Towards a more rational approach to cars
February 26, 2018 7:04 AM
My family didn’t have a car when I was growing up, and I didn’t have daily access to a car until my late 30s. As a result, I think I have a superficial conception of the trade offs in buying/leasing/buying used, and the balance of the considerations in my particular case. Context inside.
Please note at the start, I am not asking for an explanation of car leasing or depreciation. I am hoping to get a more nuanced overall approach to owning/leasing a car. It should perhaps go without saying, the “rational” approach depends on specific constraints; I’m not looking for a universal answer, but rather to my facts, which appear at the bottom.
My framework has historically been to rule out new cars (given the immediate depreciation hit), car loans (as financing a depreciating asset seems foolish), and leasing (which is essentially a loan plus the economic cost of depreciation for the lease term, and of course leaves you without an asset at the end of the term). My assumption had always been that the most rational approach would be to buy a late-model used car for cash, and drive it until it died—then repeat the cycle.
However, we’re thinking about getting a second car, and I’m starting to reconsider that perspective. First, thinking of our current car (a 2013 Forester that has always served its purpose)—it lacks a number of safety features (blind spot detectors, rear camera, lane assist, etc) that are pretty standard on later model cars. It’s also starting to make noises that come with age, but may indicate more work is needed though at 40k miles, it’s just a teenager in Subaru years). There was a recent AskMe on the comparative safety ratings of today’s cars versus the cars of just a few years ago that also made an impression on me.
Second, while I’ve always tried to avoid the accelerated depreciation that comes with a new car, I have never looked down on renting (vs a homeownership). Renting is consumption, and while you don’t build equity, you do have somewhere to sleep. Likewise, I’d buy a new cell phone without worrying about the comparably steep depreciation curve. I wonder whether my take on auto depreciation is simplistic.
And so car boffins, I turn to you.
We can afford the kind of car in question no matter how we buy (all cash new, finance new, lease, finance used, all cash used). We are not car people (and don’t fetishize new cars or cool features), and don’t drive a great deal (certainly less than the 10k miles/year cap common to leases). We have a kid and place a priority on safety. Excellent credit, clean driving records. No aversions to debt/financing per se.
Again, obviously there are trade offs, but on the broad outline above, what is the most “rational” approach, minimizing costs and maximizing the benefits (safety, etc)? Wait for 0% financing, buy new, invest the outlay that would have gone towards a cash purchase, and sell the car before the interest grace period ends? Lease, invest the savings, and trade in every 3 years? Buy used for cash, bear the lost opportunity costs, and sell every few years while the car retains some measure of trade in value and before major repairs start to arise?
Happy to provide extra info. Please do understand that I’ve run the numbers, and am fully aware that, eg, buying, even at 0% with a healthy return on the savings, is the most expensive approach (at least, when think of the buying and selling of cars, but not considering hypothetical medical bills avoided by safety features). This is not a question about cost, but rather the holistic trade offs.
Please note at the start, I am not asking for an explanation of car leasing or depreciation. I am hoping to get a more nuanced overall approach to owning/leasing a car. It should perhaps go without saying, the “rational” approach depends on specific constraints; I’m not looking for a universal answer, but rather to my facts, which appear at the bottom.
My framework has historically been to rule out new cars (given the immediate depreciation hit), car loans (as financing a depreciating asset seems foolish), and leasing (which is essentially a loan plus the economic cost of depreciation for the lease term, and of course leaves you without an asset at the end of the term). My assumption had always been that the most rational approach would be to buy a late-model used car for cash, and drive it until it died—then repeat the cycle.
However, we’re thinking about getting a second car, and I’m starting to reconsider that perspective. First, thinking of our current car (a 2013 Forester that has always served its purpose)—it lacks a number of safety features (blind spot detectors, rear camera, lane assist, etc) that are pretty standard on later model cars. It’s also starting to make noises that come with age, but may indicate more work is needed though at 40k miles, it’s just a teenager in Subaru years). There was a recent AskMe on the comparative safety ratings of today’s cars versus the cars of just a few years ago that also made an impression on me.
Second, while I’ve always tried to avoid the accelerated depreciation that comes with a new car, I have never looked down on renting (vs a homeownership). Renting is consumption, and while you don’t build equity, you do have somewhere to sleep. Likewise, I’d buy a new cell phone without worrying about the comparably steep depreciation curve. I wonder whether my take on auto depreciation is simplistic.
And so car boffins, I turn to you.
We can afford the kind of car in question no matter how we buy (all cash new, finance new, lease, finance used, all cash used). We are not car people (and don’t fetishize new cars or cool features), and don’t drive a great deal (certainly less than the 10k miles/year cap common to leases). We have a kid and place a priority on safety. Excellent credit, clean driving records. No aversions to debt/financing per se.
Again, obviously there are trade offs, but on the broad outline above, what is the most “rational” approach, minimizing costs and maximizing the benefits (safety, etc)? Wait for 0% financing, buy new, invest the outlay that would have gone towards a cash purchase, and sell the car before the interest grace period ends? Lease, invest the savings, and trade in every 3 years? Buy used for cash, bear the lost opportunity costs, and sell every few years while the car retains some measure of trade in value and before major repairs start to arise?
Happy to provide extra info. Please do understand that I’ve run the numbers, and am fully aware that, eg, buying, even at 0% with a healthy return on the savings, is the most expensive approach (at least, when think of the buying and selling of cars, but not considering hypothetical medical bills avoided by safety features). This is not a question about cost, but rather the holistic trade offs.
You may want to re-examine your logic. You say you're fine driving a car until it dies, but right above that, you say you'd never buy new due to depreciation. See the problem? Depreciation only matters if you're selling the vehicle, otherwise it's nominal value is immaterial. I used to avoid new, for reasons similar to yours, but if you're pretty sure you don't want to sell it, the premium for new is offset by the risks of buying used. (A car's former life and treatment is always uncertain, even in the age of CarFax. If you can assume you will care for it better than average, then you can assume your new car will live a longer total life than any car with 50k miles already on it, which also adds value to new, at least for conscientious car owners).
In my recent experience buying new: I was prepared to buy cash, figuring they'd like that and offer me a slightly better deal. I was wrong. New car dealers are mostly functioning as banks these days, and they happen to hand out cars as incentives to peddle loans. At least, that's the conclusion I came to when they offered me a better price at 0.9% APR than they would agree to selling it for a regular check or wad of cash (better even including all interest and finances, which I won't be paying, because I'll finish the loan early). YMMV, this was at a Subaru dealer, which we picked for safety, reliability, and the likelihood of not selling it.
TLDR: if you want to drive it into the ground, buying new with good financing will likely get you the best price for new, and drive-off-the-lot depreciation is not an issue if you're not selling.
posted by SaltySalticid at 7:37 AM on February 26, 2018
In my recent experience buying new: I was prepared to buy cash, figuring they'd like that and offer me a slightly better deal. I was wrong. New car dealers are mostly functioning as banks these days, and they happen to hand out cars as incentives to peddle loans. At least, that's the conclusion I came to when they offered me a better price at 0.9% APR than they would agree to selling it for a regular check or wad of cash (better even including all interest and finances, which I won't be paying, because I'll finish the loan early). YMMV, this was at a Subaru dealer, which we picked for safety, reliability, and the likelihood of not selling it.
TLDR: if you want to drive it into the ground, buying new with good financing will likely get you the best price for new, and drive-off-the-lot depreciation is not an issue if you're not selling.
posted by SaltySalticid at 7:37 AM on February 26, 2018
1) Have you looked into electric cars, specifically: a) any federal and state refunds you may get and b) gas savings? Those may end up shaving close to $10k off the cost of a new car. If you want to read a really good financial vs. usage analysis for an EV please read this detailed article by Mr. Money Moustache.
2) Have you looked into installing those newer safety features, such as a rear view camera, on your existing car? You could potentially retrofit your car for several hundred dollars, if that's most important to you.
posted by rada at 7:48 AM on February 26, 2018
2) Have you looked into installing those newer safety features, such as a rear view camera, on your existing car? You could potentially retrofit your car for several hundred dollars, if that's most important to you.
posted by rada at 7:48 AM on February 26, 2018
I kept the car I bought new for 11 years. The only reason why I sold it was because I moved to NY.
posted by brujita at 7:57 AM on February 26, 2018
posted by brujita at 7:57 AM on February 26, 2018
You may want to re-examine your logic. You say you're fine driving a car until it dies, but right above that, you say you'd never buy new due to depreciation. See the problem? Depreciation only matters if you're selling the vehicle, otherwise it's nominal value is immaterial.
This is true but I assume the poster means that they prefer to take advantage of the immediate depreciation hit by only considering late-model used cars. I think the worthwhile quesiton to ask her is more like "is owning a car for the first 10-30K of its lifespan worth the relative premium that you pay when buying new?"
posted by pullayup at 8:07 AM on February 26, 2018
This is true but I assume the poster means that they prefer to take advantage of the immediate depreciation hit by only considering late-model used cars. I think the worthwhile quesiton to ask her is more like "is owning a car for the first 10-30K of its lifespan worth the relative premium that you pay when buying new?"
posted by pullayup at 8:07 AM on February 26, 2018
The last few times, I went ahead and took the financing to get the better deal they were offering with financing and then paid the loan off early/right away to avoid the interest charges. But that comes down to a liquidity determination where I would have kept the loan a little longer if having a bit of extra money in the bank would have given me a greater sense of security. I prefer new for some of the reasons SaltySalticid laid out. It's not 100% financially rational. I'd get slightly better value if I bought a car that was 1 or 2 years older most times, but it makes me feel better, and that's worth the slightly higher cost to me. In the scheme of things, I feel like it's better to maximize happiness and feelings of security than to be as financially prudent as possible, but that's partly because I can afford that luxury.
I think leasing only makes sense if you want to change cars frequently and are willing to pay extra for that luxury or if you're a business that can take advantage of some tax savings. That doesn't sound like you, and it's certainly not me.
posted by willnot at 8:10 AM on February 26, 2018
I think leasing only makes sense if you want to change cars frequently and are willing to pay extra for that luxury or if you're a business that can take advantage of some tax savings. That doesn't sound like you, and it's certainly not me.
posted by willnot at 8:10 AM on February 26, 2018
A certified pre-owned car will be 1-2 years old and so will have most modern safety features. It’ll also typically have the original warranty, maybe plus some, so you’d be covered for repairs for several years. And it’s already taken the initial depreciation hit.
Finance it, buy with cash, whatever is most convenient. But do the math on the actual interest costs associated with the different rates. 3% over 4-5 years isn’t nearly as significant as 6% for 30, so I wouldn’t worry too much.
posted by Huffy Puffy at 8:52 AM on February 26, 2018
Finance it, buy with cash, whatever is most convenient. But do the math on the actual interest costs associated with the different rates. 3% over 4-5 years isn’t nearly as significant as 6% for 30, so I wouldn’t worry too much.
posted by Huffy Puffy at 8:52 AM on February 26, 2018
while I’ve always tried to avoid the accelerated depreciation that comes with a new car
FWIW, I'm looking very hard at a similar Subaru to you and what I've found is there's very little depreciation lost on them the first few years. I've found used ones with the mid-range safety features I want, but they have 30-40k miles on them and are only around $3k cheaper than what I can get a new one for with mildly aggressive bargaining. With that much wear and tear, I'd rather spend the extra money and get the new one.
posted by Candleman at 8:53 AM on February 26, 2018
FWIW, I'm looking very hard at a similar Subaru to you and what I've found is there's very little depreciation lost on them the first few years. I've found used ones with the mid-range safety features I want, but they have 30-40k miles on them and are only around $3k cheaper than what I can get a new one for with mildly aggressive bargaining. With that much wear and tear, I'd rather spend the extra money and get the new one.
posted by Candleman at 8:53 AM on February 26, 2018
Depreciation only matters if you're selling the vehicle, otherwise it's nominal value is immaterial.
I think the hardest part of trying to do this with math is that there's not one single sweet spot of cost over the life of the average car. If you buy new and keep it forever, the sweet spot is, I dunno, years six to eight, depending on the vehicle? After that the maintenance costs really start to climb, and if safety is really important to you the active and passive safety improvements that seem to be coming every few years might change the math a bit more. For low mileage used cars, assuming that they've been properly maintained, the sweet spot is maybe years two through five? Since you never know how a used car was really treated you can't be sure it's really going to be reliable after the warranty expires (or even before the warranty expires, if you're unlucky). And if you can do your own maintenance or you Have A Guy who can keep a car going on the cheap, then life begins at 60 (thousand miles), as long as you don't live somewhere with strict emissions testing, you polluter, you.
Just to complicate things, though: after the initial depreciation hit, but before the warranty expires, your maintenance and running costs should be somewhat predictable as they scale with mileage, but parts don't always wear out at the expected rate. I had a couple grand in extra costs over the warranty period on the car I bought new. Turns out a muffler is not covered under warranty, and that car ate brake pads even though I was not an aggressive driver. Once it was older and out of warranty, the costs continued to increase. The third time I had to replace the muffler, the exhaust parts weren't even available anymore, and the shop had to fabricate a whole new exhaust for the car. And I knew I'd have to replace tires because it wasn't my first car, but I wasn't prepared for the tires to cost twice as much as the previous car's tires had.
Car dealers are really just functioning as banks, and they hand out cars as incentives for loans. At least, that's the conclusion I came to when they offered me a better price at 0.9% APR than they would agree to selling it for a regular check or wad of cash
Yeah, this. It's hard to reconcile the high cost of a car with the very small amount of money the dealership gets for selling it to you (it could be less than $1000 if you negotiate well). The dealer will get a separate incentive from the finance arm if you take that loan, and that incentive could make a big difference to their bottom line. If you're negotiating you should price it out both ways (and figure out the total cost of interest, plus the value of your liquidity). Don't be surprised if the math works out for the financing offer.
posted by fedward at 9:00 AM on February 26, 2018
I think the hardest part of trying to do this with math is that there's not one single sweet spot of cost over the life of the average car. If you buy new and keep it forever, the sweet spot is, I dunno, years six to eight, depending on the vehicle? After that the maintenance costs really start to climb, and if safety is really important to you the active and passive safety improvements that seem to be coming every few years might change the math a bit more. For low mileage used cars, assuming that they've been properly maintained, the sweet spot is maybe years two through five? Since you never know how a used car was really treated you can't be sure it's really going to be reliable after the warranty expires (or even before the warranty expires, if you're unlucky). And if you can do your own maintenance or you Have A Guy who can keep a car going on the cheap, then life begins at 60 (thousand miles), as long as you don't live somewhere with strict emissions testing, you polluter, you.
Just to complicate things, though: after the initial depreciation hit, but before the warranty expires, your maintenance and running costs should be somewhat predictable as they scale with mileage, but parts don't always wear out at the expected rate. I had a couple grand in extra costs over the warranty period on the car I bought new. Turns out a muffler is not covered under warranty, and that car ate brake pads even though I was not an aggressive driver. Once it was older and out of warranty, the costs continued to increase. The third time I had to replace the muffler, the exhaust parts weren't even available anymore, and the shop had to fabricate a whole new exhaust for the car. And I knew I'd have to replace tires because it wasn't my first car, but I wasn't prepared for the tires to cost twice as much as the previous car's tires had.
Car dealers are really just functioning as banks, and they hand out cars as incentives for loans. At least, that's the conclusion I came to when they offered me a better price at 0.9% APR than they would agree to selling it for a regular check or wad of cash
Yeah, this. It's hard to reconcile the high cost of a car with the very small amount of money the dealership gets for selling it to you (it could be less than $1000 if you negotiate well). The dealer will get a separate incentive from the finance arm if you take that loan, and that incentive could make a big difference to their bottom line. If you're negotiating you should price it out both ways (and figure out the total cost of interest, plus the value of your liquidity). Don't be surprised if the math works out for the financing offer.
posted by fedward at 9:00 AM on February 26, 2018
Honestly, it sounds like you just don't like your current car. The safety upgrades you mention are really luxuries that are totally unnecessary. Maybe the sound is an issue and you could work on that with your mechanic.
It's ok to want a nice new car. It's ok to sometimes buy things even though it's not your optimal economic decision.
Personally, I aim to buy a car like yours or maybe a year newer and then drive it until it starts having regular mechanical issues, may be 100,000 miles. I would consider your car newish and to me ideal. You avoid new car depreciation and end of life insecurity and cost of break downs.
posted by Kalmya at 9:11 AM on February 26, 2018
It's ok to want a nice new car. It's ok to sometimes buy things even though it's not your optimal economic decision.
Personally, I aim to buy a car like yours or maybe a year newer and then drive it until it starts having regular mechanical issues, may be 100,000 miles. I would consider your car newish and to me ideal. You avoid new car depreciation and end of life insecurity and cost of break downs.
posted by Kalmya at 9:11 AM on February 26, 2018
If you're in an urban area and haven't fully explored all the alternatives to a second car, I'd strongly recommend that first. Uber, Lyft, Zipcar, and friends are expensive per-use but you have to use them a lot before they add up to the cost of car ownership, and they can make it easier to use public transit for most trips by being there as backup for occasional missed bus or poorly timed schedule.
Given your history I'm sure your familiar with most of the trade offs, but in my opinion the situation has changed a lot just in the last few years, so it may be worth revisiting if you were last car-free a while ago.
posted by bfields at 11:31 AM on February 26, 2018
Given your history I'm sure your familiar with most of the trade offs, but in my opinion the situation has changed a lot just in the last few years, so it may be worth revisiting if you were last car-free a while ago.
posted by bfields at 11:31 AM on February 26, 2018
Honestly, leasing sounds like a perfect option for you. Your car needs are going to be rotating every few years as the kid grows up, and these safety luxuries will keep getting smarter.
If you're scraping your pennies together, it makes sense to invest a lot of time into getting an older reliable car and getting a relationship with a mechanic that will make it last forever until it runs itself into the ground. But that means being flexible about how much space you need adjusting your life to keep working with the car. The kid gets into a hobby where it'd be nice to have lots trunk room, or team thing where it'd be nice to carpool and not rely on multiple car caravan.
But you're obviously at a point where you can recognize that isn't free. It takes up a lot of energy that you could buy back by switching to a leasing model.
posted by politikitty at 12:40 PM on February 26, 2018
If you're scraping your pennies together, it makes sense to invest a lot of time into getting an older reliable car and getting a relationship with a mechanic that will make it last forever until it runs itself into the ground. But that means being flexible about how much space you need adjusting your life to keep working with the car. The kid gets into a hobby where it'd be nice to have lots trunk room, or team thing where it'd be nice to carpool and not rely on multiple car caravan.
But you're obviously at a point where you can recognize that isn't free. It takes up a lot of energy that you could buy back by switching to a leasing model.
posted by politikitty at 12:40 PM on February 26, 2018
I used to be a big advocate of always buying used cars and totally believed that buying new never made sense. But last year, I bought a new car because it made the most sense for a few reasons:
- If you are buying a "sensible" car (say, Toyota Prius or my car, a Kia Soul), there's actually not a great market for late-model used cars. People buy cars like this to drive into the ground, or at least to drive for 5-7 years. And people selling them on the private market often want way more than they're worth. I would often find people on craigslist with 2-3 year old cars asking just $500-1,000 below what dealers were offering for new cars (or the SAME as dealers) - without the warranty you'll get with a new car. And maybe you can negotiate down, but maybe not. And frankly, it's a lot of work for each car - the negotiating, the taking it to a mechanic, etc. when you may not even be able to get a good deal.
- Maybe you can get a certified pre-owned car from the dealer that was, say, a rental car before (which is a good way to go if you do want late-model used because rental car companies take good care of their fleets). But it won't necessarily have the same warranty as a brand-new car (and I really wanted the excellent Kia warranty) and you're basically going to have to take whatever is available in your market at the time of buying, in terms of features. That's how I wound up driving a Toyota Corolla for four years that had this really terrible fake-wood interior trim that I hated. You may not be "car people" looking for something fancy, but either way, it's a huge purchase and you're going to have it for 10+ years so you might as well get the one you want.
- Cars just don't depreciate like they used to, especially those sensible brands like Toyotas/Hondas/Kias. They hold value well. Because, again, people don't really sell them every two-three years, and also because lemon laws and increased quality in new car manufacturing and design means that cars can stay on the road for longer. I had that Toyota Corolla for 4 years and only ever had to fix one thing on it.
posted by lunasol at 4:56 PM on February 26, 2018
- If you are buying a "sensible" car (say, Toyota Prius or my car, a Kia Soul), there's actually not a great market for late-model used cars. People buy cars like this to drive into the ground, or at least to drive for 5-7 years. And people selling them on the private market often want way more than they're worth. I would often find people on craigslist with 2-3 year old cars asking just $500-1,000 below what dealers were offering for new cars (or the SAME as dealers) - without the warranty you'll get with a new car. And maybe you can negotiate down, but maybe not. And frankly, it's a lot of work for each car - the negotiating, the taking it to a mechanic, etc. when you may not even be able to get a good deal.
- Maybe you can get a certified pre-owned car from the dealer that was, say, a rental car before (which is a good way to go if you do want late-model used because rental car companies take good care of their fleets). But it won't necessarily have the same warranty as a brand-new car (and I really wanted the excellent Kia warranty) and you're basically going to have to take whatever is available in your market at the time of buying, in terms of features. That's how I wound up driving a Toyota Corolla for four years that had this really terrible fake-wood interior trim that I hated. You may not be "car people" looking for something fancy, but either way, it's a huge purchase and you're going to have it for 10+ years so you might as well get the one you want.
- Cars just don't depreciate like they used to, especially those sensible brands like Toyotas/Hondas/Kias. They hold value well. Because, again, people don't really sell them every two-three years, and also because lemon laws and increased quality in new car manufacturing and design means that cars can stay on the road for longer. I had that Toyota Corolla for 4 years and only ever had to fix one thing on it.
posted by lunasol at 4:56 PM on February 26, 2018
In your particular case, if by SECOND car you mean - having another car while keeping the first, and if by 10K miles a year (or less) you mean - total mileage for all drivers, and if you're in an area where Uber or Lyft are alternatives, I'd consider that, as mentioned above. Of course, if you have two drivers who have to do 3 mile commutes every day, this probably won't work.
A truly low mileage driver who wants to stay in a new car, maybe toward the luxury end, and who is careful with their cars may be the only situation where leasing even theoretically works. I've taken leasing off the table myself because, having done it once, I hated the inflexibility around a) accepting minor damage as the car aged and b) controlling when I was going to "trade in." I also think that for most people, leasing is a sucker-punch based on the car company's assumption that they're going to get you on a)excess mileage and/or b) damage to be repaired on turn-in (or a penalty charged) [which overlays (a) and (b) that I already mentioned.] I can go further into all this if you really want me to, but I'll be honest -- leasing just doesn't align with the way I use my cars, and YMMV.
Here is my peculiar take on car *ownership*: if you are relatively non-emotional, want to have a decent car but do not have to have the latest and greatest car, and therefore are not paying a lot of stupid tax around all those emotions, a typical car is basically an asset that depreciates so rapidly that it really behaves in your household finance more like an expense. Electronics like phones are also behaving in similar ways, but given that most of us spend so little on those items relative to our transportation, it just doesn't matter as much.
This is a very sloppy way to describe it, and to complicate it further, it's a complex mix of relatively fixed (by the month, if you will, whether you drive much or little) and variable costs (i.e. they are pretty linear by the MILE (or kM)).
Financing (if any) and insurance: pretty much consistent costs by the month. You may pay a little more in insurance if you drive a ton, but not much. As has been mentioned, financing is also complicated by the fact that dealers get bonuses for selling finance. For this reason, if I had enough money in the bank to buy a car with cash, and did not have higher interest debts, I would still take the loan, negotiate harder on the price, and then pay it off in a month or so.
Depreciation due to the car's AGE and COSMETIC CONDITION: pretty much consistent cost by the month, and even babying the car cosmetically (frequent wash and wax, careful driving and parking, and garaging the car) only helps by a small factor. And it's a big part of depreciation. If you compare used 2016 cars with 10,000 miles and 50,000 miles, there is a difference, but going down to 2015 or 2014 cars with similar miles will yield differences that are equally large. IOW a 2014 car with, say, 10,000 miles is worth amazingly less than a 2016 car with 10,000 miles. So if you drive very little (and <1>
Depreciation due to mileage - this is incredibly linear. If you buy a very average car with very average miles and get an average kind of deal, you actually don't save a lot PER MILE buying late model used vs. new. That doesn't mean it's dumb to buy late model used; I merely point this out because that "sickening amount of new car depreciation" is really not as big a cliff as some think. The "big discount" most people experience is because they're buying a car that is 20-30,000 miles and 1-2 years closer to the junkyard.
Emotionally, I also seem to just do better buying late model used. It's already got the first minor scratch and dent.
Interestingly, the biggest "stupid tax" that I finally figured out I was paying was that I was trading too frequently. Whenever you buy a car, unless you are a) a car dealer b) have days and days to shop c) are a negotiating genius -- you are paying pretty close to book value RETAIL. When you trade or sell a car (and this is true whether you let a dealer have the car or sell it to an individual -- you are receiving pretty close to book value WHOLESALE. And that gap is about $1,500 to $2,500, in my experience, on mid-priced cars. (You also pay some transactional costs on leasing, which is another strike against leases - they force you to play the game every 2-4 years).
My strategy, then, has wound up being "buy late model used and drive them until they get unreliable or unsightly," which for me is >10 years and >150,000 if you buy a quality car. I'd absolutely keep that Subaru. Safety is very important to me, and if you're a careful driver I think the only things that really matter are:
- modern body engineering with crumple zones.
- airbags.
- full lap and shoulder belts.
- ABS
And I'm sure that car has all that. More and more self-driving features are nice, I guess, but I don't think that what we have as of now is going to do much besides either keep minor accidents from happening or maybe mitigate major accidents (i.e. slow you down more when you rear-end someone).
posted by randomkeystrike at 5:04 PM on February 26, 2018
A truly low mileage driver who wants to stay in a new car, maybe toward the luxury end, and who is careful with their cars may be the only situation where leasing even theoretically works. I've taken leasing off the table myself because, having done it once, I hated the inflexibility around a) accepting minor damage as the car aged and b) controlling when I was going to "trade in." I also think that for most people, leasing is a sucker-punch based on the car company's assumption that they're going to get you on a)excess mileage and/or b) damage to be repaired on turn-in (or a penalty charged) [which overlays (a) and (b) that I already mentioned.] I can go further into all this if you really want me to, but I'll be honest -- leasing just doesn't align with the way I use my cars, and YMMV.
Here is my peculiar take on car *ownership*: if you are relatively non-emotional, want to have a decent car but do not have to have the latest and greatest car, and therefore are not paying a lot of stupid tax around all those emotions, a typical car is basically an asset that depreciates so rapidly that it really behaves in your household finance more like an expense. Electronics like phones are also behaving in similar ways, but given that most of us spend so little on those items relative to our transportation, it just doesn't matter as much.
This is a very sloppy way to describe it, and to complicate it further, it's a complex mix of relatively fixed (by the month, if you will, whether you drive much or little) and variable costs (i.e. they are pretty linear by the MILE (or kM)).
Financing (if any) and insurance: pretty much consistent costs by the month. You may pay a little more in insurance if you drive a ton, but not much. As has been mentioned, financing is also complicated by the fact that dealers get bonuses for selling finance. For this reason, if I had enough money in the bank to buy a car with cash, and did not have higher interest debts, I would still take the loan, negotiate harder on the price, and then pay it off in a month or so.
Depreciation due to the car's AGE and COSMETIC CONDITION: pretty much consistent cost by the month, and even babying the car cosmetically (frequent wash and wax, careful driving and parking, and garaging the car) only helps by a small factor. And it's a big part of depreciation. If you compare used 2016 cars with 10,000 miles and 50,000 miles, there is a difference, but going down to 2015 or 2014 cars with similar miles will yield differences that are equally large. IOW a 2014 car with, say, 10,000 miles is worth amazingly less than a 2016 car with 10,000 miles. So if you drive very little (and <1>
Depreciation due to mileage - this is incredibly linear. If you buy a very average car with very average miles and get an average kind of deal, you actually don't save a lot PER MILE buying late model used vs. new. That doesn't mean it's dumb to buy late model used; I merely point this out because that "sickening amount of new car depreciation" is really not as big a cliff as some think. The "big discount" most people experience is because they're buying a car that is 20-30,000 miles and 1-2 years closer to the junkyard.
Emotionally, I also seem to just do better buying late model used. It's already got the first minor scratch and dent.
Interestingly, the biggest "stupid tax" that I finally figured out I was paying was that I was trading too frequently. Whenever you buy a car, unless you are a) a car dealer b) have days and days to shop c) are a negotiating genius -- you are paying pretty close to book value RETAIL. When you trade or sell a car (and this is true whether you let a dealer have the car or sell it to an individual -- you are receiving pretty close to book value WHOLESALE. And that gap is about $1,500 to $2,500, in my experience, on mid-priced cars. (You also pay some transactional costs on leasing, which is another strike against leases - they force you to play the game every 2-4 years).
My strategy, then, has wound up being "buy late model used and drive them until they get unreliable or unsightly," which for me is >10 years and >150,000 if you buy a quality car. I'd absolutely keep that Subaru. Safety is very important to me, and if you're a careful driver I think the only things that really matter are:
- modern body engineering with crumple zones.
- airbags.
- full lap and shoulder belts.
- ABS
And I'm sure that car has all that. More and more self-driving features are nice, I guess, but I don't think that what we have as of now is going to do much besides either keep minor accidents from happening or maybe mitigate major accidents (i.e. slow you down more when you rear-end someone).
posted by randomkeystrike at 5:04 PM on February 26, 2018
A counterpoint to all of the people who say that new safety features are luxuries, not necessities: You need to be realistic about how good of a driver YOU are. I know, personally, that I'm not the best driver. Even with no music, people talking, or other distractions, my mind tends to wander when I drive. I mostly have the right habits, like checking my blind spot, but... I'm not going to magically become a great driver (although my insurance company thinks I am because so far I've only had near misses) and until self-driving tech goes mainstream, I still need to drive every day.
How much risk are you willing to trade off for lower expense? The answer, of course, depends on your perception of crash risk due to a moment of inattentiveness. Most people have a high opinion of their own driving ability.
Btw, backup cameras are becoming mandatory this year, so you might want to hang tight for a bit until it becomes available on base-level models.
posted by serelliya at 5:23 PM on February 26, 2018
How much risk are you willing to trade off for lower expense? The answer, of course, depends on your perception of crash risk due to a moment of inattentiveness. Most people have a high opinion of their own driving ability.
Btw, backup cameras are becoming mandatory this year, so you might want to hang tight for a bit until it becomes available on base-level models.
posted by serelliya at 5:23 PM on February 26, 2018
I've always been a "buy gently used for cash and drive it into the ground" kind of person but my spouse and I have been in the market for 2 cars in the last couple of years and both times we looked at the brands we were interested in (Subaru, Toyota, Honda) and realized that the depreciation for those over at least the first 5-7 was essentially linear. You used to get a steep drop-off in the first few years on all cars, which of course resulted in a sweet spot where you could get a car with minimal wear but for a much lower cost. That is still the case for brands with less stellar reputations and for luxury brands, but for workhorses like the three I mentioned, it's no longer a big savings. And the availability of things like backup cameras and safety sensors and things as well as the current very low interest rates adds additional incentive to just buy new.
In sum, I think that there's probably a way to optimize the decision, but that you're probably not going to save a LOT of money either way, especially if you then go on to drive the car until it's a beater. So you should just find a car you like and buy it.
(My spouse and I actually ended up buying used cars--a 2008 and 2014 respectively--but mostly because we came across specific used cars that we wanted.)
posted by The Elusive Architeuthis at 8:16 PM on February 26, 2018
In sum, I think that there's probably a way to optimize the decision, but that you're probably not going to save a LOT of money either way, especially if you then go on to drive the car until it's a beater. So you should just find a car you like and buy it.
(My spouse and I actually ended up buying used cars--a 2008 and 2014 respectively--but mostly because we came across specific used cars that we wanted.)
posted by The Elusive Architeuthis at 8:16 PM on February 26, 2018
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There is a sort of a bell curve on which the costs of owning a car will scale vs the age of the car. Brand new, it's very high cost because of depreciation, but as you've realized, the maintenance on a car will slowly increase, especially at 150K+ miles. So, at least for me, owning a car in between the 30K miles and the 150K miles has always been my sweet spot.
I do have one thing to note, and that is paying cash vs a car loan. In all the times I've considered this question, many baby-boomer age people talk about always paying cash for a car and never taking out a loan. A lot of lenders will be able to find you rates on a 2-3 year old car for around 2.5%, assuming you have normal credit. 2.5% interest on a car is *basically* free, seeing that inflation is around the same amount.
At 2.5%, if you have a mortgage at 4.5%, or a student loan, or credit card debt, it is VASTLY superior to take out as much money as possible, even if you have the cash, and immediately put the cash you have toward your higher interest rate loan. Debt isn't a bad thing in-and-of-itself, and if you USE debt to pay off other debts at a higher rate, you come out ahead. My 401K has done about 5-15% in the last 5 years, and so I have never put a penny toward my 2.5% car lease except for the minimums, and I'm very happy about that arrangement.
I know you're thinking it, but those 0% interest rate deals only apply to NEW cars, and almost never the car you actually want. You will take out a loan at 0% interest for 35K, drive it off the lot, and two years later you will still have 33K in debt on a 27K car. Because new cars depreciate much faster than the 3.5% interest rate, you will be backwards a lot faster than a used car at 3.5%. Besides, in 3 years, 3.5% interest on 35K is only $2,000. So that 0% rate only saves you about $2,000, but how much will your car depreciate in that time? I'd rather get more off in the beginning than save on the interest rate!
40K miles on a subaru is totally fine. Safety is pretty relative as well. I doubt features like blind-spot monitoring, rear camera, lane assist, are truly going to make a difference in your life. However, in 5 years, self-driving features will have evolved and you may be able to make a large jump in safety.
In summary, in your situation, I would look to buy a second car with about 40K miles, for sale by owner, on craigslist, with a lease from a credit union, at less-than 3% rates, and pay the minimum. I think a good price to target for this car is $8-12K for a compact, $10-15K for a midsize sedan, or $12k-17K for a smaller SUV.
Hope this helps!
posted by bbqturtle at 7:33 AM on February 26, 2018