April 24, 2009, 4:52 am

Why Buying a New Car Instead of Looking for A Used One?

by: The Financial Blogger    Category: Personal Finance
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old-carBefore we start with today’s post, I just realized that I didn’t post yesterday! I actually put all my article for the week in draft but the post from yesterday was set to be published on the 23rd… of May! Don’t worry, posting schedule will now be back to normal 😉


ford-sport-trac-adrenalin-2009I’m still looking for cars as I didn’t make my final decision yet (I have tried the Tribute, the Rav4 and getting into an Outlander tonight!). Some readers asked me why I was looking to buy a new car instead of looking into a used one. Is it about pride? Fear? Many people think that buying new is a waste of money as the car drops in value so much after a year that your loan will be bigger than the car value! However, there are still good reasons to buy a new car:

I plan to keep my new car for several years

I have bought my present car in 2002. Therefore, I am with the same car for the past 7 years. If I was not planning to have a kid, I would probably keep it another year or two. Back in 2002, I rented the car for 4 years and then bought it. The price of the car was $23,500 back then. I will now sell it for about $4,000. So the actual cost of my car is the equivalent of a monthly payment of $232 a month for 7 years. So I figure I am loosing much when I figure that I have put about $3,000 total in maintenance and reparation during that period. If I would have bought used at the very beginning, chances I would have paid much more in maintenance.


I am willing to pay to not go to the garage

I hate when my car break. Since I only have one car and I don’t use it to go to work, it is quite a pain to coordinate my schedule with my mechanic when I need to repair something on my car. It happened only twice since I bought my car new (I didn’t have to go to the garage besides for oil changes for the first 4 years). Therefore, I am willing to pay an extra cost in order to buy the piece of mind for the first 4 years.

Can’t trust mechanics, dealerships or individuals selling used cars

Some people may argue with this, but I personally heard too many stories about fake repairs or cars that had 100,000 miles done but showing 55,000 miles on the odometer. One of my friend was actually suggested by the dealership to modify his odometer for free if he was buying another car…

Since I don’t know anything about mechanics, I would not be able to make the difference. When I buy a new car, I don’t have this problem!

Financing options are more interesting

I did some interesting calculations: if you buy a new, many car dealerships will offer 0% financing right now. However, if you buy a used car, the interest rest goes easily to 6.5% and higher (this was the best deal I found so far… some are financing at 8%!). So calculate the payment on a 35K car at 0% for 5 years: $583 per month. If I buy a 2008 instead of a 2009, I would probably buy it for 30K (which is 15% less than the original price). At a 6.5% interest rate over 5 years, the monthly payment becomes $586. In order to make a real difference, I would need to find a used car that dropped 30% of its value (so 25K) and I would save about $100 a month on my monthly payment ($489 with a 6.5%). If the interest rate is 8%, I would only save $75 a month ($506). Does it really worth it to buy a used car? I’m not quite sure…

image source: flickr, motortrend

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Comments

Another thing that factored into my descision to buy a new car instead of a used on 2 years ago was that I don’t trust the person who only keeps their car for a year or two to have kept it in good shape. After all, it only has to look decent and last until they get their next one, right? They may have driven it really hard. With a new car, you know exactly how it’s been treated from day one.

When I coupled this with the price of a 3-5 year old car compared to new (used cars were in high demand in Alberta at this time in 2007), it just wasn’t worth the $3000 to deal with the headaches of a used car.

So you are paying interesting on a depreciating asset, how worse can it get?
On top of that people are losing jobs and trying to keep the roof over their head.

Don’t expect all used cars to be perfect, they are used for a reason. And really if you are not willing to take the time to do your due diligence and check the car or get a mechanic to check for you then please don’t say you can’t trust the person selling, because their task is to sell it and the buyers is to inspect the car.

by: The Financial Blogger | April 24th, 2009 (11:56 am)

Tom,
the situation is the following:
either I pay 8% interest on a used depreciating asset or:
I pay 0% to 2% on a new depreciating asset. In both situation; I am buying a depreciating asset. I’ve always counted my car value high enough to offset my car loan. Cars are no assets period. it is just a big waste of money but hey! we have to spend it somewhere!

Are you telling me I should not talk about buying a new car while people are losing their job? I wonder what is worst:
#1 I keep my money for myself, and see people losing their job or:
#2 I spend my money and contribute to the economy and make people work (for a very small part but still, if people (that have a good financial situation) keep buying, we will get out of the recession much faster).

Well there is a difference of the total cost of borrowing of new versus used car even if you include the interest for the used car.

Actually, both don’t make sense.
Yes keep your money and spend it wisely because if you spend it you are putting yourself in a tough spot. Also, this is what got us in the mess in the first place, excessive spending and doing more of it will not help.
I am sorry but spending money on a car is not really contributing to the economy, you may consider it more like a survival tactic for the economy, or dealership in this case.
If you wanted to create work and contribute to the economy then starting a business and hiring people will work much better.
But then again, the question is who will buy the product/service.

All in all, now is not that time to be throwing your money away for the sake of the economy, I say take care of your situation first before you help others.
In terms of the car, if you can afford to keep up with payments for a few years along with maintenance, insurance, etc then it may make sense.

by: The Financial Blogger | April 24th, 2009 (12:39 pm)

I was quite happy not having to make car payment for the last 3 years. However, I need to change as my car is too small for 3 kids. I have the same car for the past 7 years, it’s not too bad 😉

I don’t say we should keep going with excessive spending; I simply can afford buying a new car as my financial situation is quite stable. Excessive spending is stupid… so is piling up a ton of cash. There must be a balance. Several people are stacking up their money with great fear and they will never use it…

You are right that creating a company would be a much bigger push on the economy than buying a car 😉 but hey, I can’t hire through my company yet… not big enough!

I think that right now is the perfect timing to make purchases if you have a stable situation. There are great deals on many things.

Well you know what, I probably have no right to say you can’t do it because I really don’t know your financial situation.

I just wanted to point out some crucial points to consider which majority of people don’t even consider.

There are great deals but really, majority of people are in the hole.

This was a great discussion 🙂

by: The Financial Blogger | April 24th, 2009 (12:46 pm)

I get your point and I agree with it. people have this tendency of digging a bigger and bigger hole 😉

cheers,

I have a few points to say too
– I’d think most people buy used cars with cash, and in turn negotiate down more
– I was told that 0% financing on new cars usually means less bargaining room vs you pay cash (and say negotiate down 10%)
– I’d buy from bigger used car dealers, or even manufacturer dealers themselves if you’re concerned about the cars

My family have owned 4 cars in Canada, except the 1st one being new, the other 3 were all 3~4 years old used cars (off lease) with no major problem.

Let’s just say, in Jan 2009, for the same $20K (AFTER TAX), I chose a 2004 Acura TL with GPS, 85K mileage
, instead of a 2009 Toyota Matrix XR, brand new, 0%

I planned to drive all my cars to the ground too fyi, and I am a total believer in used cars. To each his own, I have friends who buy new cars only because of the “used car smell”

“Can’t trust mechanics, dealerships…” I just came across a must-read for anyone getting ready to buy a car. Search Amazon Books for “Car Dealer Hell.” Just finished it and it opened my eyes to a lot of $%^& that I didn’t know. You gotta read it.