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|
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
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.
photo credit: Manik.