New Car vs Used Car–Throwing My Hat in the Ring
There are a lot of personal financial bloggers and finance gurus such as Dave Ramsey or Suze Orman who make a big deal about buying a used car and paying cash for it.
I don’t debate for one minute that you should pay cash and not take out debt to finance a vehicle, but I have always taken issue with the concept of used vs new vehicles and the elusive concept of depreciation which gets everyone up in arms and accepts as something to be avoided at all costs. Not that I deny depreciation exists, but it really plays little practical role as far as I am concerned. I will explain in a bit.
New vs Used Suburban
I have 6 kids, meaning it is necessary to have a vehicle that can transport 8 individuals plus have a lot of cargo space. For this reason, my wife and I have selected the Chevy Suburban as the mode of transportation for our large family.
Mini-vans don’t provide enough luggage space and passenger vans ride funny with a higher center of gravity. Plus the usefulness of 4 wheel drive in the snow and sitting at truck height makes my wife feel safer with kids in the car.
I am a scientific person at heart and enjoy data to make decisions. So when it is time to buy a vehicle, I look at used vehicles but don’t see the amount of depreciation that others would suggest.
For example, I went to the Chevy website and built my own 2011 Chevy Suburban LT with 2 wheel drive. I did this to match another vehicle I found on the Car Max website so I could compare apples to apples. I input the same features in the used vehicle I found and came up with a price of $46,785. I even got a DVD that isn’t on the used one because it was part of the sun and entertainment package, and I needed to get the sunroof for the comparison.
The used Suburban, on the other hand, was nicely appointed with power windows, door locks, power brakes, cruise control, and sunroof. It was a 2007 version and had 58,000 miles for a cost of $25,849. The question for me then is how many miles do I have to put on the vehicle to get an identical cost per mile driven. Then I decide whether I should buy new or used.
Let’s assume that I can get 116,000 miles from a Suburban. That means half the life of the used vehicle is gone but it costs more than half the price of the new one. It becomes a no brainer that I should buy new. If I can get 150,000 miles out of a vehicle then the cost per mile is $0.3119 for new.
I can get an additional 92,000 miles out of the used one and am paying $0.2810. So the used is cheaper in this instance. (I am assuming the cost of maintenance will be the same so that if transmission work is need at 100,000 miles, it is equal for both.) Thus the cross-over in cost per mile is somewhere between 116,000 and 150,000.
Getting Better and Wiser with Age
Previously, I always felt that 100,000 miles was about the best that I could get out of a vehicle. As a result, I have always purchased new. That is probably because of my personal experience more than anything.
The Buick Regal that I got from my parents was smoking from the engine on the day that I pulled it into the dealer to pick up and trade in for a car that I purchased earlier in the week. I was afraid they were going to kick me out and change the deal. It had about 105,000 miles on it.
My first Suburban was traded in with 135,000 in 2009 which was my previous record. I now have a Pontiac Montana (room for 8 passengers) that has 157,000 miles on it. I had to rebuild the transmission at 116,000 miles but it is paid for which is a great feeling.
As I get older, I think I am getting better at taking care of my vehicles and getting more mileage out of them which seems to change the equation toward getting a used vehicle. I still wonder about the level of maintenance that a used vehicle has enjoyed prior to my purchase.
But what if I were able to get 300,000 miles consistently. Using the above Suburban example, then the new costs $0.1559 per mile and the used $0.1068. The new costs 50% more per mile! But keep in mind that at lower levels of mileage (150,000), the difference was only 3 cents per mile or about 10%
So the bottom line is that if you tend to drive a vehicle for about 100,000 miles or so, often the new vehicle is the better deal. However, if you plan on keeping a vehicle for 150,000 miles or more, used is the way to go when strictly considering cost.
If the average American drives 15,000 miles per year and needs auto transportation for 50-60 years, he/she will drive 900,000 miles in 60 years. If he/she is able to get 300,000 miles per vehicle and save 5 cents per mile, the savings would be $45,000 over the course of a lifetime in 2011 dollars.
It is up to each individual to figure out how those savings might impact or benefit him/her. Contrast that the the savings from avoiding the $4 Starbucks twice per week during those same 60 years. The number is $24,960 to provide a little perspective.
Back to Depreciation
Personally, I don’t feel that depreciation is that much of an issue. There are only two times that it would matter. First, if you absolutely totaled the vehicle with a year or so of purchase at a time when you might be upside down and owe more than the insurance company will pay for the vehicle. I have never been in an accident that resulted in any bodily injury nor incurred more than a few thousand dollars damage.
The other instance might be if you had to sell a vehicle shortly after purchase. I have always owned my vehicles eventually and driven them until I became nervous about their ability to mechanically function. As I get older, I have been able to get more and more out of a vehicle. So depreciation has never been a consideration for me.
This exercise has been instructive for me. I enjoy teaching but also learning myself. Personally, I think it is worth the extra dollars to know that my wife and kids are in a newer vehicle whose maintenance I have controlled from day one. But I do try to get more and more out of these vehicles with each passing year. I am trying to get 200,000 miles out of my Montana and our current Suburban.
I am curious to know your thoughts. I know what several PF bloggers will say. But I would also like someone to do the same lifetime mileage exercise and cost comparison for a smaller car to see if the difference is more or less pronounced. My situation is somewhat unique with the large family I have. So feel free to do a comparison, write a post and let me know about it or comment below.