What's the most effective way to spend money on a new/used vehicle?
December 29, 2010 12:09 AM   Subscribe

Should I purchase a new or used car? I can purchase outright or finance, but what would be the best for my situation?

I've been using the same $800 clunker for nearly 7 years. After thousands in repairs, and with another set of expensive repairs on the horizon, it's time for a new vehicle.

There's a rebate program in Texas similar to Cash for Clunkers that allows for older vehicles to be traded in for a $3,000 rebate toward a newer (2008-) car. With the rebate, I have enough in savings to buy the car outright, but is that a smart move?

If I were to go the new car route, I expect to pay around $17,000 (I'm looking mostly at the 2010 Honda Fit).

Most 2008 or newer used Honda Fits come in around $11,000. Granted, they must be from dealerships (per the rebate program), and the Fits at the lower price range generally have more than 50,000 miles on them.

Besides spending my money wisely, I'm also interested in warranty and resale values. I would definitely enjoy a decent warranty. After years of expensive repairs and tossing out a couple hundred here and there, a warranty sounds amazing. Also, resale is important: I want to be able to sell my newly purchased vehicle and have a decent return.

I realize this question is a bit scatterbrained, but it accurate reflects my mindset. I have a fairly lengthy commute this coming semester, so I really want to get this car business sorted before I start in 3 weeks. Thanks!
posted by apip to Shopping (15 answers total) 3 users marked this as a favorite
Generally speaking a late model used car is almost always a better value than a new car. There's the old "You lose $5k just for driving it off the lot" thing.

If you can get a late model used, warrantied Honda for $11k versus a new for $17k that seems like a no-brainer, even with 50k on the engine.

Were it me in your place I would consider something with fewer miles, but balancing that against cost. What does $12k to $13k get you?

If you can get financing for less than 3% I'd consider it. In this, still, dicey economic time it's always good to have a chunk of change in the bank. I'd still put down a good amount on the car in addition to your rebate so that you could pay it off in short order. I'd go for a loan of no more than 3 years.

If you don't qualify for anything under 3% then I'd buy it outright.

Hondas hold their resale value very well. I'm driving a 2004 Honda Civic, which I financed at 2.9%. I don't recall what I paid for it, but I seem to recall I paid about 17k for it. It's about to turn seven years old and the going rate in my area, with my low mileage is about $8500. Not too shabby, if you ask me.
posted by FlamingBore at 12:23 AM on December 29, 2010 [2 favorites]

Cars last forever these days. 50,000 miles is just being broken in. We just bought a 75K, five-year-old Subaru for my bride which is in excellent condition for less than half the cost of the same model new. It will last us a decade if our experience with the last one purchased in similar condition is anything to go by.

I'd pay cash, if I could. In your situation, an 08 or 09 whatever you want is still going to have factory warranty, will barely be used if you buy the right one, and will be great.

Only cars I would avoid are nearly new cars with insane high miles on them (more than 15K a year).
posted by maxwelton at 12:39 AM on December 29, 2010

In his podcast, comedian Adam Carolla--an amateur racer and car collector--insisted that it's wasteful and irrational to ever buy a new car off of the lot these days.

Cars of recent vintage, according to Carolla, have a durability that is lightyears ahead of several decades ago. In terms of mechanics, a car with 20 or 30K in miles is practically new, and (thanks to improved body manufacture) often rust-free. This law holds true for both foreign and US-built autos (though obviously, Japanese cars still hold the edge with repairs).
posted by Gordion Knott at 2:27 AM on December 29, 2010

A slightly contrary view: Pick a number of miles that represents your subjective tolerance for dealing with old cars, say 150k miles. For the new FIT your using-up-the-car cost would be $17k/150k miles = 11.3 cents per mile. For the used one with 50k miles at $11k dollars the cost would be $11k/100k remaining miles = 11 cents per mile. So no real difference in this crude analysis. Play with the numbers to suit.

Of course there are other plus/minus cost factors for the new one - longer warranty and perhaps free maintenance vs. higher sales and excise tax (don't know about TX). And especially if you are a careful and gentle driver, you might wonder if the first owner was big on jack-rabbit starts and 100+mph down the expressway.

The above is more or less how I've always justified/rationalized buying new and keeping long. But as others have said, nothing at all wrong with a recent used model. Staying away from the financial edge and building savings is obviously much more important than a new car. Good luck.
posted by Kevin S at 4:48 AM on December 29, 2010 [1 favorite]

I agree with Kevin S's math. I do a similar calculation when car shopping. I usually assume that any newer car with a decent reputation for quality will have a useful lifespan of 200,000 miles. (In other words, it will probably still be running at 200k, but its value to me will be pretty much zero.) And, on most newer cars, the maintenance and repair money is pushed later in the car's life.

So I just prorate the value on that mileage. For example, when I am shopping, a car with 100,000 miles needs to cost significantly less than half of new (because half its life is gone, and the second half of its life will come with higher repair bills). It's a really easy way to sort through the options out there, because by this standard an awful lot of cars are heavily overpriced. For some vehicles that have great quality reputations (eg Toyota Tacoma) this can push you towards buying new rather than used; in other cases used becomes a compellingly better deal.

To give you another option, have you looked at any of the Kias or Hyundais? You can buy a new one for less than your total budget, and they are starting to get a pretty good reputation for quality and design.

Lastly, for reasonably accurate pricing on new cars, Truecar is a great resource. It'll show you pretty closely what you might actually pay for a given model in your area, based on real sales data.
posted by Forktine at 5:08 AM on December 29, 2010 [1 favorite]

I would just suggest you not overvalue your repair experiences. They were with the car you describe as a clunker, not a recent-model Honda.

For what it's worth, I recently bought a 2004 Volvo with fewer than 28,000 miles on it, for cash. I'd have loved for it to still be in warranty, but with the miles and the understanding that Volvos are well made, I'm optimistic.

The only thing that would concern me about being out of warranty with a Honda would be a computer issue -- although again, this is probably me overrating an issue I experienced personally. The only issue our 2003 RAV-4 has experienced where I was thankful for warranty was when it had an issue with its onboard computer. But even then, I wonder if a carmaker like Honda or Toyota wouldn't admit its mistake and make good, even out of warranty.
posted by troywestfield at 5:10 AM on December 29, 2010

You can get an estimate of costs for repairs, financing, depreciation, taxes, etc by using Edmunds True Cost Calculator.

You pick the make, model, and year of the car. Edmunds gives you back an estimated purchase price along with the "true cost of ownership" year-by-year for five years based on Edmunds massive amount of historical data.

They assume that you are going to finance the car, but they break out the financing cost as a separate line so it's easy for you to remove it. The most interesting stuff to me (hardest to come up with on my own) was their estimated year-by-year depreciation and estimated year-by-year repair costs.
posted by alms at 5:25 AM on December 29, 2010 [1 favorite]

As per another recent AskMe thread, when negotiating with the dealer, don't state you intend to pay cash until a price is agreed on. When you have agreed a price, then say you'll pay cash. A dealer will lower the sale price if they think they can make it up on the loan interest.
posted by dougrayrankin at 5:56 AM on December 29, 2010 [1 favorite]

Providing you get a warranty on the used car, to my mind, the new car gives lower value for your dollar unless the intangibles matter to you.
The intangibles of a new car (to me) are basically that (depending on make and model) you can custom order from the factory to get the exact combination of trim, color, upholstry, and factory options, that you want.
A few years of newness can also result in more features that are sometimes more than just window dressing. You'll have to evaluate for yourself if the new cars have any newer tech that might make them worthwhile to you.

But if you are happy with the usual options and colors available in the used market, then it would be better to buy used and keep the $$$$ difference. (Assuming the used cars come with a warranty on par with the new cars)
posted by -harlequin- at 6:18 AM on December 29, 2010

If you buy used, make sure the car has a detailed oil-change history. Most cars on the road are running very low on oil, for months at a time. Our reliance on 'oil lights' means most people never check the dipstick until the recommended change or until it is too late, don't inherit big problems from an under-maintained car.
posted by limited slip at 7:16 AM on December 29, 2010

What kind of interest rate would you be looking at if you financed, and how would you be using the money if you didn't pay for the car in full?

If there are no financing deals (the 3% mentioned above is about max I would pay to finance a new, keep in mind that financing rates on used cars are higher by a couple percentage points), and/or if you don't have good credit, it may cost a lot extra to finance.

I'd weigh that against what you could be be using the money for - if you're in school, what are your job prospects after graduation - will you possibly need that money to live on? If you end up having to put stuff on credit cards, that interest rate is bound to be higher than a car loan would be.

I agree to not overvalue the warranty. I am ashamed to admit that I purchased an extended warranty on a new Honda, and I kick myself for it every time I think about it. On a used car, at least for a Volvo, the "certified pre-owned" warranty added about $1,000 to the price (it was built in).

Do your research on the price - I looked at Kelly Blue Book and Edmunds - and make sure that the dealer isn't pricing the car significantly higher because of the $3,000 - when you go to buy they will probably talk that up, but make sure you know your pricing and that you and not them are keeping the bulk of the $3,000.
posted by mrs. taters at 7:51 AM on December 29, 2010

I should clarify that I'm not saying *don't* think about the warranty, especially on a used car, I'm just saying not to let that push you into a decision.
posted by mrs. taters at 7:53 AM on December 29, 2010

You dont talk much about your financial situation other than having the cash. Would paying cash wipe out your savings completely? That seems imprudent. On the other hand, if the cost of the car was less than 20% of your savings, then paying cash seems like the way to go.

I'm financially conservative, so I'd probably lean toward financing the car and preserving the nest egg. The answer for you depends on how comfortable you are with the hit to the savings account.

If you do choose to finance the car, you can always pay it off early if you decide that having the payment doesn't suit you.

As far as new versus used goes, the used car will deliver better value, but may not be what you want. From the tone of your post, it sounds like you're financially in a good spot, so a new car may be the way to go, based mostly on what sounds like your personal preference for a new vehicle.
posted by desl at 8:37 AM on December 29, 2010

Watch this. One of the most useful replies I received to a car purchase question.
posted by ecorrocio at 8:58 AM on December 29, 2010

desl states: I'm financially conservative, so I'd probably lean toward financing the car and preserving the nest egg.

I don't think taking on debt is a "financially conservative" solution. The preserved nest egg is only an illusion of one owes a bank for the car.

A better solution is to use some of the nest egg for a car, and preserve the rest.
posted by ecorrocio at 9:01 AM on December 29, 2010

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