I was asked by a reader which new car feature is “the worst.”
This one’s tough – like choosing between Hitler and Stalin. On the one hand, you have absurdly complex drivetrains (e.g., twin fuel injection systems, transmissions with three or even four too many gears – or no gears at all) and on the other you have insufferably nannyish “assistance” systems that are worse than any backseat driver – because you can’t kick them to curb.
But if I had to pick the single worst new car feature, it would be the new car itself . . . because of the financial wallop you’ll take by driving home in one.
Depreciation averages 25-30 percent of the purchase price over the first two years alone. This is even worse than it sounds because you’re effectively paying (by losing) a sum equivalent to that in addition to what you paid for the vehicle at the time of purchase.
Say you buy a new $50,000 whatever-it-is. Two years from now, its value has depreciated to $37,500. Not only did you pay the $50,000 – you also lost the $12,500. In effect, you paid $62,500 – plus interest.
Plus – as Elvis once said – tax. Including the property tax in states that have it, which is assessed on the value of the vehicle.
There’s another cost, too. The opportunity cost of the money you could have spent on something else instead. Plus the costs of those first – and inevitable – scratches and dings, which further reduce the value of the vehicle.
These are the costs – plural – of depreciation.
It is far wiser to let someone else pay them – by waiting until the vehicle you want has depreciated.
Let a couple of years go by – and then shop for it. By this time, it will have depreciated by 25-30 percent (or more) and you will therefore pay that much less for it.
Because it will depreciate less from that point onward.
The car will continue to lose value, of course – but not at the same rate, which can be a huge savings. Instead of 25-30 percent every 24 months, maybe 5 percent every 12 – and that sum will also be less because it will be a percentage of the already depreciated value of the car at the time of (your) purchase.
Less the dings and dents, which don’t hurt the function – but do reduce the price.
You will also pay less to insure it, because premiums are based on the replacement value of the vehicle.
Instead of buying it new, you wait a couple of years and buy it for $37,500 – which not only saved you from spending $50,000 up front it saved you from losing $12,500 in depreciation down the road – bringing your actual cost down to $37,500 minus the $12,500 you didn’t lose over the first two years of ownership in depreciated value.
The property tax on a 2-3-year old vehicle worth $37,500 will be considerably less than than the property tax hit you’ll take on a brand-vehicle. The savings on these two items alone is probably enough to cover what you would have to come up with as a down payment on the new car.
Which brings up the opportunity cost.
Assuming you only have so much money to spend, whatever you actually spend – or oblige yourself to spend (the monthly payment) necessarily means not having it on hand to spend on other things, should the opportunity arise. It means you won’t be able to take advantage of a great sale – because you can’t afford to buy. It may also mean having to go into debt, for some unforeseen reason that won’t wait – like the water heater dumping its guts. Your choice then will be to go without hot showers until you can afford a new water heater – or go into hock, by putting it on the card.
The more cash you have on hand, the more options you’ve got.
Some worry that buying a used vehicle is risky; they worry about something breaking and being on the hook for costly repairs. They are sold on the security that comes with a new car – and the new car warranty.
But keep in mind that the durability and reliability of late model cars is at least twice that of what was typical a generation ago – and so is the duration of the typical new car warranty, which is usually transferable to the next owner.
Keep in mind, also, that new does not necessarily mean no problems. It just means they are probably “covered,” for whatever that’s worth. And you paid for every bit of that.
It’s mostly a psychological thing.
Many people still operate on the (faulty) premise that a two-or-three-year-old car (or even a five-or-six-year-old car) only has three or four years of reliable life left in it. This is a fiction the car companies want to maintain because it is in their interest to keep you fearful of used cars, in order to sell you new ones.
Assuming you exercise reasonable caution – as by having any car you’re considering inspected by someone qualified to do so, checking service records and so on – the odds of you ending up with a car any less reliable than a brand-new one are very slim.
Meanwhile, the odds of saving more-than-a-small fortune are very high!
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