Economics of new cars

[Jon73]

I think it also worth noting that our society, and parental upbringing, train us to spend to our limit. The concept of saving money is long gone as we are too used to be able to get what we want, right now. No saving up for things. Easy financing and low monthly payments are the new phrases that are beat into our heads either through commercials, banners on the side of buildings, or reader boards. Hell, they even pay guys to stand on the side of the road to attract us in. I hate to draw a parallel from such a cheesy movie, but watch "They Live" with Roddy Piper, the subliminal effect of these slogans and phrases are constantly in front of us and some of it has to sink in without us really knowing it.

That said. Just bought a '13 Tacoma.

 

[andycr]

We are not talking maintenance cost here, we're talking catastrophic failure!

Very unlikely. You have to balance risk against reward. Bottom line is, as a company who does this every day, their money is on you not needing their product. That says it all, for me. You're statistically far better off without it.

Try not to buy cars that are known to spectacularly fail on a regular basis, of course. Gotta do your homework!

If you're buying peace of mind, and it's worth it for you, go for it. If you actually want something that makes financial sense, a used car warrantee isn't it.

 

[Xpertskir]

I can't say any debt is a healthy thing, but foaming Ramsian evangelism isn't great either. It's all about balance...

Yes. That's the biggest problem with Ramsey its financial absolutism.

"Are you advocating a form of interest rate arbitrage? Borrow for 5% and invest at 10%? "



Not really. Here is what I am saying, in a nut shell.

Givens:
Mortgage rates are 3.25-4%
20-35% of your interest payment on a mortgage is tax deductable(depending on tax bracket)
Conservative historic growth rates for an average portfolio of stocks and bonds is 6% a year

The government allows many different forms of tax deferred savings through IRA's, 401k's, ect.


Most people are unable to buy big ticket items like cars and especially houses with cash and need some sort of a loan. Lets assume that is the case in this example.

Ramsey would then say you are better off putting down as much as possible and pay as much extra per month on your mortgage as possible. Paying towards a mortgage that is in the mid 3% range(20-30% of which is tax deductible) with after tax dollars.



The alternative is investing the extra money pre tax(starting out of the gate with 20-30% more than if you were paying down your debt), typically with some sort of company match, tax deferred growth, and compounded at ~6% a year. Those numbers are difficult to argue with, and over the period of a decade or two the divergence in actual wealth between the two is astounding.

Also, god forbid, if there is some sort of emergency you have access to the funds, in certain cases without penalty. You cant call your bank and ask them for mortgage prepayments back.

Assume that both people in this situation put down 20% to avoid PMI, although the math can make sense for putting less down even flying in the face of PMI.


I'll put some numbers to it.

Tax rate 25%

200,000 mortgage at 3.5% interest

30 year 718 per month
15 year 1143 per month

Stock/Bond portfolio growth rate is 6%


Couple A takes the 30 year mortgage and saves the extra 425 per month(566 pre tax).

Couple B takes the 15 year mortgage, and saves nothing until year 15, then saves the entire 1143 per month(1524 pre tax).

At the end of 30 years, couple A has house and $536,963

At the end of 30 years couple B has the house and $425,670


That doesn't take into account the tax deduction on the interest payment side. Also, like some people said the market doesn't necessarily return 6% per year, there are bad years. Incremental investment helps to decrease the portfolio volatility(since you have more purchase points, some lower some higher), since Couple B is saving for a shorter time period they are more at risk of a bad year or two hurting their portfolio than couple A who spreads their purchases over the course of the 30 years. Another issue is that the government places limits on how much you can invest per year in a tax advantaged account, so in some case Couple B would be prevented from investing all of the extra money in one of these accounts. Yet another thing in play is that with inflation you are continually paying your debt down with "cheaper" future dollars and over the course of 30 years this effect is not to be overlooked.

Obviously every situation is different and this oversimplifies the situation, but the above illustrates a common misconception about saving and debt.

 

[Zuljin]

We bought our truck new. Three miles on it. Paid off and
237,000 miles later, all the times it gets me to work, the camping trips, hunting trips, fishing trips, moves and just all around daily use; we got our money's worth and continue to do so.

My bike is used. 20 something thousand miles later and I'm still on it. Paid.

Our car was bought new and was paid for in 4 years. We'll trade it soon on another new car because we want the car we want. If everything goes to crap and they come get it, we'll buy one cash from the paper.

About that last new car. We had nothing when we bought it. The dealer fudged a lot to get it for us and we paid the rate for it. We gambled on making things better and did. We used that car to do it. The only way we were going to have it to use to our advantage was a few hundred bucks a month at a time. Like someone said, it's case by case. In our case, we made it work.

 

[brewkinger]

Because buying a used car is like buying something that someone couldn't wait to get rid of, get a good warranty.

The counterpoint which coincidentally happens to address the OP is this:

A reliable beater is truly the way to go, but alas there are very few guarantees with this option.

Having said that, the reason that a used car is the better deal is because most of Americans feel the need to update their status every 2-3 years with the purchase (and usually finance) of a car that they cannot afford, but WANT!
Even worse option is the need to sign a "fleece" deal and rent a car for 2-3 years.

Statistically speaking, major design flaws and critical issues with newer model vehicles from reliable manufacturers become apparent within the first 24 to 30 months in the life of a vehicle. Well within the warranty or lease deal term.
Owner #1 is pleased with the vehicle warranty and/or displeased if the warrantied issues caused them any undue stress.
They have essentially paid an inflated rate for the "use" of a vehicle. Sounds very similar to a lease.

Owner #2 in either of the previous financed or leased deals, gets a reliable vehicle that has 90% of the major issues all taken care of AND they get the remainder of a factory warranty, which are remarkable in their coverage!

Owner #2 has more flexibility to barter a price because the manufacturer has already gotten more than the depreciation of the vehicle (otherwise it would cost the previous owner MORE)
They have offered a low ball on the trade in value (and made more money)
They have sold/financed or leased a new vehicle (disguised with the "lure" of same monthly payment) for more than it was worth again (and made more money)
They are willing to take a small loss on the showroom floor if they can still come out ahead. Make space and sell another car.

I have owned 3 certified pre-used vehicles with a total value new of over $70 grand and have paid a little less than 30 grand, all in a period of 8 years.
30K/8K = 3750 per year to drive a good looking, reliable vehicle. These vehicles have had issues, all of which were covered completely by factory warranties. In total on all 3 vehicles I have spent 2000 more on non warranty issues (not including routine maintenance), so an additional $250 per year. Grand total of 4 grand per year for a car.
Small fee to pay when you consider the options.

 

[andycr]

Absolutely. I don't understand the whole "buy new, drive into ground for 20 years, leave in a ditch somewhere, repeat" thing. Do you really want to take the insane depreciation hit of a new car every 20 years, only to be stuck with it for a quarter of your life? Or do you want to buy smart, negotiate, and patiently and intelligently buy and sell every few years and stay in a 3 year old "used" car with fewer mechanical issues than a new one? Park your money in a 3 year old car temporarily, sell it a few years later for a little less than you paid for it, and do it again?

I'm not the kind of guy who can commit to one car for 20 years...

Most people are strangling themselves with the value that disappears the moment you drive it off the car lot, on top of depreciation, on top of debt interest.

I stay the heck away from the first 2 years on this chart... They're a killer.

 

[TyTanium]

Not really. Here is what I am saying, in a nut shell.

< a bunch of stuff>

Yeah, so that's essentially rate arbitrage. If you have debt and are investing at the same time, it's implicitly saying you're borrowing at a lower rate and investing at a higher one. And as you pointed out, that often is the rational thing to do. Tax-advantaged investing, company match, dollar cost averaging, etc...definitely agree with you there. It makes sense. I'm not gonna forego tax-free equity returns + match to pay down a 3% mortgage.

AFAIK, Ramsey doesn't advocate stopping investing to pay off your house. You stop investing/401k etc while you have crazy 20% consumer debt...pound that out, then build up cash and continue investing w/company match etc. Only after you've maxed your retirement that you start working on the house. I think.

Again, we're saying the same thing here, and sorry for the massive off-topic. I'm a finance guy and can talk about this stuff for hours.

Happy returns!

 

[OrdinaryAvgGuy]

This is my type of thread.

The answer to the question who buys new cars is simple. Misinformed suckers. There's one born every minute and in America, there has to be 10 born every min.

That being said, I purchased my first car 16 years ago - a 1988 Chevy with 110k miles on it. Paid a whopping $800 cash for it.

Drove this bad boy for 9 years (another 110k miles) and it never left me on the side of the road. Sold it for $1,000 - $200 profit.

Sold it, bought a 1997 Chevy with 130k. Paid $1,300 for it and it never left me stranded. Drove it 40k, painted it myself and sold it 3 years later for $4,500 to some sucker. Cha-ching.

Bought another Chevy for you guessed it $4,500 with 145k, been driving it ever since and have it for sale now on Craigslist. I love tax season because there is no shortage of suckers with a big wad of cash to blow.

So if you missed that, I purchased one car for $800 16 years ago. No car payments and have a vehicle that I am now driving and selling for $5,500 on Craigslist.

I have a tracfone 450 mins that cost me $15 per month, and have never paid more than the introductory price for cable and internet. I even found a way to provide myself with free shelter for life. I could go on and on but who's listening?

My friends who are always broke think I have some sort of magical powers because I rarely pay for anything and always have a dollar in my pocket.

I tell them its simple. Resist the temptation of doing what everyone else is doing and put your money in the right places.

 

[brewkinger]

+1

Live like no one else, so that one day you can live like no one else.

 

[OrdinaryAvgGuy]

+1

Live like no one else, so that one day you can live like no one else.

Never heard this one but has a very nice ring to it.

 

[Zuljin]

Rent your shoes if you can. Someone said someone said that. Think about it. What are we buying? What are we going to have in the end? Check the cemetery.

So you buy a car and a house. You bought something to keep buying. Repairs. Taxes. Stop paying either and see if you own it.

 

[autobaun70]

All of my vehicles i have purchased, with the exception of my current truck, have been used. The only reason for the truck being new was that at the time it was my company required work vehicle, and had to be under 5 years old (got a nice allowance at the time). At the time, due to gas prices, late model full size used trucks were within 2-3 grand of new ones.

At this point, I have a paid for, 2008 4x4 pickup (4 Door Dodge), that mainly sits, and a 2007 Honda Accord that I drive daily. Given my fairly long commute, I can pay the car off in approximately 2 years, feed it gas/maintenance, and insure it for the price of the fuel that my truck would use.

I don't see any need to drive the truck every day. I do need it for towing my boat, doing stuff on around the family farm on occasion, I figure I can bank the $ I would put on a truck payment, hang onto it for the next 8-10 years, then replace it with another nice one.

The one major expense that most people pay out that I just cannot understand is on maintenance. I do nearly all of my own work, including rotating tires, oil changes, and have taken on more major items such as clutch replacement, engine swaps, etc. The thought of shelling out hundreds of $'s for such is just foreign to me.

 

[passedpawn]

Every single one of you would buy a new car if money wasn't a concern. Parsimony I can appreciate, envy I can't.

 

[jeffjm]

Why would I want to buy a car from some stranger across town whose only interest in me is taking my money and never seeing me again? If I knew more about cars, that might be an acceptable risk, but I don't.

If I buy a two or three year old used car from a dealer, I don't save all that much over new.

If I buy a used car older than that, I have to really start being concerned about maintenance costs and repair history.

So I buy new and drive it until it's dead, being religious about scheduled maintenance, and enjoying many years of having no car payments (during which time I can set aside money for the next new car).

 

[Zuljin]

Every single one of you would buy a new car if money wasn't a concern. Parsimony I can appreciate, envy I can't.

Here's hoping. We'll see tamale if these lizards want to move a rock out their tank or sit on it a little longer. Or just sell it to the next guy. That's what they do. I'm like them, not the only game in town.

And maybe later, once I've ragged the piss out of it for a few years, I'll sell it some well informed consumer who represents everything right with America for a steal of deal. A steal, I tell ya.

Or I'll keep it til the wheels fall off. Or until it's that cool old car you don't see much anymore.

 

[RacingRam]

I NEVER thought I would buy a new car, but I did about 15 months ago. We only have 1 car which my wife drives 98% of the time. Because I don't have a way to get to her if something happened, I wanted the most reliable car I could find. Our last car got totaled, so we had $7500 from the settlement to replace it. We looked at a ton of used cars, but most reliable stuff was $15k+ with more miles on it than I wanted (her favorite was $17,500). We knew we were going to have to finance. We ended up getting a 2011 Mitsubishi Outlander brand new for $20k. So basically my payment ended up being $100/month higher, but I feel a lot better about the reliability of the car.

 

[Devin]

I used to be in the "never buy a new car again" boat. I have purchased two new cars in my life. The first was a 2002 Dodge Ram 2500, and it was one of the biggest lemons I have ever owned. For the 2.5 years I owned it, it was in the shop (under warranty) for about 14 months. That thing sucked big. Previous to that vehicle (and since), I have also always done my own maintenance and repair work. But, with that one, since it was under warranty, I just took it in so that I wouldn't have to deal with it.

I paid that truck off in a couple of years and then shortly thereafter, I got married. My wife had never had a new vehicle, so I decided to trade that truck in on a new 2005 4Runner for my wife. We paid that off in two years, and we still have that vehicle. It has 97,000 miles on it and it has given me absolutely NO problems. I have performed all of the maintenance on it myself. Someone pointed it out earlier, but I know the EXACT history of that vehicle. That is fairly huge for someone that does their own work.

Anyway, after the 4Runner, I decided that I wasn't ever going to buy new again. I had always had fairly good luck with used vehicles. That was until recently. I purchased a 2000 Ford Crew Cab used with the "legendary" 7.3 diesel. Turned out to be one of the bigger mistakes that I made. I spent many, many weekends out in the garage wrenching on that thing. I still have it and I don't trust it as far as I can throw it. So, although I told myself that I wouldn't, I am going to buy a new truck this summer - just for the reason of knowing the history of the vehicle. That, and I am really getting sick of throwing wrenches every weekend.

There have been many who have posted in this thread something to the gist of how they get these super-cheap used cars and run the tar out them and then re-sell them for a profit. Those are the previous owners that scare me. Actually, most of the used vehicles on the highway today scare me. People that don't actually do the maintenance on the vehicles that they should. Many used cars on the road are just plain dangerous.

And all of these graphs and videos that show that your car won't be worth much in the future all depends on the type of car you get. What was the figure from the video? 20% resale in 5 years??? My 4Runner is 8 years old and it books just a touch over 50% of what I paid for it. From a reliability standpoint, that 4Runner is the best vehicle I have ever owned. So, my new truck is going to be another 'Yota.

 

[Devin]

Another thing: have you seen the prices of "slightly used" vehicles these days? They are insane. Just a few thou more in many cases gets you a vehicle with no miles and a warranty.

 

[Homercidal]

We bought a 2000 Durango years back for $11,000 used. It had 108,000. It's now got 245,000 and has pulled our camper and the family with our dogs and while it's gas mileage sucks, it's been pretty decent. Now that it's getting pretty rusty we are thinking about buying a used small car for gas mileage. However, I do want to check new prices before we buy. Friends bought a new Ford Focus because the difference in price between that and a good used car was practically nothing.

Having tools and an interest in fixing can make a car last a long time. I just happen to really like my Jeep and plan to keep it running and in decent body condition for as long as I can. This summer looks to be the summer for new rockers and maybe patch a hole in the underbody. One time after an accident with dumb old lady (turned left in front of me) I had to replace a bunch of the front end. I did the work myself and the extra money went into parts for my Mustang. That car will probably cost me more in the long run than the Jeep!

 

[kombat]

I'll never buy a brand new car again.

I bought my very first car 6 months after I graduated from university. It was a brand-new, 1999 Volkswagen Jetta. The base price was $23,000. Reasonable, right? Well, I wanted the 6-cylinder engine, instead of the standard 4-cylinder. +$1,000. I wanted alloy rims and a sunroof. +$1,000. I wanted a manual transmission, but as it was the first year for the new model, they hadn't yet figured out how to mate the manual to the VR6 engine. So I had to get an automatic transmission. +$1,000. The dealer found exactly the car we wanted in a nearby city, except it had heated seats. We could take this car (plus another $1,000 for the heated seats), or wait 6 weeks for them to ship our exact model. We took the nearby model.

For those keeping track at home, our $23,000 car had grown to $27,000 with the options. Then you add things like Scotchguard, extra charge for the "metallic paint", dealer admin charge, delivery charge, dealer prep, air conditioning tax, fuel consumption surcharge, and we're up to $29,000. Then you add provincial (8%) and federal (7%, at the time) taxes, and we're up to $32,800. We made a $1,000 down payment, then we financed the rest at 7.9% for 5 years, with the monthly payments coming out to $656/month (I'll always remember the exact number). Do the math. $656/month * 60 months = $39,360. When you consider our $1,000 down payment, that car cost me over $40,000.

For a Jetta.

And it didn't even have leather seats.

I'll never get suckered like that again.

P.S. - It was totalled in a rear-ending (not our fault) 4 years and 9 months later, before we were even finished paying for it. A 17-year old girl, texting on her cell phone, rear-ended my wife and shoved her under a school bus. We got $13,000 from the insurance company.

Think about it.

$40,000, gone from our lives. Turned into $13,000 in insurance money, which went into a used Passat. Which cost us $4,000 in repairs in one year, which we traded in towards another car, for a $6,000 credit (total spent: $17,000, credit value: $6,000. Net loss: $11,000). That car (2006 Mazda 3) now has >290,000 km on it, and is worth less than $1,000. Money you spend on cars is money lost forever. All cars are eventually worth $0.

 

[kombat]

Another thing: have you seen the prices of "slightly used" vehicles these days? They are insane. Just a few thou more in many cases gets you a vehicle with no miles and a warranty.

Right. Except when you buy new, they tack on delivery, A/C surtax, fuel surcharge, dealer prep, and probably a couple other items. Also, around here, new cars attract both provincial and federal taxes, while used cars (at least private sales) are exempt from the provincial tax and only pay the federal tax. So 2 taxes on a higher amount (because of the extra fees) instead of 1 tax on a lower price can add up to thousands of dollars difference. Then if you finance it, the difference widens further, since you're paying interest on a price that had several extra fees added to it, then was taxed twice instead of once.

Don't be fooled.

 

[TyTanium]

I just take the train.

 

[user 107007]

I didn't see anyone mention this option so.

If you are willing to do your research and investigate the car you wish to buy. A branded title vehicle can be a good option.

I just purchased a 2012 Forester for my wife. It had less than 20k miles on it and it cost $14k. The same model with the same package was $26k. The reason the title was branded was due to a no fault accident. The accident consisted of the rear bumper being torn off by another car as it was parked. The insurance company totaled the car for a bumper.

Now I did do my research before even test driving. I got the VIN # and ran a search for the accident report and insurance report. I also had a mechanic lift it and look at the car.

When we were looking I talked to a number of dealers about their lease programs, and in the end they all turned into a negative for my situation. The mileage limit was the killer usually. You can only drive 10k miles a year with out incurring any extra cost. Living in a Rocky Mnt. state most trips on top of a daily commute would use the 10k in 6 months.

Of coarse each situation is different, but usually a little effort on your part equals greater savings.

 

[Bobby_M]

I do believe there are people that make purchase decision solely based on what they think they can afford monthly. Hell, that's why the salespeople and finance officers go after customers with that angle. Still, there are people like myself that know buying new costs a premium over a lightly used vehicle but we're willing to pay for the privilege of having something fresh, new, etc without someone else's ass smell in the seat.

Between my wife and I we've bought three new vehicles over the last 15 years and we always paid cash and always took leftover deals with several thousand in cash incentives. We don't buy anything we can't afford.

 

[Devin]

Right. Except when you buy new, they tack on delivery, A/C surtax, fuel surcharge, dealer prep, and probably a couple other items. Also, around here, new cars attract both provincial and federal taxes, while used cars (at least private sales) are exempt from the provincial tax and only pay the federal tax. So 2 taxes on a higher amount (because of the extra fees) instead of 1 tax on a lower price can add up to thousands of dollars difference. Then if you finance it, the difference widens further, since you're paying interest on a price that had several extra fees added to it, then was taxed twice instead of once.

Don't be fooled.

I'm not being "fooled". In my current research for a new 'Yota, the difference in price, after all of the crap that you mention above, is just a few thou between a brand new one and a slightly used (less than 20K miles), like I said. So much for the 20% drop in value right when you drive it off the lot (again, I think that number totally depends on what car you buy).

 

[PistolsAtDawn]

So one thing that was only lightly touched on in this thread is: totaled vehicles.

As a former loan officer, I dealt with many people who were in the unfortunate situation of having a totaled vehicle that wasn't worth nearly as much as they owed on it. But that obligation to repay exactly what they borrowed remained all the same. So the remaining balance of that loan got converted to an unsecured (and therefore higher interest rate) loan that they still had to pay off while trying to make payments on yet another vehicle. Try getting approved for the same interest rate you got on the first vehicle after this happens. Good luck with that.

The single easiest way to find yourself in this situation is to finance a new vehicle (and God forbid you make the mistake of rolling another underwater vehicle loan into the new one) and NOT buy GAP insurance. To your insurance company, your vehicle is only worth market value. They don't care what you paid for it.

So consider this scenario: you buy a new vehicle, drive it off the lot and completely wreck it on the way home. That vehicle lost a minimum of say 9% (these aren't hard figures) on the way home by virtue of having acquired its first owner and being driven. So now you have no vehicle, you're out that 9% - and possibly more - if you didn't purchase GAP insurance. Over the course of the first year, your vehicle will lose around 19% of it's value. Imagine how bad this same scenario gets if you wreck it later in the same year in which you purchased it.

But instead if you had purchased a lightly-used and reliable vehicle for a good price (not above market value), then at least your insurance is going to cover all or very-nearly all of the value of that vehicle, and you are not going to be that much out of pocket if at all.

Having totaled a car in my life (not my fault either!) I would never consider buying a new car without GAP insurance, and I likely wouldn't buy a brand new one in any case.

Would you buy stock in a company that was guaranteed to lose 19% in the first year and never recover from that loss?

It's a depreciating asset no matter what you do, so all warm and fuzzy feelings about owning a new vehicle aside, I can't see how it can ever make sense to buy new even if you buy it outright with cash.

 

[PapsD]

Right. Except when you buy new, they tack on delivery, A/C surtax, fuel surcharge, dealer prep, and probably a couple other items. Also, around here, new cars attract both provincial and federal taxes, while used cars (at least private sales) are exempt from the provincial tax and only pay the federal tax. So 2 taxes on a higher amount (because of the extra fees) instead of 1 tax on a lower price can add up to thousands of dollars difference. Then if you finance it, the difference widens further, since you're paying interest on a price that had several extra fees added to it, then was taxed twice instead of once.

Don't be fooled.

It depends where you live as far as sales tax. In Illinois you have to pay state sales tax on a vehicle based on the year and the purchase price except if the vehicle is over 15 years old or you buy the vehicle from an immediate family member. Some dealers may also charge some dealer fees on a used car sale. Plus if you finance a used car you'll still get hit with the finance fees.

After that you still have to buy or transfer the plates and transfer the title.

 

[landshark]

Yeah, guess I'm the odd duck. I buy whatever vehicle fits my whim that day (current is a BMW 535xi, was a new Dodge 2500 4x4 diesel before that, probably be an Audi A6 or VW Passet next). Drive it for 3 years, get bored of it, repeat. I can't stand seeing the same dash for 150k miles.

New vehicles don't put you in debt. Listening to some ****** friend say he wants to get married in Vegas and telling you he wants you there as his best man puts you in debt.

 

[b-boy]

I've had bad experiences with used cars and I won't go back. I buy new, and I take good care of them so I get my money's worth. I won't finance for more than 4 years, so I get about 5 payment-free years. I usually keep my cars for about 8-10 yrs, 100,000 miles, or until I experience an expensive repair - whichever comes first.

I've bought and I've leased. My latest car is a lease. I put no money down, and I'll pay $200 per month for the lease for the next 3-years. That's less than I pay to put gas in the tank every month. I also have a bumper-to-bumper warranty. That was a no-brainer.

 

[Bumbler]

Every single one of you would buy a new car if money wasn't a concern. Parsimony I can appreciate, envy I can't.

Not necessarily. I'm 45 and I've only owned 3 vehicles in my life and they've all been used. It's not because I can't afford new. It's because I'm excessively frugal. My father always said, moths flew out of my wallet whenever I opened it. I don't care if I keep up with the Jones' and I can't justify the numbers.

I think if people thought in terms of hours worked instead of $$$, their spending habits would change. $350 a month for a new truck. I can do that. Do I want to work 10 X-tra hours a month. NO! I'd rather travel, fish, brew and retire early.