| Gary Foreman is a former Certified Financial Planner (CFP) who currently writes
about family finances and edits
The Dollar Stretcher website
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Gary,
My partner and I are planning on purchasing a car. We have budgeted
for it. He would like a station wagon and wants to buy it
second-hand (at least 12 months old). I prefer a brand new car,
especially with car price ranging from $14,000 on up these days.
I realize that new car value drops
dramatically once we drive it off the car lot. But we will know from
the start what's been going on with this car and can take good care
of it, which you can never do with a used car. David is of the
opinion that a good second hand car is more economical than a cheap
new car.
He needs the car for work -
commuting between different facilities.
This is a fairly big purchase for
us and I very much would like to know what you think.
--Nancy
 Good question! And one that we all
face from time to time. We can't tell Nancy and David which car to
choose. That's not possible. But, we can give them some tools to use
in making a good decision.
For comparison purposes we'll use a
Ford Taurus wagon. Let's take a look at four different times in the
life of an automobile. First, when it's new. Then when it's two,
five and ten years old. To get pricing information we went to Kelley's
Blue Book.
We're going to use past car prices as
an example. There's a pretty good chance that what happened to used
car prices in the last ten years will be a reasonable estimate of
the future.
We'll start with the new 2004 Ford
Taurus SE four door wagon. It's equipped with V6, automatic, radio
and air conditioning. Retail price on the 2004 model is $22,290. But
Nancy and David can expect to pay closer to the invoice of $20,457.
To simplify our comparisons, we're going to ignore sales tax and
state registration fees.
Now, let's look at a 2002 used Taurus
wagon with similar equipment. According to Kelley's the retail value
on it is $15,040. So Nancy can expect to pay a little over $5,000
for the comfort of knowing the car's entire history. Most cars lose
about 25 to 35% of their value in the first two years.
Nancy's fear of spending $15,000 on a
used car and getting a lemon is understandable. She can minimize
that by checking the car's history at CarFax.com.
For $15 they'll provide a report. Many dealers will even give you
the CarFax report. One warning. The reports will only show items
that appear on official records. So if the car was in an accident
that wasn't reported, it won't show up in the history.
If you buy a used car, you should be
eligible for the remainder of the new car warranty. It's a good idea
to find out exactly what you'll get from the manufacturer. Also,
some dealers will include an extended warranty with a used car. A
good warranty minimizes the risk of buying trouble. Yet, Nancy is
right. There is some small risk.
Next, let's take a look at what
happens in a few years when they're ready to sell. Suppose they
typically trade a car when it's five years old. A 1999 Taurus wagon
retails at $8,785. So, their new car would depreciate $11,672 over
five years. That works out to $2,334 per year.
By comparison, the used 2002 model
would cost $6,255 over three years or $2,085 per year in
depreciation. So the new car runs about $250 more per year. Looked
at this way the new car does seems more affordable.
But, there are other things for Nancy
and David to consider. Borrowing $7,000 will cost $385 in interest
the first year (based on a rate of 5.5%). So that's an extra $30 per
month.
Buying the used car will mean that
they'll trade for something newer after only three years. If you get
bored with your car that's good. But if you dislike the shopping and
negotiating experience, then it's a minus.
Finally, let's see what happens if
they keep a car for 10 years. A 1994 Taurus is worth $4,305. That
means that it only depreciated $896 per year for the last five
years. Quite a bit less than in the earlier years. A real money
saver.
So what should Nancy and David do?
For most people the used car is the best financial decision. My car
was bought when it was 2 years old. But, the new car price penalty
is minimized the longer you keep your car. No matter what Nancy and
David select, we hope that they can afford it and enjoy it!
--End--
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