Buyng New vs Buying Used Cars : Financial Modeling Skills

So everyone generally says that buying new is dumb but is it really and can you go ahead and use it to your advantage with financing? Rates are uber low right now and you can go head and get 5 year financing for .9 to 1.9% at a lot of places on a new car, but a used car will take you to a 5-6 percent .. so just some rough numbers on a 40k new luxury car and a 3-4 year old version of the same car that has 50kish miles on it.. is 25k value an agreeable number?

1.098 at 1.9 for 5 years, from 40k 43.92

1.28 at 5 percent for 5 years, 25k becomes 32k over the same time period

Of course you can pay cash to negate the higher finance charge on used, but what if you get the 1.9 percent loan and go ahead and invest the equal amount of cash in MLPs/high yield bonds giving solid dividends over a 5 year period at 7 percent or so right now? 40k * 1.07 for 5 years gives you roughly 56k... a 12k difference between the loans rate and the 'arb' that youd come out on

Obviously there is a depreciation of the vehicle over time but the new car will always have a higher residual mile per mile, although depreciating at a quicker rate. Both will sell for 10kish around the end of their 'life' around 100k, which may be 6-8 years for the new car and 4-6 for the used car or so (maybe more?)

Does anyone want to model out certain scenarios like this to try to calculate what IS actually the best thing to do, all of these factors considered? :)

 

You are leaving out many costs associated with a car. Insurance, repairs, fuel. ect ect. Even the same car will have different costs for new vs used.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 

It also obviously depends on when and where you purchase said vehicle. A couple of years ago, I was on the market for a used Honda Civic. However, at the time, used car inventories were becoming more scarce, and the price I was getting on a new car at year end wasn't much higher than a used car from the dealership. I ended up buying the new car with a dealer discount, financing at a low rate (despite having the money to purchase outright, I was told this could help build credit), and paying it off within a few months. I ended up selling the same car a year later for $600 less than I had paid, in cash.

Heister is right though that you have to consider insurance, etc on a new vehicle vs a used car.

 
shorttheworld:
yeah the credit building is another perk -- repairs will on average be less for a new car so another point in their circle, but are new cars cheaper than used for insurance? obviously higher worth but maybe more reliable -- is it zero sum? anyone know the stats

Haha, do classic cars count? Correct me if I'm wrong, but insurance is primarily to protect other drivers, and to protect against collision damage, the latter of which doesn't really directly depend on the reliability of the car.

 

Older cars are typically cheaper to insure provided they haven't been in an accident, I don't know anything about classic cars. Honestly, unless you get it certified pre-owned, you have no idea what you're really buying and a new car is just less of a headache. Heister hit the nail on the head: the savings can quickly be eaten up with repairs / maintanance and you have no guarantee that you won't get nickeled and dimed to death on the deal.

Get busy living
 

new cars are one of the worst value items on the planet, right after 1st class airfares (but hey, the extra $15 of champagne was worth it, right?)

i ain't now jew either but this one is simples

Moving tonnes of product. Making fat stacks.
 

First, if you buy used you should buy a 2 to 3 year old certified pre-owned. They typically offer a warranty that will last as long as you're going to own the car. Also, most manufacturers have rate specials on CPO cars all of the time, so you can easily get 1.9 or 2.9 for 60 months. If you look at the published residual values that they use for leases, it's obvious what a waste buying a new car is, especially considering those residuals are much higher than they will actually be (i.e. 62% in 3 years vs. 53% actual value). Why pay over 40% more for a new car when you can pay less with almost the same warranty coverage and a very close rate? Also, the depreciation schedule slows down as the vehicle gets older, so when you take into account the low rate and a slower depreciation schedule you're less likely to be upside down.

 

Classic cars can either be very inexpesnive to own and insure, or very expensive.

I have antique insurance on my classic cars, and its something like 500 for the year for three cars ( 67 Impala, 67 GMC truck, 72 Nova) but thats with the antique insurance. Its only supposed to cover the vehicle on trips to shows, but I don't really care. If something happened I "would have to prove I was on my way to a car show," but I don't worry about it the six or seven times I bring them out over the summer. However, if I threw one on as a daily, itd double or triple.

Its funny how it works though. I want my next project car to be an E39 5 series, but its not quite an antique so itd be very expensive to insure. Forget an E36- they don't want to see that shit.

Don't know too much about whether to buy new or used, but I think if I were going to get a "new" car, itd be certified pre-owned, Don't touch a used car thats not certified. Dont touch a car that came from an auction unless its like sub 5 grand, and is purely going to be a hobby car. Don't touch a used car that was flipped from an auction because you are likely paying 8-10 grand more than they paid for it. Dealer is only winner, ever. I know kids upside down in loans on g37s and the like, and the dealer is laughing all the way to the bank. Owing 12 on a car worth 7, that is broken and does not have any type of warranty, is NOT a good scene.

Just thought I would add my little 2 cents.

"That dude is so haole, he don't even have any breath left."
 
mapr89:
Most of the time new, used cars many times end up costing more than the new one. Remember, it all depends on the circumstances.

What? Your comment is a contradiction.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 

In my humble opinion, there are many faulty things found in this thread.

I should point out that all of this work has already been done for you in Consumer Reports, where they calculate the cost of ownership of cars which includes depreciation, and also compare new cars versus used ones. The conclusion is that it is better to buy used cars, and the sweet spot is between two to three years old, as that is when the depreciation rate begins to slow down. As someone else mentioned you can buy CPO in this time frame and still walk out with a warranty.

Second, I think your assumed depreciation rate is probably not correct. I don't believe a $40,000 car can command $25,000 after four or even three years. I can buy a used Lexus LS460 right now for $30,000 that is just three years old, and that is one of the highest rated and most reliable cars to ever be built, and has an MSRP of around $80,000 when new, plus could possibly still be under warranty if CPO. I think a good rule of thumb is to assume a car has depreciated around 40% after two years and around 50% after three years. So a $40,000 car should cost you - at most - $20,000 up front if it is three years old, and even less if four.

A comparison of depreciation rates vs financing rates can give you a rough idea of which is the smarter choice, financially. You mentioned as much as a 4% difference in loan rates between new and used but you're talking about then absorbing depreciation of as much as 25% per year in the first few years of a car, and the more expensive a car is, the higher its initial depreciation rate is (assuming there isn't something extraordinary about it such as a limited Ferrari with a wait list to buy). For example, I can buy a Mercedes Benz SL 600 - their flagship luxury sedan - new for $110,000, or I can buy it three years old for $35,000, especially if I travel down to Boca and get it off of some rich guy's lease.

Again, if you're really interested in seeing analysis of this stuff with all the factors thrown in, including depreciation, estimated maintenance costs, etc, just subscribe to Consumer Reports.

 

If you only need the car for a few years, look for a car with historically low depreciation, a few years old, but with low mileage. It sounds like you won't need to drive all that much, so don't worry too much too much about fuel efficiency. You can find very sporty four-six year old cars for around $15,000 or less. http://www.kbb.com/cars-for-sale/cars/bmw/?year=2009&atcmodelcode=318i|… Check this out, 2009 3 series with under 100,000 miles sell for less than $18,000 in NYC. Buying elsewhere will probably be cheaper.

"Everyone has a plan until they get punched in the face."
 

If your goal is to keep a car for few years look into leasing! Both Audi and BMW have great lease deals for their entry level cars. Also, if you want to get the best value look into a 2014 toyota corolla. They have a extremely low lease and it comes with a 2 year "Toyota Care" package (Free maintenance , tow and etc.).

 

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