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Why you should buy a used car

Why you should buy a used car

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We recently helped QL’s dad buy a used car. When we buy for ourselves in the future, we’ll buy used too.

If you have basic knowledge of accounting, you will have heard of the term “depreciation”, which means decreasing value in an asset. Depreciation is neither good nor bad in accounting since you are trying to match the use of the asset with its cost. The difference between depreciation of an asset at a company and depreciation on a typical user’s car is that the company’s asset is usually making the company money.

From the moment you drive a new car off a dealer’s lot, it loses value. Imagine driving down the street throwing dollar bills in the air. It’s kind of like that.

The cost of buying a new car

Let’s take a look at the cost of buying a few standard middle-class family vehicles.

  1. Toyota Camry XLE
  2. Lexus RX 350
  3. Infiniti QX80

For the purpose of this example, I made the following assumptions:

  • MSRP listed on Google search for 2017 model years of the cars above
  • 7% tax, title, and license fees
  • 2% APR financing
  • Vehicle has a residual value of 1/3 its original cost after five years



As you can see, the monthly cost can vary widely, depending on the new vehicle you choose.

Toyota Camry XLE Lexus RX350 Infinity QX 80
List price $26,310 $43,320 $63,850
Taxes and fees 1,842 3,032 $4,470
Sale price 28,152 46,352 $68,320
Monthly payment 493 812 1,197
Annual cost 5,921 9,749 14,370
Total gross cost 29,606 48,747 71,849
Residual value 8,770 14,440 21,283
Total net cost $20,836 $34,307 $50,566
Implied monthly cost $347 $572 $843

Looking at the Toyota Camry, you will see that you pay $493/month to drive the vehicle. If you manage to sell the vehicle after five years for $8,770, then your implied monthly cost drops to $347/month. This is only the vehicle’s cost, it does not include insurance, fuel, maintenance, or parking costs.

The cost of buying a used car

Now let’s look at the cost of buying the same cars, but used. I used the following assumptions

  • Pulled the cost of 2013 (four years old) model years of the same cars from KBB.com
  • Kept KBB’s mileage estimate
  • Standard options and a very good vehicle condition
  • Purchased from a private party
  • 7% tax, title, and license fees
  • 2% APR financing
  • Vehicle has 10% original vehicle cost residual value, rounded to the nearest 1000 after six years (vehicle is a total of 10 years old at end of term)
Toyota Camry XLE Lexus RX350 Infinity QX 80
List price $12,000 $21,000 $33,500
Taxes and fees 840 1,470 $2,345
Sale price 12,840 22,470 $35,845
Monthly payment 189 331 529
Annual cost 2,273 3,977 6,345
Total gross cost 15,909 27,841 44,413
Residual value 3,000 4,000 6,000
Total net cost $12,909 $23,841 $38,413
Implied monthly cost $179 $331 $534

Sticking with the Toyota Camry example, your monthly payments decrease $304 to $189. After factoring in the residual value, the cost drops $10 to $179/month. As you can see, if you are willing to drive a used Toyota Camry, one that looks and drives perfectly, you could save $314/month of cold hard cash.

Now let’s look at one last example, this time of only the Toyota Camry. I made a few additional assumptions for this.

  • Purchase a car that’s 4-6 years old (2011-2013) in our example
  • Search carefully and negotiate aggressively to get the price down as low as possible
  • Pay cash for the vehicle
  • Own it for six years, driving it into the ground
  • Capture the same $3,000 in residual value
Toyota Camry XLE
List price $8,500
Taxes and fees 595
Sale price 9,095
Residual value 3,000
Total net cost $6,095
Implied monthly cost $85

As you can see, by selecting a slightly older vehicle, making sure you get the best possible price for the used car from a private party, and driving it into the ground, you can lower you monthly cost from $347 to $85.

Parting Thoughts

Of course, there are risks to buying used. If you buy a certified-used car from a dealer, it may have a warranty on it. However older used cars are sold in as-is condition, meaning you’re responsible for any maintenance costs after you take possession of the vehicle. These costs can be substantial, so keep that in mind.

On average, the odds of something going wrong with a car are mostly equal per mile. I’d argue that certain cars (Honda Civics, Toyota Camrys) are more dependable and last longer than their American peers. Those odds increase as the vehicle’s mileage increases, especially if the owner doesn’t keep the car in good operating condition. Thus, if you are driving a high mileage vehicle over long distances, your expected maintenance costs are going to be high. If this is the case you should consider buying a certified used car to take advantage of the warranty.

 

What have been your experiences with owning a used car, good or bad?

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