A reader asked about “trading down” – lowering their car-related expenses (especially repair and maintenance expenses) by trading in their current vehicle (a luxury-brand vehicle) and rather than digging themselves a new and deeper hole by using the proceeds as partial payment on another such, using the proceeds from the sale of their old vehicle to buy something that costs less.
As Gomez Addams used to say: That’s a capital idea, old man!
Cars are not investments.
They are depreciating consumer appliances.
And the amount of money you will lose on your “investment” is usually proportionate to the original new car purchase price. The higher it is, the worse it will be.
Luxury brand cars are notorious examples. They cost the most to buy when new and are worth the least – proportionately – after five or six years, about the length of the typical new car loan.
For example, the base price of a new (2017) BMW 7 Series sedan is $85,295. The depreciated average retail value of a 2012 BMW 7 today is about $35,000.
When it was new, its base price was $71,000.
Over the course of just five years, the car has lost about half its original value. Which – to a great extent – was based on its being new. The “latest” thing. As soon as you drive it off the lot, it no longer is. After a couple of years, its snob appeal has faded like Madonna’s youth.
And its desirability (and value) accordingly.
That is an “investment” you don’t want to make.
And, it doesn’t take into account a peripheral issue – the cost to repair and maintain the car.
This is a factor with any car but luxury cars are – once again – notoriously awful in this respect. Post warranty, they are infamous for being money pits. It’s the nature of the beast. To make their case for your dollars when they are new, luxury cars beckon with lots of gadgets not generally found in lower-priced cars. These gadgets (for example, the “iDrive” mouse controller input and hands-free gesture control in the new BMW 7) will impress your friends, but can end up costing you a fortune when they fail.
Pretty much everything is more expensive when it comes to luxury car repairs and maintenance, even basic things like oil and filter changes. High-cost synthetic oil is often mandatory, as an example – or the “minor” repair involves a very expensive part and very expensive dealer hourly labor rates.
Because of “proprietary” software – and the “proprietary” diagnostic machines necessary to access the car’s computer (ECU) lower-cost independent repair shops sometimes cannot work on some of these high-end cars. You have to take it to the dealer for service – or a shop that has the necessary equipment, which they have to lay out a bunch of money to acquire.
The point being, it’s perfectly fine to buy a higher-end car as a treat for yourself – like a dinner at the best restaurant in town. Just don’t deceive yourself about the financial realities of this transaction.
Getting back to trading down.
It’s a way to triage the damage done to your bottom line.
Sell the car and take what you get to buy something else that costs less.
Instead of acquiring more debt, get rid of debt.
You can also greatly reduce repair and maintenance costs this way. By not buying another luxury-brand car.
This does not mean you will be slumming it.
Far from it.
While it is true that a new luxury car like the BMW 7 discussed earlier will have (or offer) technological gimcracks like gesture control (wave your hand dismissively to end a phone call without actually touching any control) most of the amenities that used to be exclusive to high-end cars and which defined “luxury” are now pretty common in much more reasonably priced cars. For example, electronic climate control, heated and cooled seats, heated steering wheels, top-drawer audio systems, panorama (full roof length) sunroofs, really nice leather and real wood trim… these things can be found in cars priced in the $35k ballpark… brand new.
Have a look at this pic of the current (2016) Mazda6 sedan’s interior. Does it look low-rent to you? This car costs less than $30k… brand new.
Even if the thing depreciates by 50 percent over the next 5-6 years, you’ve only lost about $17k. Or about half what you would have lost had you bought a new BMW 7.
And the new $35k car probably won’t lose half its value over the next 5-6 years. In part because its value is not so tied to its newness, as is the case with luxury-brand cars. It will still depreciate, but not as shockingly.
And it should cost you less to repair and maintain – because repair and maintenance costs are a selling point when it comes to normal, everyday cars. They are hardly even a consideration when it comes to luxury cars.
Also, the nature of the beast. The normal car will have – usually – have simpler systems, less complex (and so expensive to fix/replace) components. Most shops – including independent repair shops – will have the diagnostic equipment needed to properly service the thing, too.
So you won’t have to go to the dealership for service.
You won’t be driving a hooptie.
And you’ll have money in your pocket instead of the finance company’s pocket.
That’s an investment worth making.
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