Recently, a friend who is way richer than I am called me and asked a simple question.
“Throttle,” he said, “Should I buy a new or used car?”
Without waiting for him to ask me what I thought, I answered: “Buy a brand new car, if you can afford it…damn the economists!”
He was shocked — but he said he would think about it and get back to me.
While I’m eager to see where he’s headed and what he’ll wind up with eventually, I thought it wise to update things here with my thoughts and share why, in my considered opinion, the new vs used car debate isn’t debate at all.
New vs. Used Cars: Depreciation and the Used Car Logic
It is said that immediately after most brand-new cars are driven off the lot, they lose about 10% of their value, followed by an additional 10–20% after the first year. Generally, they depreciate about 15–25% year on year after that (source).
This, to the uninformed mind, is crazy, to say the least…and, this is what informed the economists to come up with the used car theory, arguing for the purchase of used cars only.
On face value too, their arguments make sense: why buy something that will lose more than 50% of its value after the first five years of ownership?
Why not allow someone less savvy to take the blow and then, buy if off them for about 50% less the MSRP?
Makes perfect sense, doesn’t it?
No, it doesn’t: there’s something the folks who buy brand-new cars know that economists do not appreciate — and it isn’t all about big egos that need to be massaged.
What Economists Don’t Know about Used Cars
When economists suggest that you buy used cars only as a way of saving you from the hit the car takes depreciation-wise, especially in the first five years of its life, what they essentially focus on is the monetary and financial part alone — and the fact that you’ll be saving some bucks from the MSRP.
But, is this the full story?
It turns out there’s more to car ownership than this bit about depreciation that economists would want you to focus on — and this is where the meat of the story lies: used cars are a pain in the butt — something economists know nothing about.
1. A Messed Up Break-In Period
The life of an engine and transmission, besides the quality of their manufacture, is determined by the break-in period such vehicles they are attached to face.
JD Power holds that this break-in period varies from manufacturer to manufacturer but is generally 500–1000 miles of driving the vehicle gently, with varying speeds and usually, changing the engine oil right after the period.
While I agree with JD Power, I generally recommend 2000 miles — just to be (extra safe) with the engine oil (and transmission fluid) changed after the first 250–500 miles and then, after the next 1000 miles again.
Done properly, this creates the foundation of engine and transmission longevity; done wrongly (or ignored), the seeds of destruction for that vehicle are sown already.
Now, this is what happens when an engine (or tranny) isn’t broken in correctly: such problems as the cylinder wall getting worn out quicker than expected and the camshaft lobes wearing incorrectly, causing the valves to open and close at the wrong intervals (and overheating/premature wear of the tranny) could present themselves, down the line, when the original owner has sold the vehicle to the ‘savvy’ second buyer.
What then happens? This ‘savvy’ buyer wastes money trying to fix these issues (or in extreme cases, gets a new engine — or tranny).
At the end, usually, when the time and money spent is calculated, it usually amounts to simply buying a brand new vehicle and handling everything yourself from the very first day.
2. Warranty Expiry
The warranty (rust, drivetrain etc.) on most new cars doesn’t extend beyond the first five years; for most cars, it’s usually way less than that.
For those who buy their cars brand new, for the duration of their warranty cover, they need not bother about anything going wrong with their vehicles.
This is NOT the case with users who buy their cars used, thinking they are saving up and being smart.
So, essentially, instead of enjoying your new car and thinking only about gasoline, tires and brake pads), you’re worrying about what the strange noises in your transmission and whether it’ll go away on its own or be a major repair.
At the end, this worry, quantified, runs to several hundred of dollars, weekly.
This isn’t the way of vehicle ownership!
3. Most Cars Are Designed Around The Warranty Period In Mind
When car manufacturers throw away warranties like confetti, they aren’t stupid: for the most time, they’re sure that no issues will result in such a time.
This is what keeps them in business; if warranties are claimed all the time, they’ll soon run out of business!
Unfortunately, right after the warranty period, it is customary to have many things begin to fall apart, things that you need to fix with your hard-earned money!
For some European (and American) models, the entire engine might need an overhaul right after the warranty period — the period after which the original owner sells off to ‘the more savvy buyer’.
Does it remotely make any sense to buy problems in the name of ‘saving’ money?
Do All New Cars Lose Value This Fast?
The good news is this: not all new cars lose value this fast. In that regard, the 10% depreciation that happens right off when you drive the car from the lot does not apply to all makes and models.
For instance, a new Lexus LFA, cost about $375,000 for the 2013 model — around that time. Curiously, once off the lot, this price increased appreciably and has remained so, through the years.
Thanks to limited production numbers and eventually, complete stoppage of production, the vehicle easily retails for over a million bucks now, used.
Talk of buying it ‘cheaper’ when used!
The LFA, if you’re curious, isn’t the only vehicle that has this characteristic: the Toyota Supra and Porsche 911 are other examples that disprove this way of thinking and logic.
Generally too, well-made vehicles like Lexuses, Toyotas, and Hondas also tend to hold their value better and depreciate slower than some imports that ride and handle excellently but have their transmissions and engines needing attention even before the first year of ownership.
Wrap-Up: Is It Better To Buy A New Or Used Car?
I’ll speak for myself as a DIY mechanic with a daily driver that is 15 (plus) years old; a daily driver that is beginning to have some of its parts fall off as a result of age and less than ideal care its previous owner(s) gave it.
The irony? I’m the one paying for their carelessness and nonchalant attitude now — which, in my opinion, shouldn’t be so.
So, in the new vs used car debate, in terms of buying, I’d say you should stick with me, instead of your economists and enjoy the peace of mind that comes with doing so.
However, going with your economist when the question of whether of not you should buy a new or used car is also an alternative, especially if money appears to be your challenge at the time of purchase.
Remember though, that what you appear to be saving now may be gulped down by parts and mechanics in the days to come.
Choose wisely.