New or Used Car?

Gary,
My partner and I are planning on purchasing a car. We have budgeted for it. He would like a station wagon and wants to buy it second-hand (at least 12 months old). I prefer a brand new car, especially with car price ranging from $14,000 on up these days.  I realize that new car value drops dramatically once we drive it off the car lot. But we will know from the start what's been going on with this car and can take good care of it, which you can never do with a used car. David is of the opinion that a good second hand car is more economical than a cheap new car.  He needs the car for work - commuting between different facilities.  This is a fairly big purchase for us and I very much would like to know what you think.
Nancy

Good question! And one that we all face from time to time. We can't tell Nancy and David which car to choose. That's not possible. But, we can give them some tools to use in making a good decision.

For comparison purposes we'll use a Ford Taurus wagon. Let's take a look at four different times in the life of an automobile. First, when it's new. Then when it's two, five and ten years old. To get pricing information we went to Kelley's Blue Book.

We're going to use past car prices as an example. There's a pretty good chance that what happened to used car prices in the last ten years will be a reasonable estimate of the future.

We'll start with the new 2004 Ford Taurus SE four door wagon. It's equipped with V6, automatic, radio and air conditioning. Retail price on the 2004 model is $22,290. But Nancy and David can expect to pay closer to the invoice of $20,457. To simplify our comparisons, we're going to ignore sales tax and state registration fees.

Now, let's look at a 2002 used Taurus wagon with similar equipment. According to Kelley's the retail value on it is $15,040. So Nancy can expect to pay a little over $5,000 for the comfort of knowing the car's entire history. Most cars lose about 25 to 35% of their value in the first two years.

Nancy's fear of spending $15,000 on a used car and getting a lemon is understandable. She can minimize that by checking the car's history at <www.carfax.com>. For $15 they'll provide a report. Many dealers will even give you the CarFax report. One warning. The reports will only show items that appear on official records. So if the car was in an accident that wasn't reported, it won't show up in the history.

If you buy a used car, you should be eligible for the remainder of the new car warranty. It's a good idea to find out exactly what you'll get from the manufacturer. Also, some dealers will include an extended warranty with a used car. A good warranty minimizes the risk of buying trouble. Yet, Nancy is right. There is some small risk.

Next, let's take a look at what happens in a few years when they're ready to sell. Suppose they typically trade a car when it's five years old. A 1999 Taurus wagon retails at $8,785. So, their new car would depreciate $11,672 over five years. That works out to $2,334 per year.

By comparison, the used 2002 model would cost $6,255 over three years or $2,085 per year in depreciation. So the new car runs about $250 more per year. Looked at this way the new car does seems more affordable.

But, there are other things for Nancy and David to consider. Borrowing $7,000 will cost $385 in interest the first year (based on a rate of 5.5%). So that's an extra $30 per month.

Buying the used car will mean that they'll trade for something newer after only three years. If you get bored with your car that's good. But if you dislike the shopping and negotiating experience, then it's a minus.

Finally, let's see what happens if they keep a car for 10 years. A 1994 Taurus is worth $4,305. That means that it only depreciated $896 per year for the last five years. Quite a bit less than in the earlier years. A real money saver.

So what should Nancy and David do? For most people the used car is the best financial decision. My car was bought when it was 2 years old. But, the new car price penalty is minimized the longer you keep your car. No matter what Nancy and David select, we hope that they can afford it and enjoy it!