You could simplistically say that there are two ways to buy a car – new or used. In reality, there are many variations on these themes. Let’s look at four approaches and examine the short- and long-term financial impacts.
Buy a new car from a dealer
There are obviously a wide range of new cars out there that you could choose from. For this article I have chosen the Honda CR-V, which edmonds.com lists as the most popular new car in America for 2011. We’ll look at the EX-L trim level, which is a moderately equipped version of this car. Honda lists the price of this car as $26,845. Honda is currently offering 0.9% financing on this vehicle for 60 months, which would give you a $478 monthly payment. Keep in mind, though, that unless you have super, mega, unbelieveably good credit, you won’t qualify for this financing offer and will more likely pay about 5%. This means that the monthly payment is really $529. Over the life of the loan, this car will cost $31,740 (total of all monthly payments).
Buy a late model used car from a dealer
Another popular option is to buy a car that is a couple of years old with low mileage from a new or used car dealer. We’ll consider the same car again to make sure we are comparing apples to apples. The NADA retail value for the 2009 Honda CR-V is $23,925. Again financing at 5% for 60 monthls, the payments will be $451. The total cost of the car including financing is $27,060. Nice job. You save almost $5000! Don’t get excited yet – you’re still handing over $5412 every year. That’s alot of cash you could use for something else. This why I like not having car payments and haven’t had one for several years.
Buy an older used car from a dealer or owner
The older car you buy, the less it will cost. You could pick just about any price point you want and then find a car to match that. I’m going to somewhat arbitrarily pick $5000 as the price for this third option. To get a CR-V in that price range, we’ll have to go with a 1998 model. This car has an NADA retail value of $5025. You may be able to get one a year or two newer for this price if you look for on for sale by owner instead of going to a dealer. This time let’s only finance it for 36 months since the payments will be so much lower. At 5%, that will cost $151 per month for a total cost of $5436.
Sure you may spend a little more on repairs than you would with the new or two-year-old car, but Honda makes extremely reliable vehicles. If you choose carefully you will still have very little repair costs. Besides, you are paying $27k less for it than a new one. You can do a lot of repairs and still come out way ahead for that savings.
The really cheap option
My last option here is to look for the $1000 car. Honda hasn’t been making CR-Vs long enough to get one with that resale value, so let’s look at the Civic. According to Consumer Guides, a 1992-1995 Civic will fall into the $600-$2000 price range. I’ve gone with the range here instead of picking a specific car because when you get to this area the prices can vary widely, but you will certainly be able to find your $1000 car within this range of years and still have a reliable car.
I’m not even going to talk about financing here because it shouldn’t be necessary. That’s the whole point. Now we are down to a price range where anyone can save up the money to just buy one without paying a penny in interest. Between rounding up all the loose change in the house and selling some junk you don’t use on Craigslist, most people can probably come up with a thousand dollars within a couple of months without even saving up.
Here’s a table to summarize the short term costs:
Let’s look briefly at the long term costs of these different approaches. The vast majority of people trade cars at least once every five years, so let’s assume that you do that with each of these approaches. I’m also just calculating in today’s dollars, so in reality inflation would make the newer cars cost much much more. Driving a new car between age 20 and retirement at age 65 will cost a total of $285,660. Going with the two-year-old car, you will spend $243,540. The $5k cars will only cost you $81,540 and the $1k cars will cost $9000. Even if you bought a $1k car every year, it would cost $240k less over this time perior. You save enough money to buy the median priced house in this country!
Keep in mind also that I have not included sales tax, dealer fees, and insurance because they vary so widely by location. Including these costs means you save even more by going with the cheaper cars.
Leave a comment. Which of these approaches is closest to your car-buying method? Do you think buying cheaper cars is too risky? Is it worth $240k?