand-new 2005 for $11,800 a month later.

As far as new vs used, it depends on the deals you make. I can get a much better deal on a used car. It just requires more research and time with a salesman.

When I bought my Aveo, I didn't have experience with cars or car salesmen and probably wasted at least $1500. After working with F&I salesmen and their deal screens for 4 years, I was much better prepared when my husband wanted to buy a Prius in 2008.

Prius's were BIG then since gas was nearly $4 a gallon around here, so they had no wiggle room with their new Prius. BUT, I was able to get him a 1 year old fully-loaded Prius for $21,000 instead of their $27,000 asking price. That was only $50 below its Kelley Blue Book Value, but way better than the $31,000 new Prius that was going to be sold for $5000 more than its Kelley Blue Book value...

Like it was said above, knowledge is power and most car deals are in your hands...as long as you don't try buying a new Hybrid when everybody's scared about $5 a gallon gas...

[Spencer Mayes]

To those who say used is always cheaper than used, check this out.

http://www.edmunds.com/industry-car-news/new-vs-used-car-buying.html#cpo

[Ryan@TheFinancialStudent]

I think the decision new vs used also depends somewhat on what TYPE of vehicle you're buying.

For example, I don't think I would ever buy a new SUV. The prices are simply sky high and you have to factor in higher gas costs.

But I would probably buy a new sedan.

The biggest con to buying used is that it's too easy to pick out a bad one. New gives you 3-5 years of care-free driving. That's hard to assign a value to.

[Mark]

@Ryan: If you have a good mechanic, you will not buy a used car with serious problems. They can easily check for all the major issues. In fact, you can do about 95% of that checking yourself.

I have lost count of the number of cars I have bought (including for myself, my wife and my daughter) over the 30 years - must be at least 15. I have sometimes bought the wrong vehicle (i.e., too small or "she didn't like it"), and once had a serious accident, so I have replaced some after only a year or two. But I have never bought a new vehicle, and also never bought a lemon.

[Mark]

@Spencer: Notice that Edmunds is comparing MONTHLY PAYMENTS. Usually the interest rates on used car loans are higher than new. New cars are not cheaper - used car FINANCING is cheaper!

If you are paying cash, it will look different.

[[email protected]]

I bought a gto for 10k almost.4yrs ago used. Say what you will about the styling, but the interior is still better than the new camaros and challengers. With only 41k on it I paid in cash. Do you have any idea what a used challenger r/t with slower track times or a camaro with worse visibility and similar miles goes for? More than double that and for arguably the same freakin performance. I think the only area where buying new beats late model used is the sub compact segment. Due to gas prices its forcing the used values on these cars to skyrocket and dealers are gouging customers in same cases 30 percent over KBB. I'vr seen people asking 13k for a yaris with over 60 k on it and 4 yrs old. There is no hard and fast rule. Do the research and determine what level of ass raping your willing to take. Either way, your going toget bent over.