New Car Time Again, and Why I Won’t be Buying Used

If you’re a long-time reader of this site (and therefore an unofficial stalker, thank you very much) you know that back in 2006 I put up a bunch of posts on car shopping because I was buying a used car without a named operator insurance policyvan insurance from £149(If you click the link, keep clicking on “Older Posts” for the complete list of car shopping-related posts.) It’s four years later and I’m at it again. This time, though, I’m buying a new car (a far more enjoyable prospect).

I know, wisdom dictates that I either keep fixing up what I have or buy something used, preferably 2 years old, because values drop most during those first years and if there are any major defects they’ll have shown up, probably. However, this wisdom is faulty, outdated, and doesn’t account for my admitted control issues. (I’m OCDelightful!)

[hmtad name=”120×600 Skyscraper Within Articles” align=”floatleft”]Our Situation

Currently we have 2 cars, a Civic and an Accord, both (obviously) Hondas, both from model year 2002 (and both which have recalls on them for some airbag issue).

The Civic, which I bought new in March of ’02 for around $13,000 (including tax, tag, and title), is at 160,000 miles. Overall, it still runs great, although maintenance issues have slowly become costlier. (For example, I just spent $600 in non-regular maintenance related issues.) Still, the car doesn’t cost me more than $2000 a year in total maintenance, which is pretty decent considering I own it outright. Fuel economy is still excellent and for the exception of a faulty fuel pump sometime back in late 2003 I’ve never had any issues with it. (The fuel pump was under warranty.) This is not the car I’m looking to replace.

The Accord, on the other hand, I bought used in September of 2006 for $13,500. Includes extended warranty, taxes, tag, and title. At that point the most important things for me were to get a reliable car with a payment of about $250 per month, and to get a car I felt comfortable driving long distances in. (I love my Civic, but being 6’1″, I can’t quite stretch out my legs.) The car had 43,000 miles when it was purchased. Just under four years later, it sits at approximately 122,000 miles, meaning that I average about 22,000 miles per year on the vehicle. This is the vehicle I’m looking to replace. Why? Because I can’t trust it (and its starting to cost me).

Don’t get me wrong: the car has never left anyone stranded, and it’s a good car, but before I got to it someone drove it for 43,000 miles, meaning I can’t account for its care history for the first 1/3 of its total mileage life (or half its age, although whoever had it obviously drove it a lot less than me). Recently it started having transmission issues, nothing big, just shifting harder than before; once in a while (very infrequently, actually), mid shift, the RPMs shoot straight up and the car quits accelerating. A second or two later, it catches and goes, pulling the car forward and threatening passengers with a mild case of whiplash. Due to this, we took the car to a transmission shop to get it check. The mechanic said that there didn’t seem to be anything wrong externally with the transmission, but that he thinks there’s something inside that needs repair. Minimum cost: $800, just to take the transmission out, look inside, put it back together and put it back. (This includes taxes.) Parts and additional labor would be extra. Add to this the need for new rotors, a timing belt, and a few other miscellaneous items and suddenly this car threatens to cost me around $2000 in repairs, not including the paint job I need to give it because of some major scratches on the side of the car (there when I bought the thing and are begining to rust) or the $900 I just recently spent on its 120,000 mile maintenance and getting it new tires. My father, formerly a car repair shop owner, says I should try a transmission flush, although the transmission mechanic said he doesn’t think that would help. Still, that’s at least $100.

The value of the car, in its current condition, is about $3900 for sale in the private market, according to Kelly Blue Book. We still owe about the same on it. If I can get that much for it it’ll be a miracle.

Can you see now why I’d rather get rid of this one?

The Fallacy of the Used Vehicle

Cars depreciate, that’s a fact. However, some cars depreciate far more than others. American cars, for example, have a far steeper depreciation after the first two years than either Hondas or Toyotas. (Some claim this is changing, particularly with Fords, but I haven’t really seen the evidence: I don’t know how much of that sentiment is based on fact and how much is based on patriotism.) This means that if you’re going to buy an American car, you might do well to go ahead and buy something used. If you’re going to buy a foreign car, though, chances are you’ll pay nearly as much with the used as you would with the new. There’ll be a few thousand dollars difference, true, but if you’re financing then this difference is offset by the financing deals banks and car dealerships give new car buyers. (For example, Honda currently has 0% for 36 months and 1.9% for 60 months on all new Accords, while Ford is has 0% financing, 60 months, on all new Fusions, plus $2500 cash-back.) Here’s a concrete example:

A 2010 Accord EX-L starts at about $29,000 according to Honda.com. Go to Cars.com, and do a search for used Accords and here’s what you get:

  • 2010 Accord EX-L, 72 miles on it, $29,815
  • 2009 Accord EX-L, 9,256 miles on it, $24,980
  • 2009 Accord EX-L, 6,266 miles on it, $23,998
  • 2008 Accord EX-L, 36,086 miles on it, $23,991
  • 2008 Accord EX-L, 28,295 miles on it, $23,703
  • 2009 Accord EX-L, 9,500 miles on it, $23,279 (although my first question becomes, “what’s wrong with it?”)
  • 2008 Accord EX-L, 19,356 miles on it, $22,987 (Honda Certified Used, which is excellent.)

Looks good, right? If I was paying cash then this would be wonderful! Now lets look at monthly payments, comparing the last vehicle on that list (the Honda Certified Used) and the new Accord. (I’ll be using the Cars.com Auto Loan Calculator. Note that I round up for prices.)

  • Used: At $23,000, no down payment or trade-in, 6.5% sales tax and 6.96% interest at 60 months my monthly payment is $480.
  • New: At $29,000, no down payment or trade-in, 6.5% sales tax and 1.9% interest at 60 months my monthly payment is $540.

Alright, so there’s a $60 dollar difference. Not huge, but nothing to balk at. Now comes the big one: maintenance. (I’m using the AOL Autos calculator and presuming, quite safely, that I’ll be driving 20,000 miles. Yes, AOL still exists; I was surprised, too.)

  • For a 2008 Accord bought in its third year, my estimated maintenance costs would be around $1,610 for year 1. Year 2: $210. Year 3: $3,700. This breaks down to around $153 per month.
  • For a new 2010 Accord my estimated maintenance costs would be $120 for year 1. Year 2: $353. Year 3: $1610. This breaks down to around $57 per month.

This means that by buying used I’m spending, total, about $90 per month for the used above the price of the new, with the diference being purely maintenance. This doesn’t include efficiencies provided by new technologies introduced into the later model, or the fact that while the bulk of maintenance cost rise for the new will occur after the loan has been paid off (and the car is a mere 5 years old), the maintenance cost rise for the used car combined with the monthly payment will make the auto increasingly more expensive in the later years of the loan.

To put it simply: if you’re going to do a long-term (60 month) payment, buying new allows you to separate car payments from increasing maintenance requirements: you’re either paying for maintenance or for financing, but not both. Buying a used car, however, means that towards the end of the loan you’ll be paying for maintenance AND the loan itself, leaving you in the same place I’m at now, feeling like you’ve been taken for a sap.

Finally, there’s the whole control issue. I don’t know who did what to that car for the first 20,000 miles of its life. Did they change the oil on time? Do routine maintenance? Drove it around mostly in the mid-western and northern states, ensuring that rust would become a factor once it made it down to Florida? (Interesting fact: cars that spend their entire lives in FL develop far less rust than those which are brought from up north.) When I buy a car new I know exactly what goes into that car and what kind of care it has had; if something goes wrong, thee’s a pretty good chance I’ll know whose fault it was. (This is why I always either go to the dealership or find someone recommended in the CarTalk Mechanics Files. In fact, this is how I found my favorite Honda shop in Ft. Lauderdale, ForeignTech (formerly HondaTech), located on State Road 7/441, just north of Broward Blvd.) In other words, I control the environment that car exists in and there are few if any unknown variables. That’s piece of mind a new car will give you.

Of course, there is a third option: just keep what’s already here. Fix it up, pay it off, and keep it for a while longer. This has been heavily considered, but we decided that having two very high mileage cars, no matter how well maintained, put it at risk of finding ourselves in some future date needing to buy two cars at the same time. The last thing I want to do is have to buy two used cars in a hurry. While I love sparring with used car sales people, (seriously, I LOVE it!) I don’t care to do it at gunpoint.

Sidenote: There are a few points I’m sure some of you more financially astute folks are thinking, like “why not just save $500 a month and pay cash when you’re ready?” and “why not get a cheaper used car but finance for a far shorter term to avoid the maintenance cost overlap?”

With the first question its a question of practicality: we didn’t start saving for a car years ago (even though we do have savings, a rainy year fund NOT to be spent on cars). Had we successfully done so, it would be fine, probably. $500 for 4 years would be $24k, just about the right amount for a new midsize sedan. But starting now, even at $500 per month would still mean that it would be 2 years before we could buy something as cheap as a Smart Fortwo, which my wife refuses to drive around here (lots of trucks) and is impractical from the standpoint of our parenting plans (don’t read into that), or a used vehicle, which we would rather not buy, due to the aforementioned control issues. I really don’t think we have 2 years. Combine the repair and finance costs for what we do have and we wouldn’t even be able to start saving any appreciable amount for the next year.

The second question is actually a great one, and something we’re considering. I used a Honda Accord for my example because it was our default choice, since that’s what were replacing. Smaller, more inexpensive cars are also options. We also plan to put a down payment. The examples were simply for the sake of having some numbers to play with.

Alright, So Buying New. What Are the Options?

Although I used the Honda Accord for my example above, we’re far from making a final decision. We’re still considering the Ford Fusion and Taurus; Toyota Venza, Matrix, and Prius (yes, I’m well aware of recalls), Honda Insight, Civic, Crosstour and Fit, and others we haven’t yet really looked at. (One car, the Smart Fortwo, was eliminated, sadly, because we need a back seat. Oh, but how I want one of those little skates.) It’s still nebulous for us so the answer to this will come in another article sometime in the near future. For now, if you have any recommendations, especially about the cars I’ve mentioned here, I’d love to hear it.

3 thoughts on “New Car Time Again, and Why I Won’t be Buying Used

  1. Disclosure: My family owns and runs a used car garage and workshop.

    Why is there such a large difference in interest on the cars (6.96% vs 1.9%)?

    Secondly, depreciation (here in the UK, anyway) slows immensely after 3 years. If you want the best value, broaden your scope to ’07s.

    I could also suggest you go to auction. You don’t have the benefit of a garage to fall back on if you have immediate problems but this is where most used car showrooms get most of their cars. If you know what you’re looking for, you can get a serious bargain.

    And one last suggestion: don’t keep your cars longer than you need to. If you buy a 3 year-old car, keep it for two years and sell it on. Rinse and repeat. You need to remain conscious of the value of your car and know what it’s going to be in the future. This way you can dodge many larger maintenance costs by never having a car more than five years old.

    If you’re buying from auction and selling privately, sell even faster and you could actually make money. It’s effort and there’s a learning curve but you keep your car relatively up to date.

    This isn’t practical with new cars because they drop a third (or more) of their worth in their first three years.

  2. Hey Oli, thanks for the excellent questions.

    • The interest rate of 6.96% reflects the standard rate for buying a used car. Likely, I would be able to get as low as 6%, depending on the lender and loan total. The interest rate of 1.9% reflects the current special rate for purchasing a new Honda Accord and financing for 60 months via Honda Finance. (Likewise, Ford is offering 0% for 60 months on a 2010 Fusion, non-hybrid). Because of the economy, a lot of dealerships and companies are having specials like this at the moment.
    • Auctions are a bit tricky here. First, I don’t know cars enough to go to one without a mechanic (or someone who knows cars very well) on hand and make a wise decision. Since they usually take place during weekdays, during work hours, it’s almost impossible to get someone to go with me. Second, you need to have cash on hand: whether it comes from a savings account or loan doesn’t matter, but you need to be able to pay there. (Putting a car on a credit card isn’t my idea of a good time, and general purpose loans would be over 10% interest, most likely.) Third, most auctions are dealer auctions, so I’d need a dealer’s license. Even if I could get into one, items 1 and 2 preclude my participation.
    • The way car values drop in the US might be a bit different than in the UK, I think. Here, it’s the firs 2 years that show the big drop, usually the first. This is most pronounced with American cars: for example, the Chevy Malibu has a depreciation of approximately ~$10,000 the first year, while the Honda Accord has a drop of ~$6,500. At the second year the drop is ~$3,000, and after that it’s about $1,500 per year.

    Despite all of this, your advice is quite good, and very usable, so thanks! I’ve considered doing things like this in the past, but my hesitation has always been in the time requirements. Even though my dad used to run a auto repair shop, my brother is a pretty good spare-time mechanic, and my ex-brother-in-law was a master mechanic for Mercedes, I’ve never had any major interest in automobiles; instead of spending time doing something I love, I’d have to spend it dealing with cars all day, talking about things like pistons and gears and twin-turbo whatchamacallits, stuff that would take me from 0 to sleeping in 3.45 seconds.

    As for keeping my cars longer than I need to, I’ve always been of the mentality that a car should be kept so long as it is useful and as long as it doesn’t cost you too much to keep it, which is why we owned a 1987 Chevy Cavalier until 2006. (Sold it for $400, with which I bought 100 cups of coffee.) I guess maybe my thing is to buy either new cars or older cars for cash, since then I don’t have to worry about a payment. (Provided they’re not too maintenance intensive, I’m a happy fellow.) Your points, however, make a lot of sense, and are things I will need to consider going forward.

    Thanks for the (well received) advice!

  3. I understand your POV. Just bit the bullet today and financed a new Honda FIT to replace an increasingly unreliable, now inoperable Civic. Hondas are usually great and do retain their value exceptionally well (esp. if the body is well maintained). However, I bought one used (5 years old) and within the first month started having issues. Brakes, then a wire. Within the first 6 months I had to replace the transmission for $2500! Other major and minor repairs followed almost regularly over the next 7 years. What I thought I had gained by getting a used car, formerly leased, I lost through my ignorance of the car’s real history. A tow truck guy evenully told me it was clear to him that the car had been in some accident because of changes to the body. He said since it had been under lease, the dealership probably just fixed it in house without having to report it to an insurance company. That car got me through a lot, but it was also stressful and more expensive than anticipated. That is why I chose to buy new today, with all the warranties and care packages, etc.

    All that to say, I totally get your reasoning, and agree. Financing causes one to incur interest, but paying interest is preferable to the inconvenience of mechanical problems and increasing costs of regular maintenance.

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