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Devil’s Advocate: Buy a New Car, Not a Used One

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[Today I continue a short-series of devil's advocate posts. The series is short, because I'm running out of ideas for them, so if you have some ideas you'd like to share, please contact me.]

It seems like everyone knows that a new car loses a lot of value as soon as it is driven off the lot. I've seen estimates in the 20-33% range. It's natural to want to avoid this. Why not be that person that buys the car after the depreciation, scoring a big deal?

Better yet, I've seen estimates that a car loses 50% of its value in the first 3 years. So it makes sense to buy a car after that and drive it for another 7+ years. I'll take 7 years for half the price over, right? In fact, I've written about this car buying strategy before.

That was exactly what I was planning to do when I bought a new Subaru Forester at the end of last year. Sometimes there's a wide difference between having a theory and pulling it off in practice.

It seems my first miscalculation was thinking that the 50% loss of value applied to car dealerships. It seems like the car retained closer to 66% or 70% at the dealership. It makes sense because dealerships have to make money for their overhead. Also they've presumably put these cars, typically coming off of leases, through a process to get them "certified used." That adds to the price too.

So when I went to cash in that 50% depreciation, it was closer to 30%. Simple math: if you plan on driving a car for 10 years and you've only scored 30% depreciation for 3 years... you really aren't saving anything. In fact, you are giving up the best three of the car.

What's worse is that you are buying a car that's three years behind the times. If there's improved fuel efficiency in the newest version of the car, you sacrifice that in going used. I also found that there aren't dealer incentives, and that generally leaves less room to negotiate. For example, the 0% financing that they were offering on the new car didn't apply to the used ones. It was like the dealers were purposely pushing us to buy the new car... almost as if they liked having a few used cars in to bring in people, so that they could upsell them a new one.

But car dealers aren't that smart, are they?

What do you think? Did you score a good deal from a dealer on a used car? Let me know in the comments.

Posted on October 11, 2013.

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9 Responses to “Devil’s Advocate: Buy a New Car, Not a Used One”

  1. Special_Ed says:

    Paid cash for a 2004 Lexus in 2010 at 22% of the new price. It had 92,000 miles on it. It now has 140,000 miles and still runs like new. I plan to get more miles from the car than the original owner did for only 22% of the original price. Sounds like a good deal to me.

  2. Lazy Man says:

    Ahh, at first I thought this was only 22% off of the new price… not 22% of the new price. At that point it probably does make a lot of sense. My guide of depreciating it 10% a year for 10 years had you getting a 6 year old car for 22%, where I would expect it to be 40%. Seems like you’ll be doing well with it.

  3. Rob says:

    Just a note from a dealer’s point of view…

    Every car dealer in the world would rather sell you a used car than a new car. Margins on new cars get worse and worse as the years pass. Many customers know the cost and all the incentives, which makes it increasingly tougher to make a profit on a non-luxury new car.

    Used cars, on the other hand, are great. Nobody knows what the dealer really paid for a used car, and the pricing guides are all over the place.

    I’ll leave it to you on the customer side, but for a dealer? Used cars are king.

  4. Lazy Man says:

    Rob,

    That’s interesting. I pushed hard for a used car at the end of last year and again on a recent trip and both dealerships pushed me to the new cars.

  5. joe says:

    They probably push you for the new cars to get to their manufacturer quota and/or the new cars probably have a manufacturer dealer rebate that might provide them a higher margin than, say a less popular vehicle(less likely though). Otherwise, they would probably push for the used car, where the appropriate price is harder to pin down from the buyer perspective—car condition, history, necessary repairs, etc can easily vary the final value to you–which you can only determine after you use the car. at least for a brand new one, you know that for the next 3-5 years, your warranty will cover everything…that’s probably worth at least 10-15% of the car price…peace of mind for that time.

  6. Steve says:

    I agree with LM that they only seem to have used cars on hand as a lure. Last time we shopped, my wife and I also got a song and dance about how there is more room to negotiate on new cars. In our case they claimed… well to sum up, that they had overpaid for the used cars they had and thus, had a floor on the price. I am confident that selling new cars is plenty profitable. If I had to give a reason, I’d say that selling new cars is more repeatable – all that estimating, cleaning, certifying and whatnot may make it hard for the buyer to guess the right price, but it’s a lot of work for the dealer to price and deal with each car as well. With new cars they can treat them as interchangeable commodities and it simplifies their pricing and selling.

  7. John says:

    From what I understand, it’s gotten to the point the car is hardly the product anymore, the credit is. At least in as far as financing earns a dealership more than actual sales. Could it be that is the real reason dealers are pushing new cars? I imagine there is some kind of combination of carrot and stick used to motivate salespeople to tow the line on financing the biggest sale possible.

  8. […] Man @ Lazy Man and Money writes Devil’s Advocate: Buy a New Car, Not a Used One – Conventional wisdom says buying a used car i the better financial move, but I disagree. […]

  9. […] Devil’s Advocate: Buy a New Car, Not a Used One I love articles that challenge the conventional wisdom like this one from lazymanandmoney.com .  Believe it or not, I have purchased 3 new cards in my lifetime and I purchased them because they were a better deal than the alternative, not because I wanted a flashy new car. (Wanting a flashy new car was secondary).  If you play around with the numbers at my car cost calculator you will see that the key to lowering your cost is driving your new car a long, long time.  The Lazy Man explains why that is in this article. // […]

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