Why Buying New Cars Over Used Is a Million Dollar Decision
September 12, 2019

Why Buying New Cars Over Used Is a Million Dollar Decision

When I was in college, I had a part-time job at a bus depot. One of the mechanics was a self-made millionaire. I told him I wanted to be a schoolteacher, so he knew my salary wouldn’t be high. One day he said, “You don’t need a high-paying job if you want to become wealthy. You just need to do some small things right…things that very few people think about.”

“If you’re rich,” he said, “it’s OK to buy a brand new car. But many people who aren’t rich buy new cars without realizing they’re a huge wealth destroyer.”

My friend, Nathan Schelble, believes the same thing. The 49-year old elementary school counselor is careful with his money. His frugal living helped him pay off his home in East Aurora, New York and build a million dollar portfolio of index funds. A few years ago, Nathan told me that leasing cars instead of buying used cars could be a $1 million decision. That’s why he says he would never lease a car…nor would he ever buy a new one.

2006 Honda Accord:
Purchased In 2015 For $5,500 - Sold In 2018 For $4,800

2006 Honda Accord

In 2015, Nathan bought a 2006 Honda Accord with 60,000 miles on it. He paid $5,500. In 2016 Nathan said, “I should be able to get at least $3,500 for this Honda if I sell it in 3 to 5 years.” It turns out, the car’s resale value was better than he thought. He sold it in 2018 for $4,800.

“Over three years, I lost $700 on that car,” he says. “I also paid a total of $1000 on oil changes, new tires and some new, front brake pads.” Nathan has a few used-car buying tips. But first, let’s see how much money used-car buyers like Nathan can save, compared to someone who buys new cars.

According to Road & Track, most new cars lose about 50 percent of their value within the first five years. Some lose more. For example, the Chevrolet Impala is reported to lose about 66.2 percent over just five years. That’s a whopping $18,549 off the car’s retail price. If we buy an expensive foreign car, its value drops off a cliff. A Mercedes Benz E Class, for example, loses an average of 67.2 percent over five years. That’s a mind-boggling $35,582 below the retail price.

Assume somebody bought a new car every five years. Let’s also assume they lost 50 percent of the car’s value to depreciation. According to analysts at Kelley Blue Book, the average price of a new car in the United States was $36,590 in February 2019. According to ValuePenguin, the average car loan charges 4.21 percent per year over a 5-year loan period. That means, if somebody bought a car costing $36,590, and if they financed the car at 4.21 percent per year, the car’s five-year total cost would be $40,630.08.

If the owner sold the car five years after purchasing it, they might get 50 percent of its original value back: $18,295. That means, the car’s total cost would be about $22,335.08 over five years.

New cars lose up to 20 percent of their value after the first 12 months. After that, the drop is less severe. Over the years, Nathan has bought plenty of used cars. He hasn’t lost more than $4000 on any of them, over a five-year period. That includes maintenance and depreciation. Consequently, even his most expensive cars cost him about $18,335 less over a five-year period, compared to what most people pay when they finance a new car.

That might not sound like much, until you see the long-term value of those savings.

Financing New vs Buying A Used Car With Cash

Average New Car, including financing costs $40,630.08
5-Year Total New Car Cost after loan interest and depreciation $22,335.08
5-Year Total Used Car Costs (including maintenance) $4000
Used Car Savings Over 5-Years $18,335
Annual Cost Savings $3,667
Potential Long- Term Gain Of Buying Used Cars Over New Cars $1.34 million over 43 years

Over the past 30 years, Vanguard’s Balanced index (60% U.S. stocks, 40% U.S. bonds) averaged a compound annual return of 8.09 percent. If a 22-year old invested what they saved through clever car purchases (about $3,667 per year), and if they earned a return of 8.09 percent, they would have about $1,340,718 by the time they’re 65 years old.

2009 Honda Accord:
Purchased in 2019 For $8,500

2009 Honda Accord

You could argue that $1.34 million might not have the same buying power 43 years from now. I agree. But every year, it will cost more to a buy a new car. As a result, the gap between the new and used cars will grow (in dollar terms), so a used car shopper might end up saving far more than $3,667 per year.

Last summer, Nathan bought another used car. It was a 2009 Honda Accord for $8,500. It had just 35,000 miles on it. Most people drive about 12,000 miles a year, so Nathan’s 10-year old car has as much wear and tear as a three-year old vehicle. “In 3 to 4 years, I hope to sell this for about $7,000,” says Nathan.

You might wonder how people like Nathan find such deals. He says you don’t require special skills. “You need to start looking for a used car before you need one,” he says. “Be patient. Spend about 10 minutes a day checking out classified ads online. When you see a quality, low-mileage used car at a decent price, be one of the first to check it out. Such deals don’t always last long. But if you happen to miss it, don’t worry. Another great deal will likely come along.”

Nathan has a soft spot for Hondas, Based on their reliability ratings, it’s easy to see why. U.S. News published a list of the best used cars based on their reliability. They used opinions from automotive experts and total cost of ownership data from third-party providers. Here are some of their favorite, low-cost cars.

Best Small Cars Under $10,000

Rank Car Average Used Purchase Price
1 2011 and 2012 Honda Fit $6,604 - $9,027
2 2010 Toyota Prius $7,401 – 8,956
3 2012 Honda Civic and 2011 Toyota Prius $6,635 - $12,032

Best Subcompact Cars Under $5000

Rank Car Average Used Purchase Price
1 2009 Honda Fit $4,215 - $5,433
2 2011 Mazda 2 $4,582 - $5,258
3 2009 Toyota Yaris $3,253 - $4,310

Best Mid-Sized Cars Under $10,000

Rank Car Average Used Purchase Price
1 2010 Ford Fusion Hybrid $5,219
2 2010 Ford Fusion $5,018 - $7,016
3 2010 Mercury Milan Hybrid $5,747

Best Large-Sized Cars Under $10,000

Rank Car Average Used Purchase Price
1 2010 Toyota Avalon $7,146 - $8,879
2 2011 Buick LaCrosse $7,487 - $9,116
3 2010 Hyndai Azera $7,135 - $8,416

Best Sports Cars Under $12,000

Rank Car Average Used Purchase Price
1 2010 Mazda MX5-Miata $6,915 - $8,241
2 2010 Ford Mustang $7,365 – $11,139
3 2010 Chevrolet Camaro $8,774 - $9,560

Many people prefer to buy new cars. When doing so, it’s often smart to keep the car for at least ten years. That way, you’ll buy fewer cars over time, which should save you money. But if you want to find a deal on a reliable, low-mileage used vehicle, it could save you a fortune. Purchasing used cars over new cars could be a million dollar decision.

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