This is the second in a series of posts called the “Two-Sided Coin,” where TSD’s Jon Gorey and Holly Johnson take opposing viewpoints on a number of personal finance topics.
Jon: I’ll Never Buy a Used Car Again
Most personal finance experts, including we here at The Simple Dollar, tend to recommend people buy late-model used cars to get the best bang for their buck. It’s true that a car’s value depreciates substantially the minute you drive it off the lot, which makes it feel like you’re paying for something imaginary and worthless. However, keep in mind that those numbers are often exaggerated: A vehicle loses 30% off its sticker price in the first year — but when was the last time you paid anything near the sticker price for a new car?
In practice, a new car — with the right incentives and rebates — can be a better deal than a used one. I know many TSD readers will probably want to set my new car on fire for saying as much, but let me share a story.
In my 20s, I only drove very used cars, and they were almost all a catastrophe waiting to happen. By 2003, I was driving a 14-year-old Saab 900S, which I’d bought used for about $1,500 in cash a couple of years earlier. It had probably cost me twice that much in repairs over just two years, not including the psychological damage that accompanies stalling out in the middle of an intersection on more than one occasion.
I’d had enough: I was going to buy my first new car, with a warranty and everything.
I went to a big Honda dealership and negotiated a good deal on a bare-bones 2003 Honda Civic, in dark green. It was the teaser deal they had advertised in the newspaper — something like $10,500, no power windows, possibly without air conditioning — and after some wrangling I got them to honor it. But as I was signing the contract, they came back to say they were all out of green ones, or even my second choices of grey or blue; they only had a white one left in the stripped-down trim (which… yuck) and it would be a week or more before they got any others in.
They made some calls and it turned out there was a similar green one at the used lot across the street, a 2002 model with about 20,000 miles on it. We went over and it was essentially the same car, so I said I’d take it. Except they insisted the price was firm at about $11,400.
I was incredulous. “You just agreed to sell me a brand-new Civic for $10,500. Why would I pay almost a thousand dollars more for a used one?” I asked.
It all came down to dealer incentives. They were willing to take a small loss on the new one to get a juicy sales incentive from Honda headquarters. Hondas, meanwhile, hold their resale value quite well, and their used division couldn’t sell the 2002 model for any less without taking a loss.
So no, buying used is not a guarantee that you’re getting a better deal.
What’s more, the first three to five years of a vehicle’s life are usually issue-free. (And if there is an issue, it’s likely covered by the warranty.) When you buy a car that’s four or five years old, however, you’re getting in just at the wrong time. The 60,000-mile threshold often requires some expensive routine maintenance, and many cars start to decline irreversibly after 100,000 miles, requiring more and more maintenance and repairs.
To me, the knowledge that I’ll enjoy a car’s very best years without any expensive surprises — and that I’m the one racking up those early miles responsibly, not a rotating cast of rental-car drivers — is worth whatever premium I end up paying for a new vehicle. By year four or five, the car’s completely paid off, making later-year maintenance much easier to swallow.
This doesn’t mean I advocate paying more for a car. In practical terms, this just means I’d rather buy a very basic new car than a more luxurious used one.
To me, it’s not about new vs. used — the more important thing is not to overextend yourself for a car either way. They’re all depreciating assets that will eventually rust into oblivion. No matter what the commercials tell you, your car is just a mode of transportation — not a showpiece.
Holly: Why I’ll Never Buy New
“Sixty months same as cash!”
“LIQUIDATION SALE: We’re letting cars go below retail!”
“Drive a brand-new car off the lot today, and you’ll score a $1,500 rebate!”
If you stop by your local dealership, chances are good you’ll hear all of these lines. Crazy enough, a really good salesman can even convince you that he’s losing money when he sells new cars at a steep discount. But, if you’re willing to admit that car dealerships don’t exist to give cars away for free, you can see these gimmicks for what they really are – poorly veiled marketing techniques meant to separate you from your money.
I should know. When I was in my early 20s, a Mitsubishi radio commercial reeled me straight into the dealership. With my curiosity piqued and my vulnerability at an all-time high, I drove off the dealership lot with a $25,000 Mitsubishi Galant I couldn’t afford. Sadly, I was thrilled with the purchase. Why? Because I had 60 months at 0% APR.
After a few years though, I completely tired of those monthly payments and learned a pretty valuable lesson. And, that lesson was this: Most new cars, and especially ones you need to finance, aren’t worth the toll they take on your finances.
Because I had a $500 monthly car payment, my entire life had to change. I eeked by on a small monthly budget, threw all my “extra” money toward my loan for years, and struggled to afford well, basically anything. Sadly, it was all because I heard a commercial for 0% APR and fell for it – hook, line and sinker.
Of course, sales and incentives aren’t the only reason people buy new cars instead of used. If you ask new car owners why they bought new, many will tell you they feel more secure with a bumper-to-bumper warranty and the prospect of fewer repairs. And the truth is, I actually get that argument.
When I drove a brand new ride, I slept well at night knowing that my extended bumper-t0-bumper warranty would cover nearly anything that went wrong. Plus, I took comfort in the fact that the chance of my car breaking down on the side of the road was slim to none.
Still, it would be easy to accomplish the same thing by buying a used car still within warranty and having it checked out by a qualified mechanic before the purchase. You don’t have to buy a brand spanking new car to get a warranty, peace of mind, or security. And when the alternative is paying a giant car payment to drive something new, I now know I’m better off choosing a different path.
Now that I know better, I only buy used cars and drive them until the cows come home. Right now I drive a 2007 Dodge Caravan, and despite being somewhat of a clunker, I have only spent around $1,500 in repairs during the six years I’ve owned it. That sure beats paying a monthly car payment and losing thousands every year for “peace of mind and security.”
And now that I have more experience under my belt, I pay for everything – and even large purchases – with cash. In my mind, monthly payments only obscure the real cost of what you’re buying and make it easier to overspend.
Of course, some people want a new car and save up the money to pay in cash. While that’s a smart move if you’re a new car enthusiast, the sad reality is, most people don’t handle their new car purchase that way. If you don’t believe me, look to Experian’s latest quarterly report on the automotive finance market.
As of the last quarter of 2015, 86% of new cars where financed with a loan, whereas only 55% of used car purchases were financed. Further, the average new car loan was for a whopping $29,551 last quarter, up $1,170 from the year before.
And if that doesn’t shock you, consider this: The average car payment on a new car reached an all-time high last quarter at $493. That’s nearly $500 per month, or $6,000 per year, just to drive something shiny and new.
To me, these statistics prove that most people aren’t using dealer “sales” and incentives to negotiate an awesome price; instead, they’re using them to justify spending more than they can afford.
I don’t believe in a “one size fits all” solution for anyone, but I do know this: If you have to borrow money for five or six years to buy a car, you can’t truly afford it.
As I have always said, saving the money and paying in cash has a way of showing us what we truly value. If you truly want a new car, try saving up the money then negotiating a deal. Chances are, reliable used cars will start creeping onto your radar pretty quick.
So, heads or tails, tell us what you think…