Get

Rich

Slow

New Car or Used Car

Obviously, used cars cost less, but must you sacrifice newness to save a few bucks? If you understand depreciation, whether it is new or used, you can save money.

How depreciation works

Like most things, cars diminish in value as they age. Fortunately, we can anticipate the depreciation. I looked in the N.A.D.A. Used Car Buyers Guide and found a pattern. The car's value is related to its value when purchased. An approximate table of values is below.

Age              Value/Original Cost

New                    100%
1 year                  65%
2 years                 50%
3 years                 40%
4 years                 30%
5 years                 25%
6 years                 20%
7 years                 15%
more than 7 years       15%

Table 1.  The value of a car as a function of its age

This table assumes several things. The car is not unusual (like a Ferrari); the car is driven about 10,000 miles per year; and it is reasonably well maintained. The above table is a bit on the pessimistic side, representing someone who might buy a new non-Japanese car from a dealer in autumn, when new car prices are at their peak, and later sell to a dealer, not an individual. For example (an actual example) a 1993 Cadillac DeVille was purchased new for $29,144 and presented to a car dealer seven years later. The dealer offered $4400 (15%) for it. The owner then sold it privately for $6800 (23%). The extra 8% represents the owner's diligence, not the car's value.

Does the table sound right in general? Let's use some common sense. There is nothing like a new car. If a car is two years old, somehow you can tell. The paint is not a shiny. The driver's seat has the owner's "contour." And there is no new car smell. What you don't know can hurt you. Did the owner change the oil? Did he allow road salt to stay on the car and start rusting it? Was there a collision that is only partially repaired? No wonder a two year old car sells for half as much as a new car.

If old cars are so terrible, why does the table say that they stop depreciating after seven years? Because a car that runs well always has value. One assumption of the table is that the car is reasonably well maintained. Old cars can be washed, just like new cars. Parts can be replaced as long as they are still manufactured. If some old cars look like junk, it is only because the owner decided to not invest any more money to maintain it. In saving a few dollars, the owner hastens the departure of the old car and the need to purchase its replacement.

How to work depreciation for you

There are two winning strategies. The first is to buy a car new and keep it forever. According to Table 1, you will lose 85% of its original value, but over several years. The other strategy is to buy the car after it has depreciated. You can buy a seven year old car and it will never depreciate, but then you will always have an old car.

A good compromise is to buy a two year old car and keep it for several years. According to Table 1, you will lose 35% of its value. If you keep it for five years, this is 7% per year ($1400 per year for the average car). By taking this approach, you can get a used average car for the price of an economy car. Better yet, you can get a used luxury car for the price of an average car.

If you really want to exploit depreciation, you can buy a ten year old Cadillac for $2000 to $3000 at 1996 prices. Click here to learn about the expenses in maintaining old cars.

If you are still not convinced that depreciation is an insidious thief, find out how depreciation affects Average Joe and Silly Eddie .

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Copyright 1996 Alacrity Research