Why Used? - CountrysideAutoIA

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Why Used?.. by Eddie Barnett

Many books have been written about "Buying a Car"...how to look, where to look, what to look for.... As I say, many volumes have been written covering all facets of purchasing a vehicle. Likewise, numerous websites are dedicated to this same topic. However, there is one topic that is often overlooked and simply left out of the decision making process involved in buying a car - any car. That is the focus of this report - "The Economics of Car Buying", and perhaps more to the point - "The Economics of Buying a Used Car". Yeah I know, there are a lot of terms that are used to mean "used", they just do not want to say, "used". Whether they are "Pre-owned" or any other term that may be used - they are still "used".
Reasons for buying a car:
There are as many reasons as there are cars buyers for "Why To Buy Used". Some folks simply can not afford a new car and by necessity they are used car buyers. Often times buyer's logic is to buy new to eliminate the possibility of service and repair. To a certain extent that can be valid, but the old saying, "...they ain't maken 'em like they used to." is very true - car manufacturers are not making them like they used to - THEY ARE MANY TIMES BETTER! As recent as 30 or 40 years back, a car with 100,000 miles was "ready for the junk yard". Not any more - with proper attention to service and regular maintenance, cars now are very capable of 150,000 miles, 200,000 miles, and even a lot more - vehicles that we regularly use (both personal and business) can be expected to exceed 300,000 miles, and many do.  
When Economics is the primary topics, one the points of consideration is Investments. For clarification purposes, we are only considering personal vehicles, not commercial or those vehicles that are used for direct or related support of generating revenues.
  1. Good Investments: real estate, mutual funds, stocks, and many other related areas
  2. Bad Investments: new car
Whether or not this can be considered factual is not important - what is important is that this is pretty well understood by any mature, responsible adult (not to discriminate against immature, irresponsible, others). The point is simply that in a presentation involving Economics, Investments should be considered. And I certainly hope that everyone does not stop buying new cars and start buying used cars - our economy would collapse!.. well DAH!.. that is not going to happen, since America loves new cars.

Taxes and Registration Fees:
An expense that most folks do not consider until "after" a purchase, is taxes. There are numerous taxes, such as personal property, wheel tax, and any number of other obsequre costs that are, in reality, taxes. But here we will only look at the nearly 100% common is State Sales Tax. This cost is based on price (only), so regardless of amount of financing, etc. it is the agreed price of the car. License Plates and Title expenses are also often ignored until after the purchase is made, but in all know cases will be considerable more for new cars compared to used cars.
An expense that is (as far as I know) mandated by virtually all states as a requirement to operate a vehicle on the state roads, is insurance. We will explore this further when we provide an example purchase comparison, but for now the understanding is that new vehicle insurance will cost more than insurance for used vehicles when reviewing similar coverage.

Consider Mileage vs. Age:
Everyone knows that new cars have zero mileage and of course, it is always one of the first questions asked of a used car...we want to know, "...how many miles?" and it certainly is a legitimate question. But a better question may be of yourself, and that is, "...how many miles to I expect to drive before expecting to need another car?". Or maybe the comparison is between two used vehicles - a 2 year old car with 80,000 is very likely to cost more than a 5 year old vehicle with 80,000 miles, but if Usage Mileage is the prime consideration, then the 5 year old car will be a significantly better value.  

Depreciation costs:
If you are not sure what the depreciation cost is on a new vehicle, buy a new car and then return the next day and ask what the trade-in or value is of that one day old car. As we noted initially, cars are not to be considered an investment - they do NOT increase in value with age. On the contrary, the value decrease (depreciation) rate is much steeper, the newer the car. In other words, the older the car, the less consideration for depreciation.  

Unless you consider major maintenance, such as motor or transmission, Regular Maintenance should just about be a push for new vs. used. Regardless of some of the extended service warranties of many of the new vehicles, regular maintenance is required and not related to the age of the vehicle.
Finance Interest Rate and Cost:
Actual Rates are, indeed, much less for new cars than they are for used cars, but it is the "amount that you pay" that needs to be included in the budgeting and analysis process.  
Yeah, I know - Status is not an Economic issue. However, whether or not it is admitted, it is very often a prime reason why THE OTHER GUY is buying a new car. It is my understanding that even after he was wealthy beyond common person understanding, Sam Walton drove a 20 year old pickup...wonder why?! You are what you are - a new car doesn't change you,..  does it?
Now we will "do the math..." and include some exact numbers in our Analysis. We will arbitrarily pick a car and model for this analysis and concede ahead of time that there is any number of arguments that could be made for different models, different ages, etc. The point we want to begin with is that it is the relative numbers to be considered and not the actual models and ages.

We will use the Chrysler Town & Country Limited Minivan as our model vehicle for comparison analysis. We choose this one because it has been a very popular model, particularly with young families, and because the same LX model is available today as was available 10 years past, and they are equipped with nearly the same features in all of those years. It has also proved to be a very reliable vehicle.

We will need to make some basic assumptions:
  1. We will expect 3 years of service and add 50,000 miles (that is a little under 17,000 per year)
  2. We will expect the same miles per gallon on fuel
  3. We expect that all would get the same regular service - oil, filter, etc.
  4. We do not expect any major repair costs
  5. We do expect minor repairs may have a slight difference
  6. We used Kelly Blue Book - Suggested Retail and Very Good Condition
  7. Insurance rates are approximately the same. NOTE  (*)
  8. We used local bank rates that can vary by time and area
  9. Minor repairs would be belts, hoses, batteries, etc.
  10. 100% financing without a down payment (unlikey, but for analysis only....)
Start Mileage075,000150,000
End Mileage50,000125,000200,000
Sales Tax@7%
Interest Rate60 mon @ 4.5%48 mon @ 6%36 mon @ 7.5%
Payment Amount$588/mon$340/mon$162/mon
36 Month Cost$21,200$12,250$5,830
Minor Repairs$1,000$2,000$3,000
Value @ 36 mon$16,000$6,400$3,800
Debt @ 36 mon$14,000$4,100$0
Equity @ 36 mon$2,000$2,300$3,800
Total Cost=
Cost - Equity
(*)   Insurance
For those that are willing to assume a bit more risk, it would be worth considering the oldest model in our analysis to be "self insured". That means you would cover the very basic insurance, which is Liability, but not include "Full Coverage". Instead, take the monthly payment amount that would be the quoted cost for Full Coverage, and put that in a savings or investment account of some kind. Yes there is a risk in the cost of the car but that risk deminishes with time, and if there were no accidents in the finance period, then that compounded amount is your "cash"!.. no longer a cost. Keep the same program continuing for future cars if you so desire, and the compounding is amazing.

There are no points of arguments - this analysis is for reference purposes ONLY  - it is the relative differential of the costs that is to be considered. The intent is to cause you to pause and consider car purchasing alternatives. Newer cars do not make you better looking, nor do they make you smarter (contrary to some beliefs, perhaps...they have never made a car that could make me look pretty!). Just because you can budget new car payments does not make it a good reason to buy a new car.  ... just a thought!

Click here for more on Compounding Money.
712-621-7222 - Mike


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