by You’ve seen the posts on instagram, FB, and countless articles. They usually have titles in the following themes:
- Never buy a new car
- Buying a new car is a total waste of money
- A car immediately loses 30% of it’s value the minute you drive it off the lot
These headlines can make it seem that a person is crazy or downright fiscally irresponsible if they…dare we say it…purchase a new car.
Today we are going to explore this and look at both sides of the issue.
In full disclosure both of us here at Bridges Twins have purchased both new cars and used cars at different times.
The examples below will relate to the purchases of Toyota’s. We have always been fans of the value of the car maker, worked as consultants at Toyota and Lexus, and owned stock in the company.
The Case For The New Car
You have decided that you want to go the new car route. For this equation to work you want to select a car that holds its value well. You have scanned for vehicles with a high resale value and have settled on the Toyota Tacoma. This mid-size pickup is the #1 in resale at 5 and 7 years according to caredge.
After 5 years the car has depreciated 29% which is amazing for a vehicle as some vehicles do that in 1 year.
Before we get into the hard and fast financial numbers let’s look at the advantages of a new car:
- You are the only owner of the car
- You get the original manufacturer warranty
- You can find a car with the features you want without comprising, at least too much, because of what resale inventory is available in your area
- Avoid having to worry if everything you are being told about the vehicle is true
The average purchase price for a Tacoma is $37,394 according to car edge. By year 10 it’s worth $17,987 or about $18K.
For our work here we are going to exclude sales tax. If you drove the car to year 10 and then sold it you would have paid $19,394 to drive the car or $161.62 on a monthly basis.
In the above we are excluding maintenance. When buying a new car one of the key considerations is that you drive it for quite a long time. We would encourage you to drive it well after you have paid it off and keep putting that money away toward your next vehicle.
The Case for The Used Car
Our used car purchases in the past have been with dealerships that offered certified pre-owned. For those not familiar with these types of programs in general they include the following:
- A thorough inspection of the vehicle by the mechanics that regularly perform maintenance on that type of vehicle
- They have brought the vehicle up to a standard set by the manufacturer
- It can come with a warranty backed by the original manufacturer of the vehicle
- They tend to have lower mileage compared to those that are not certified pre-owned
- Tend to be cars that are only several years old
All that is well and good however we talk about making smart financial decisions around here so let’s look into the financial details.
According to our friends over at caredge.com a Toyota 4Runner will depreciate 33% after 5 years. This car has an average sale value of nearly $45K.
With the 4Runner after 2 years the vehicle still retains 81% of it’s value on average. For a vehicle at this price point you would save, on average $8K. This is a considerable amount of money. Keep in mind you also save taxes as you will be paying on a smaller purchase price.
If you find a vehicle with low mileage and with a warranty you will be winning.
So Should You Buy a New or Used Car?
What the above shows is that the phrase “never buy a new car” isn’t 100% true. It’s not a hard and fast rule. Why do we say this? Is it because we have purchased new and used cars and somehow want to defend our actions? Absolutely not!
What matters in a big ticket purchase, such as a car, is that you have done your homework. For example if you are buying a new vehicle, such as a BMW 6 series, that depreciates 69% over the first 5 years then maybe you want to consider a used version as you will save substantial money over a new version of the car.
A car purchase should not prevent you from saving for larger goals such as retirement, a home down payment, or larger goals. If the payment will put you in a situation where you will have to cut back dramatically on saving then whether it’s a new or a used car the decision should be carefully evaluated.
Take Action & Take Control Of Your Finances
As with everything we produce here we encourage you to follow three rules:
- Invest Consistently
- Develop Your Squirrel Funds
- Manage your fear and you WILL succeed
