David asked an interesting question in the comments section of “Best and Worst Used Cars of 2007“, the question was:

.. is it cheaper to buy a used car every 5 years, or a new one every 10 – 12? I currently have a ‘95 Dakota (needed a new rear diff this year (caused by towing?) and the ECU died). Once the loan was paid, I had 7.5 years of trouble-and repair-free driving. I still have it, but bought a smaller vehicle this year (also new) which I expect to keep for a similar lifespan. The new vehicle has a 7 year bumper to bumper warranty, so I should have no repair expense during that time.

Doing some research around the net, it seems that cars depreciate 20% right off the lot in addition to the regular 7-12% depreciation / year. Of course this depends on the make/model of your car, features, colour, KM’s etc.

For the sake of simplicity, we’ll assume 32% depreciation in the first year, along with 12% depreciation every year after that. You guys can check the Canadian Black Book to confirm the depreciation of your favorite car maker/model. I tested these numbers on Hyundai’s and they are spot on. However, Honda’s/Toyota’s hold their values better.

  • Year : Residual Value
  • MSRP: 100%
  • 1st year: 68%
  • 2nd year: 60%
  • 3rd year: 53%
  • 4th year: 46%
  • 5th year: 41%
  • 6th year: 36%
  • 7th year: 32%
  • 8th year: 28%
  • 9th year: 24%
  • 10th year: 22%
  • 11th year: 19%
  • 12th year: 17%

The biggest factor that we need to account for between new and used cars are the repair costs. These costs typically start after the new car warranty expires. We’ll assume the bumper to bumper warranty expires after 3 years at which time the repair bill starts rolling in.

We’ll start the repair/maintenance costs at $600/yr increasing by 15% every year, starting @ year 4. In terms of the car, we’ll pick a fairly economical car that has an MSRP of $20,000.

Year Residual Value Repair Cost
1 $13,600 0
2 $11,968 0
3 $10,531.84 0
4 $9,268.02 $600
5 $8,155.86 $690
6 $7,177.15 $793.50
7 $6,315.90 $912.53
8 $5,557.99 $1,049.40
9 $4,891.03 $1,206.81
10 $4,304.11 $1,387.84
11 $3,787.61 $1,596.01
12 $3,333.10 $1,835.41

Buying this new car every 10 years would result in a total cost of (not accounting for financing charges):

  • MSRP – residual value + repair costs
  • $20,000 – $4,304.11 + $6,640.08 = $22,335.97 (could be more if you get low-balled on your trade-in)

Buying this car once it’s 2 years old for around $13,000 (after small dealer markup) and keeping it for 5 years then buying another 2 year old car for another 5 (for a total of 10 years of driving):

  • Purchase price – residual value @ year 7 + repair costs (from years 2-7)
  • $13,000 – $6,315.90 + $2,996.03 = $9,680.13 x 2 = $19,360.26

Conclusions:

It appears that buying a used car every 5 years would be less expensive than purchasing a new car every 10 years. Of course, pretty big assumptions were made in this post so the calculations were meant to be relative.

I think the biggest issue with new cars is the massive depreciation after the first year. If you are a new car person, why not buy an “almost new” car that is one or two years old? At least that way you still get the new car feel, intact warranty, AND you don’t need to pay for the initial 30% depreciation.

If you insist of buying a new car, check out my article on car salesman negotiating tactics.

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photo credit: Manik.

65 Comments

  1. FinanciallyEnhanced on June 29, 2008 at 10:15 am

    Great calculations. I personally prefer to purchase a new car every 3 years because the re-sale value is still rather high depending on the car purchased and on the condition it is left in.
    For old cars every 5 years should be a perfect amount of time to sell and buy a new car because the car has had a long life and may have too many repairs or problems depending on the condition.

    These are just my views, Good post, keep up the great work!

  2. Todd A on August 5, 2008 at 12:33 am

    Neither … buy a used car every 10 years. Oh yeah, make sure you buy a GOOD car, not something that dwells at the bottom of the reliability rankings (regardless of how sporty it is). And, I can’t take credit for this idea, I read the “used car, drive it 10 years” theory in the book, “The Millionaire Next Door”.

  3. Mike W on November 15, 2008 at 5:45 am

    Ok here is what I have seen in my experience with cars. I have never sold a car after 1-2 years (after purchasing brand new) but I wouldnt doubt that the car drops 20-30% after that time period. But do you really think the car dealership is going to sell you that same car for 20-30% less and break even on the price? No way….they are going to sell it for 10-15% less. So lets look at the numbers.

    Lets say you want to buy a compact 2008 for 15K if you take off the 10-15% that means you can get a 2007 for 12,750 – 13,500. Now we have to account for the sale of the car. Lets say these two people who bought the 2008 and 2007 decide to sell the car 5 years later (same date because they bought both cars at the same time)….this number would be a little harder to figure out exactly (so many variables) and Im no soothsayer…..but I would say all other things being equal….a 2008 will sell for more than a 2007. So that closer the gap even further.

    To me there is something to be said knowing that YOU had total control of that car from day 1. If someone traded in a car after 1 year that has to be something going on that they know about that the mechanic didnt catch in that 30 minutes to one hour that he had to check it out on the day of the trade in.

  4. JJ on December 9, 2008 at 6:48 pm

    I have been using an old used car for 6 years. Based on my personal experience, I would say, if you have an average luck (get huge repair bill for engine or transmission, etc), used car will be significantly cost effective – way more than the number in this post.

    The purchase price of my old car is $4500. My average annual repair + maintenance cost such as oil change is $600. The expense is each year is not even, one year could be $1500 (such as change tires/brakes), next year could be only $300.

    So the total cost of 6-year ownership is about $8000 excluding insurance. Not mention there are still some residual value.

    Things I want to point out about the post is,

    1. New car in warranty also has maintenance cost (such as oil change or some other consumable parts)

    2. New car’s insurance cost will be significantly higher. A low value used car does not need to buy full-coverage insurance, which usually save a lot money per year.

    3. People who buy really old car, don’t really spend huge money for repairing, why? They don’t go to expensive dealership. They usually use cheaper mechanics.

    4. Many people buy used cars from owner directly, that usually saves a few hundred dollars or even $1000+.

    5. Above points are all about money. But for many people, driving a new car is definitely worthwhile – enjoyable nice car, less headache for car repair, etc.

    6. Depends on if you are lucky. Used car could cost a lot as I mention earlier. Some people buy a $3000 old car, but have to donate it after a few months because it the repair cost is too high.

  5. 34 Ways To Save Money On Car Expenses : Moolanomy on December 26, 2008 at 1:32 am

    […] If you need a car, buy a used car. […]

  6. bat on January 5, 2009 at 1:37 pm

    used car – 10k
    new car – 20k
    driving your dream car – priceless

  7. links for Frugal Living | Funny Web Pages on April 15, 2009 at 2:37 am

    […] New Car every 10 years or Used Car every 5? | Million Dollar Journey (tags: frugal-living) […]

  8. American on July 5, 2009 at 10:14 am

    I disagree with the 32% drop the first year. Should be more like 20%. This changes the equation considerably (and the result). Plus the car insurance should change with age. Who is going to pay full coverage for collision on a car that’s only worth $5k?

  9. […] but not that great a deal if you’re a cash buyer.  If we do go new, we hope to drive the vehicle for at least 10 years.  In addition to “factory incentives”, the dealership themselves should have some […]

  10. Chris on November 4, 2012 at 11:50 am

    Don’t forget lots of people use financing to buy the new car… buying used is sometimes about paying with cash especially if you want to get a better deal in a private sale. If you know what to look for you can pick up really nice used cars for 5000 bucks and they can last.

    Then learn to fix the simple things and save the big shet for the mechanics and you will save 15000 bucks. I think buying cars that between 5-7 years old give you the best price point… but you will never know that new car smell.

    Note- The first owner of my jeep bought it for 33,000… the second owner payed 15,000 3.5 years later. 1.5 years later I bought it for 10,500.. inspection done.. only needs fluid changed.

  11. Richard on January 14, 2013 at 12:26 pm

    Just a thought, why did you say new every 10 or used every 5, why not compare the annual cost of buying a used car when the depreciation has been paid by original owner. Anyone who thinks a 2 year old accord can miss THAT MUCH maintenance, dealer or otherwise, is missing the boat. I am going out on a limb, and say EVERYONE gets their oil changed (yes you all have your story about your idiot neighbor that forgot to do it for 6 years, but in general, people change oil!) A 2 year old honda will not need much more than that! So take that honda bought 2 years old, and drive it 8 years, and compare THAT to your buy new keep 10, this will make a real good case for buying a used car. I personally am just about ready to get rid of my accord, bought 2 years old, going on 8 I’ve had it, MTC is next to non-existant, 2 sets of brakes front and rear (2nd rear only becuase caliper ceased), and an engine coolant temperature sensor, 2 sets of tires, and oil & tranny fluid change, thats all that car asked for in 100k miles!

  12. Richard on January 14, 2013 at 12:34 pm

    One more thought! I keep my records all written down, inspections, oil/filter purchases, tranny fluid, brake parts, and its running me on avg right around $250/yr mtc (doing work myself obviously). At time of sale, this car will cost me $1500/yr depreciation, pretty good for a model that between 0-2 years is about $4500/yr, and 0-4 is about $3500/yr. So my math tells me, i’m running an ex-l model for half what buying a new one and trading in costs. Every scenario where I buy new and keep X years (unless X=25 maybe), says used is cheaper!

  13. Moti on February 5, 2013 at 2:39 pm

    I own a 97 lexus es300. I bought it in November 2011 for 3,500 and it had 180,000 km on it. It came with all service records and I am handy so I have made small repairs to it as required (sensor, some lubrication, oil changes). It is not painless to maintain but its reliable. Its a v6 but I think thats part of the reason why its more reliable than a smaller car of the same age.

    Personally, I hate car payments. they are like golden cages that suck your money/value. But i did buy a rather old car with medium range fuel economy.
    Its a strong car, and starts up in -25 with no issues, everyday, hasnt broken down and has lots of toys.

    Basically, though, its hard to find a good used car, and most people dont put in the effort. But the “myth” of a new car being a safe car is overblown. A used car is pefectly fine if its a good make.

    Being a bit wiser, I’d buy a 2004/2005 toyota corolla or a mazada3 today at about 5-6k and drive it into the ground.

    While a car is a very personal choice, basically for 8K or under you CAN get a great compact that will do your daily commuter runs/chores for 5-8 years. Choose something dull, with 4 doors. Insurance is lower then too. If its a good brand and you keep up with the maintenance schedule (you should for ANY car you have) it should make alot of financial sense!

    Get your car amortization to $100/month. Its possible…but its not flashy! lol

  14. Moti on February 5, 2013 at 2:42 pm

    Now i feel a bit silly. Basically Chris wrote the same thing so much better a few comments up, thanks Chris! I totally agree. 5-7 years and 5k is a sweet spot!

  15. David on May 11, 2013 at 5:32 am

    Yeah but what about the fact that my new car will be financed at 0% for 84 months and a used car would be more around 5 %… I believe that if you buy a new car from the year before at the good moment or buy a demo and take care of your car for up to 10 years , it will be the cheapest way to own a car.

  16. Beth McDonald on May 8, 2014 at 3:35 pm

    I think new cars are a better option, depreciation be damned. There’s an infographic that actually shows off all that stuff.

    Take look at it here: http://blog.unhaggle.com/new-used-car-buy-infographic/

  17. P.P. on February 27, 2017 at 11:40 am

    Bought a 1994 Volvo 850 in 2009 with 223,000 kilometers in MINT condition.
    It now has 390,000 kilometers and still in MINT. No rust at all I wash it 2 times a week.
    I have changed rotors and pads 2 times ,PCV cleaning, Timing belt,idler pully,tentioner pulley,radiator and upper and lower radiator hose. bought the car for $1.360.00 and $2,500.00 in maintainance in 7 years. Did a compression Test to see how much life is in the motor it is within Factory specs. I owned 30 cars every make and model, This has been hands down the most reliable car. Ask yourself if You buy a new car for $35,000.00 and put 167,000 kilometers on it in 7 years. How much is it worth ? maybe $10,000.00 I cost You $25,000.00 to drive 7 years. It cost me $2,500.00 to drive for 7 years. Its still drives like a new car,does not burn a drop of oil or oil leaks of any kind It has never refused to start in The COLDEST of days. If you want to know how good these cars are go to YouTube ,type Robert DIY

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