NEW OR USED

Before you even get started on this question, there is one concept that you should be aware of. The largest cost of vehicle ownership is value depreciation, and the really evil part of this cost is that you do not have to pay it until you are selling the vehicle or trading it in. It is absolutely critical that you look at what a two year older version of the vehicle is valued at on the used market (that is, its wholesale or trade in value) before you plunk down your hard earned dollars to buy it. Many new and used vehicles will lose fully half of their value within two years or less. That includes cheap vehicles as well as expensive vehicles. This means that the car you buy will be worth far less than what you owe on the car loan, and you will have to add thousands of dollars to the selling price of the vehicle to pay off the loan. This condition is called being "upside down" on the loan.

Some dealers will advertize that they will put you into a new vehicle even if you are upside down on the loan, but what they are really doing is adding the difference between the vehicle's value and what you owe to the new loan. This does nothing but put you deeper in debt.

Sooner or later you will have to either pay the money or face the financial consequences. The consequences include having to pay very high interest rates and exhorbitant fees to get future loans from "special finance" companies. The end result of that is that you will be paying around double the vehicle's value for future vehicles. That's not good. Used car dealers (including used car sales at new car dealerships) are only too happy to arrange special financing because it provides very high profits for them and the buyers are the ones who provide that high profit.

When some salesman tells you that he can put you in a vehicle that you know that you should not be able to afford, be wary. He can put you in the car, but getting out of that car will be very difficult.

To decide on new or used, you should start by asking yourself three questions:

How long will you keep the vehicle? Vehicles depreciate the most in the early part of their life cycle. If you buy new vehicles and keep each vehicle for only one or two years, you will be eaten alive by that depreciation unless you are a very tough negotiator, and you sell your own vehicle rather than trading it in. In this case, it would be more financially prudent to buy used, especially if you put a lot of miles on the vehicle. On the other hand, if you keep a vehicle forever, and you spend the effort to maintain and protect it, the initial depreciation will not affect you. Buy new. If you trade every couple years and do not drive much, or if the vehicle is a business expense, consider a lease.

Are you a good judge of used vehicles? This is more a question of where you should buy. If you can judge a vehicle or person, you can buy a used vehicle from an individual. The question is not whether the individual is a “nice guy”. It’s whether he/she knows how to take care of his vehicle and whether he/she, in fact, did. If you cannot judge vehicles or people, buy your used vehicle from a reputable new vehicle dealer. They have to stand behind what they sell. Individuals do not. When you buy from an individual, once you sign the papers, the vehicle is your, uh, problem. In either case, take the prospective vehicle to a mechanic you know or to a (different) new vehicle dealership for that model vehicle, and have the vehicle thoroughly examined for mechanical condition as well as for body repairs. The new trend at new car dealers is to "certify" used vehicles. These vehicles are offered at higher prices, but they come with a warranty from that specific dealer or that type of dealer (Honda, Ford, Lexus, etc).

Why are you buying? It’s transportation, is it not? Well, not always. It can also be for show. Try to be realistic with yourself. If “keeping up with the Jones’” is important to you, then take that into account. You do not have to admit it to the rest of the world, but be accurate and truthful with yourself. If it is purely transportation, you are buying miles and capacity. If it is for show, you are buying status, so if your status dream boat has to have 80,000 miles on it before you can afford it, remember to add the extra cost of high mileage maintenance even if you think it will last for 200,000 miles. Any vehicle will last for 200,000 miles if you pour enough money into it.

Once again, as discussed in Section One (When is the Right Time?), vehicles now have around a hundred different systems, many with computers, and at 80,000 miles, most of those hundred systems have 80,000 miles and some number of years on them. Even though the reliability of the newer vehicles is far better than those from the 1950s, the probability of failure in a hundred systems is higher than that in twenty systems, and a failure in any of the newer systems can be very expensive.

It is true that monthly payments for new vehicles are higher, but if you are good to your vehicle, the maintenance costs should remain low. To check for total cost, add the maintenance costs for used vehicles and consider that the majority of the money that you spend for maintenance does not add to the value of the vehicle.

In the most reliable of today’s vehicles, you can plan on around 130,000 miles or 9 years, whichever comes first, as the life cycle of a vehicle, assuming that you take care of the vehicle. Many vehicles will last 100,000 miles or 6 years with the same care. These numbers are before the vehicle will probably break seriously three times (costing more than $500 each time to fix).

Beware of “price vehicles”, that is, those vehicles that are offered as cheap-to-buy transportation, especially from American and Korean manufacturers. You get what you pay for more often than not. You will get better service by buying a reliable brand with 40,000 miles on it than by paying the same money for a new “price vehicle” that is designed to last for 40,000 miles or a month and a half, whichever comes first.

Some manufacturers of cheap vehicles offer 10 year/100,000 mile warranties. The length of the warranty does not indicate the reliability or quality of the vehicle, although that is what you are supposed to think. The terms of the warranty should be read carefully. Some manufacturers demand that ALL maintenance must be done at the dealership for the warranty to remain valid. That includes oil changes, tire rotations, all filters, etc., and it is all done at the dealer's prices. You end up paying more than you would if you had bought a more expensive vehicle. The question is, how much time do you have (and how many times can you tolerate) to sit in the service department waiting for the vehicle to be fixed? And what is covered? And will the warranty be honored at all? Many dealers will just void the warranty and rule that whatever is wrong is the owner's fault, and the manufacturers will back the dealer's decision. Save your money. Buy a reliable vehicle with a 3 year/36,000 mile bumper to bumper warranty that will not break at all. Those vehicles do exist. And they can be had for reasonable prices.

Beware of advertized rebates and deep discounts on new vehicles. It is good that you can save money on your new vehicle, but those same rebates and low prices will affect (reduce) the value of your vehicle on the used market. It ends up that what money you saved on the purchase leaves your pocket when you sell your vehicle. Worse, if the vehicle that you buy is the same as vehicles that are sold elsewhere for deep discounts, such as fleet purchases, that, also, affects (reduces) the value of your vehicle on the used market.

Depreciation can, also, be affected by advertizing. If a vehicle is advertized heavily, it becomes more identifiable, and therefore more popular. You might not have thought that a Toyota Corolla Station Wagon would sell well, but after the Matrix and Vibe commercials accompanying their introduction, they have done very well, and they do not depreciate as quickly as they would have without the advertizing. On the other hand, the Infiniti G20 was not advertized heavily. It was never widely recognized by the buying public, and therefore, even though it is a very high quality vehicle, it suffered high depreciation.

Pontiac Vibe Toyota Matrix Infiniti G20

Let us assume at this point that you have decided to buy a used vehicle. Let us also assume that you either have the ability to judge the condition of used cars or have a friend that can and will do it for you. How do you know what marques of vehicles are decent buys? There are a few general rules:

A quality new vehicle will probably become a quality used vehicle relative to other used vehicles. Sounds logical, right? There’s another reason. There is a better chance that the vehicle was bought new by a person who was interested in its quality, and therefore, it has a better chance of receiving better treatment and maintenance from its former owner. Of course, that is not always true. There is just a better chance of it. And there is a better chance that a person who buys a cheap (“price”) vehicle is not going to shower it with the best of care. Once again, that is not always true. There’s just a better chance of it.

The more popular vehicles cost more even if they are not the higher quality vehicles. If everyone in the neighborhood has a Suburban, and you are thinking about a used one, you can count on paying more than you would pay for similar vehicles that were priced the same when new, but did not sell as well. Mazda makes quality vehicles, but they are not as popular in America as Toyota and Honda. Even though similarly priced when new, Mazdas are cheaper on the used market.

The Consumer Reports Buyers Guide is a great reference for used vehicles. One section has vehicles to avoid, usually based on abnormal depreciation rates. Abnormal depreciation rates can be caused by unpopular styling, mechanical problems, unusually fast wear out rates, or lack of adequate service establishments (like maybe a company went out of business or retreated back to Europe). Ever try to get a Peugeot or Alfa Romeo serviced? Another interesting section in the Consumer Reports Buyers Guide is the vehicle reliability section. It tells what percentage of vehicle owners have had problems with the various systems in the vehicle. The vehicles with lots of problems will almost certainly be shown in the “vehicles to avoid” section.

As a final thought, if you are looking at a very late model used vehicle, you should check the sale prices at the new car dealer. There are times when you can get a new vehicle at or below the used vehicle price, especially at the end of the model year (around October) and around the end of the calendar year (late December to early January).