New Cars and Auto Financing: Stupid, or Sensible?

[dskelcy]

After reading this article, I came up with a formula to determine if a used car is a good value or not. In using this formula, I have determined that purchasing a used vehicle from a dealer that has high mileage is a bad idea. Here is my example showing same.

Step 1:  Assume (per Mr. Money Mustache) that every vehicle can be driven for 200,000 miles. For the car you are considering, take the mileage  and subtract it from 200,000. This means that if I have a 2007 Honda CR-V with 150,333 miles, I would subtract the 150,333 from the 200,000.      200,000-150,333=49,667 miles left in the vehicle.

Step 2:  The next step is to divide the miles left in the vehicle by the number of anticipated miles you would put on the vehicle very year. For my example, I am going to assume I would place 12,000 miles on the vehicle every year.  Using the Step 1 example, I would do this:  49,667 (miles left) / 12,000 (miles to be on vehicle every year) = 4.13 years left of life on the vehicle.

Step 3: The 3rd step is to divide the cost of the vehicle by the number of years left on the vehicle to determine how much the vehicle would cost if I spread the cost over the life of the vehicle. Using my example, let's assume the vehicle I am looking at costs $10,890.   So, I would do this:  $10,890/4.13= $2,636 (amount the vehicle costs per year if I spread the total over the life of the vehicle.)

I have found that dealers price their high mileage vehicles extremely high which means the amount a high mileage vehicle costs over time is much, much higher than for the same model, SAME YEAR of the vehicle with low miles. So I would encourage folks buying from a dealer to buy a vehicle with low miles versus high miles.

I would encourage folks to try this formula on different vehicles for sale and provide me with feedback about this idea which I think allows you to determine if you are paying a good and fair price for a used vehicle and which also allows you to compare DIFFERENT VEHICLES to see if you are getting a good price.

[ADK_Junkie]

Yeah, I know this is anti MMM... but we recently bought a new car  (let me list the excuses... longer commute, 2 young kids+1 on the way, both adults working, so we just didn't want to deal with the hassle of repairs because it makes it terribly inconvenient.... yeah, so lot's wrong with our excuses... but anyway..)

When shopping for cars, I just did not see the good price breaks for used cars.  I have no idea why someone would buy a car with 50K miles on it but only $4K less in price than new...  my personal cost calculation assumes a 10 year life and most of the value should be gone once the car reaches 100K... instead 100K minivans are priced close to half of new... I suppose a big difference is if you have the money or not vs financing...

[JustGettingStarted1980]

I bought a used car 6 months ago,

This was a care with 27,000 miles on it, only 3 years old, but cost $>10000 less than the same the car brand new.  This was well worth is to me since I plan on driving it about 5000 miles/year.

What do you think?

[AHLEditor]

I don't think buying a new car is necessarily a wasted expense, it just comes down to how you utilize it.

Wife and I bought Corrolla's back in 2002 and 2003 respectively.  High downpayment, still driving both today.  I like that having a new car means it has been taken care of right since the beginning, something that IMO reduces the risk of repair costs (friend once bought a Mitsubishi with 19k miles on it only to find out it had NEVER had an oil change.)

I have 167k on my Corrolla Matrix and she's still humming like a bird and have never had any non-routine work done that didn't involve ice and a sidewalk curb (the joys of winter).  No car payments for 8 years and still no plans to introduce any more.  Can't complain about my purchase there.

Now anyone who leases I call an outright idiot.....

[ender]

Newer vehicles are considerably higher quality now than they were before, so they hold their value better.

In other words, 50,000 miles isn't 1/2 the expected life of a new car so it doesn't kill the value that much -- even American made.

[AHLEditor]

BTW - not every car can go 200k unless you either are a true grease monkey or are willing to continue to invest.

I bought a used Saturn SC2 back in my younger days, had 77k on it and by the time it reached 145k it was no longer worth maintaining given problem after problem.  It really does depend on the manufacturer and how well the car was maintained from the outset (not saying cars with poor reputations can't live long - I once heard of a Yugo making it to 240k - but there are percentages in your favor based on who built it.)

[SnackDog]

New cars can make a lot of sense depending on the situation, especially if you don't want to tie up a lot of money or pay a lot of tax. A 2015 Fiat 500 can be had for $199/month, which is ridiculously cheap.

[Clean Shaven]

Some cars hold value too well to make them good buys in what I consider the sweet spot for used purchases - 1-2 year old, still under full factory warranty. Toyota and Honda seem to be in this category. A 1 or 2 year old Corolla isn't going to save much over a new one.

American and Korean brands seem to take a larger depreciation hit in that first year, and make for better used deals. All depends on what you're looking for.

It is easier to shop for and negotiate good pricing on new cars. I recognize this doesn't fit the Mustachian Way of buying 10-year old Prius with 100K miles, but everyone has their own choices to make on what's worth spending $ on. 

[RWD]

Using your formula my Subaru Legacy which just broke 200k miles last week has an infinite cost to keep (or is paying me, if you use a negative value for remaining life)...

Your formula is ignoring resale value (vehicle with 200k miles aren't worth only $0), repairs/maintenance, fuel economy differences, insurance differences, etc.

[bzzzt]

BTW - not every car can go 200k unless you either are a true grease monkey or are willing to continue to invest.

I bought a used Saturn SC2 back in my younger days, had 77k on it and by the time it reached 145k it was no longer worth maintaining given problem after problem.  It really does depend on the manufacturer and how well the car was maintained from the outset (not saying cars with poor reputations can't live long - I once heard of a Yugo making it to 240k - but there are percentages in your favor based on who built it.)

Grease monkey here. I love those Saturns because you can work on them fairly easily and they're like Legos, all the pieces interchange and the parts are cheap. I bought my '96 in '07 with 178k miles on it for $1100. My brother is still driving it with 268k and I think we're at ~$3500 all-in and ~$800 of that was tires. They are fairly maintenance intensive cars though.

[Sarnia Saver]

Now anyone who leases I call an outright idiot.....

Leases are 100% write off for business purposes if you run your own business if I recall.

[Reynold]

When we bought a new car (wife is super paranoid about breakdowns and maintaining everything thoroughly, but fine with lower end cars) it was actually cheaper to buy it on payments, then pay the loan off with the cash we had set aside for the purchase a month later, because they were offering an additional $500 off if you financed through them.  Since the interest rate was like 2% and we made all of one monthly payment, for about $10 in interest we saved that additional $500 amount on the purchase.  Note; one additional expense we hadn't counted on in NJ was a Department of Motor Vehicles fee for removing the car financing company as lien holder, that was another $30-40 if I recall.  Still a large savings, but annoying, and of course doing the purchase that way did involve a bit more work on our part. 

So whether buying new or used, ask about additional discounts for buying on payments even if you have the cash, they are sometimes so eager to sell the car and/or make money on the loan they'll offer additional incentives.  Surely NOBODY could be rich enough to have all the money to purchase a vehicle at one time!  :)  Just make sure there is no prepayment penalty. 

[alsoknownasDean]

Theoretically if you have the money invested earning x%, and the offered finance rate is <x%, all else being equal, financing is better value.

Of course there's all the other added costs (higher insurance premiums, etc) to consider.

The other thing for many people would be that financing gets them to buy more. If they have $20,000 cash and want to buy a car, then that'll be their price limit. If they finance, the less-Mustachian among us might use it as an excuse to go crazy with the options list or buy the next size up or a fancier brand or whatever. Suddenly they've got a $25,000 debt on a rapidly depreciating asset.

When comparing a $20,000 new car with a $10,000 used car, there's also the opportunity cost of the extra $10,000. If you buy the $20,000 car, you're forgoing the income that you would have earnt had you bought the $10,000 car and invested the rest.

[ketchup]

I try to compare strictly on a cost per mile basis.  In this department, yes, depreciation tends to be the largest expense.  The second is fuel, followed by maintenance/repairs.

I remember MMM posting as a rule of thumb once that 10 cents/mile in depreciation is a pretty good bet, meaning it's worth it to pay $1,000 more for a car that will last you 10,000 miles more.

I say BS to that; go for 5 cents at the most, but as little as possible.  I've put 21,000 on one of my cars since I bought it, and it's worth about $200 less than I paid for it ($1000), so that's 1 cent/mile.  My other car is worth at least what I paid for it ($700), and I've driven it 12,000 miles, so 0 cents/mile so far.  Both are at about 170k, so if we assume they each have 30k miles left in them before they are worth scrap value at 200k (unlikely, but for the sake of math), their total depreciation will have been 1.4 cents/mile and 1.2 cents/mile conservatively.  Essentially nothing, nearly negating the top cost of driving.

Both had about 150k on them on purchase, which I feel like is the sweet spot for deprecation as long as you're willing to do a bit of a maintenance catchup right off the bat.  The "last" 50k of a car's life (before it gets prohibitive levels of pain-in-the-ass-ness to keep it going) are by far the cheapest.  And plenty keep going past 200k.

If you're not willing to get your hands dirty with some DIY work (although I haven't had to do a whole ton by any means; it still would have been cost-effective to farm out all the work if I had to), the previous 50k to that is probably your best bet (100k -> 150k).  Those are almost as cheap miles, and when you're done with it you can sell it to a nut like me.

[Sid Hoffman]

Now anyone who leases I call an outright idiot.....

Leases are 100% write off for business purposes if you run your own business if I recall.

Yeah my CPA publishes a monthly newsletter and the issue of buy/lease for business vehicles gets in the newsletter at least once a year.  The bottom line is that it's way easier at tax time and generally financially advantageous to lease cars used for business.

Also, the kind of person who leases is already the kind of person who wants a new car every 3 years anyway.  Leasing guarantees a fixed cost, whereas buying and then trying to trade-in after 3 years means you are at the mercy of that dealership you show up in as far as how much they offer you in trade.  Spoiler alert: they'll offer you less than the lease residual.

Some people have jobs or situations that demand they use a car that must not ever fail.  Leasing is a good way to have a car that is so new that it shouldn't ever just outright mechanically fail.  It's a higher cost way to operate than buying cars and keeping them more than 3 years, but it's certainly not an invalid option, nor would I be so insensitive to just call people stupid for being different from myself.

[r3dt4rget]

I try to compare strictly on a cost per mile basis.  In this department, yes, depreciation tends to be the largest expense.  The second is fuel, followed by maintenance/repairs.

I remember MMM posting as a rule of thumb once that 10 cents/mile in depreciation is a pretty good bet, meaning it's worth it to pay $1,000 more for a car that will last you 10,000 miles more.

I say BS to that; go for 5 cents at the most, but as little as possible.  I've put 21,000 on one of my cars since I bought it, and it's worth about $200 less than I paid for it ($1000), so that's 1 cent/mile.  My other car is worth at least what I paid for it ($700), and I've driven it 12,000 miles, so 0 cents/mile so far.  Both are at about 170k, so if we assume they each have 30k miles left in them before they are worth scrap value at 200k (unlikely, but for the sake of math), their total depreciation will have been 1.4 cents/mile and 1.2 cents/mile conservatively.  Essentially nothing, nearly negating the top cost of driving.

Both had about 150k on them on purchase, which I feel like is the sweet spot for deprecation as long as you're willing to do a bit of a maintenance catchup right off the bat.  The "last" 50k of a car's life (before it gets prohibitive levels of pain-in-the-ass-ness to keep it going) are by far the cheapest.  And plenty keep going past 200k.

If you're not willing to get your hands dirty with some DIY work (although I haven't had to do a whole ton by any means; it still would have been cost-effective to farm out all the work if I had to), the previous 50k to that is probably your best bet (100k -> 150k).  Those are almost as cheap miles, and when you're done with it you can sell it to a nut like me.

I have to agree with this. It's also why I have kept my car running for so long without upgrading. There comes a point where depreciation is so slow, and the value of the car is so low, that it's not even a real expense. Even as repair costs rise with miles it's cheaper to pay for repairs than for depreciation of a newer car. This is especially true if you learn to take care of it yourself and avoid labor charges at the shop. When you buy a new car for $20k and it takes a 20% hit right off the lot, and then 15% every year for the next 5 years, that is a significant expense. A lot of people justify newer cars by saying they want reliability, aka low risk of repair costs. But in exchange you are actually paying much more in depreciation, taxes, and insurance than you would be in repair costs by owning a 10-20 year old car.

Using my own car as another example: Bought at 125k miles for $3000. I've put 150,000 more miles on it, and it's worth about $1500 now. That's $0.01 per mile in depreciation costs. I average 35 mpg over the year, so 37,500 miles a year (I know... I know...) @ 35 mpg that costs $2.50/gal = $0.07 per mile. Repair/maintenance has been unusually high for my car. I've replaced the engine twice and had other big problems these cars don't normally experience. I've spent roughly $6k on it in 4 years and 150,000 miles. That comes out to $0.04/mile. Insurance and property taxes add about $0.01/mile.

Total cost = $0.13/mile

As you can see, repairs/maintenance begin to cost the most to drive the car. But even with my terrible reliability record my cost per mile is insanely low compared to most figures out there, for example $0.55/mile. I can still feel comfortable spending $6k to repair a $1500 car because I know that I am either going to pay for depreciation, or pay for repairs. The great thing about going for the repair risk is that it's not a sure thing. I could just pay for oil in the next 2 years and not have any problems. But what is guaranteed risk is depreciation and the higher taxes/insurance you pay on a newer car.

[bzzzt]

I try to compare strictly on a cost per mile basis.  In this department, yes, depreciation tends to be the largest expense.

What about appreciation? I bought my truck 3 years ago for $10k and KBB is saying that it's now worth $12k. I have to love $60-70k diesel trucks keeping the prices up on 10 year old diesel trucks because fewer people can afford the equivalent of a second mortgage to drive one.