Buying a new car is exciting! It’s shiny and clean, and it’s all yours. Well, after a couple of vehicle purchases, Mr. ODA and I learned a few things. And in the end, we’ve decided that buying a “pre-owned” (used…) vehicle is a more practical decision. So while I understand that this approach isn’t for everyone, maybe I can break this down in a way to get you on board.
Whether you’re buying the vehicle new, buying it used, or leasing it, you’re going to have basically the same costs of ownership after the initial purchase. You’ll need to pay for the registration, insurance, and taxes on any of these options. In all cases, you’re going to have to purchase fuel to make the car work. Unless you’re purposefully looking for a new vehicle after a short amount of time and ignoring maintenance, there will be maintenance costs (e.g., oil change, new tires, other fluids). However, the cost of those maintenance activities will depend on the vehicle.
In some states, you also have a personal property tax that may be an up-front tax on the vehicle, or could be an annual tax based on the vehicle’s value. Examples – In Georgia, there’s a one-time Title Ad Valorem Tax that is 6.6% of the fair market value of the vehicle at the time of purchase. In Virginia, there’s an annual personal property tax. Make note of this – the tax is directly related to the value of your vehicle. The more expensive and new the vehicle, the more you’re going to pay to Virginia in taxes – every year. At least each year that passes, the value of the car decreases, and therefore your tax owed decreases.
I’ve brushed on depreciation with the mention of a car’s value; that was the biggest determining factor for our move towards purchasing pre-owned vehicles. Depreciation is the loss of value over time. A very literal definition from dictionary.com says, “a reduction in the value of an asset with the passage of time, due in particular to wear and tear.”
While the value of a car decreases each year, it’s not a linear amount of value that’s lost each year. According to Edmunds, a car loses about 20% of its value in the first year. That means that if you spent $30,000 on the car, you probably can only sell if for about $24,000 after one year. Depreciation slows down after that first year, but the value continues to decline.
No matter the vehicle, you lose the most value as soon as you drive it off the lot. This is where purchasing a pre-owned vehicle is beneficial; someone else endured that largest loss of value.
You can look into Certified Pre-Owned (CPO) Vehicles, versus just a used vehicle, to give you peace of mind. According to cars.com, a car can only be labeled as CPO after a dealer has certified to the manufacturer that the car passed a multipoint inspection, which can encompass 150 or more items, and repairs have been completed as needed. A CPO vehicle comes with a free car history report, which will show you all the maintenance activities performed, as well as any accidents. A CPO vehicle may even come with a warranty and be in better condition than a non-CPO car. They are supposed to have been reconditioned to like-new condition, and they come with additional benefits that may not be provided on other used cars. But, CPO cars will cost you a bit more on average than a “regular” used car due to this due-diligence and other benefits.
RISKS OF PURCHASING A USED VEHICLE OVER A NEW
When buying a used vehicle, you have to weigh the cost against what you’re receiving (as you would with any purchase, really). Even when buying a new car, there’s no guarantee that it will work perfectly, but you’ll be covered by warranties and (hopefully) a reputable dealership. With a used car, you are taking on a risk that there are issues caused by the previous owner, including not knowing how the car was maintained. Was it owned by someone who followed the user manual, maintaining the right fluids and putting the right gasoline in it? What was their driving style – was it hard starts, stops, and turns with aggression, or was it a gentle, defensive driver that owned it? Was it owned by someone who knew they were getting rid of it in 1-3 years, so no maintenance was necessary in their mind and it wasn’t driven with care?
The question you ask yourself is whether you’re willing to take on this risk of how the car was treated for the cost you’re paying, and what that initial loss of value really means to you.
CPO vehicles began with luxury vehicle lines, but they’re more widely available now. If a luxury vehicle is something you’re interested in, there are some things to keep in mind. Not only does a luxury vehicle cost more up front, the maintenance, and possibly the fuel, will cost more as well. These are recurring costs that you should be considering when taking on the responsibility of a new vehicle.
An Audi was my dream car. I could not wait for it to be my time to make that purchase. Then I started hearing stories about how my friends’ Audis were in the shop. Not only were they costing them for having to be in the shop more than my car, but the maintenance itself was more expensive! I was used to paying $19.99 for an oil change on my Honda Civic in Albany, NY. The thought of paying $75 or more for an oil change because it’s an Audi was gut wrenching to me. Then there’s tires. I paid about $400 to put four new tires on my Chevy Equinox. Tires on an Audi? Double. I didn’t look into the cost of insurance, but usually it ends up being more to insure these sportier vehicles.
I had to truly take the time to consider how much I wanted this vehicle – was it something I needed and would accept the increased ownership costs, or was I ready to let go of this dream?
KEYS TO THE PURCHASING PROCESS
Don’t talk to the salesman in terms of monthly payment. I had quite the experience holding strong to my “what is the total cost of the vehicle” question and not talking about the cost in terms of monthly payment. I don’t want anything buried in my monthly payment. I repeated “don’t worry about what I want to pay month to month or how much I can afford in terms of a monthly payment.” I wanted to buy the car for $17,000. He wouldn’t say yes or no. He kept offering us a different monthly payment, and then we’d sit there, do the math, and say, “nope, that comes to $17,500.” You’d think after the first, or second, time we did this, he’d catch on that we’re not playing his antics and would be verifying the principal of the loan. We were there for hours. Hours. I got it though.
Know what price you want for any trade-in vehicles. When you trade in a vehicle to the dealership, you’re eliminating the hassle of selling it yourself (e.g., how do you market your car, how do you let someone test drive your car, how do you negotiate to get what you want?), but you’re probably not getting top dollar for it either. We’ve traded in two vehicles. The first was straight forward. The second had a fair market value of maybe $6,500 in fair/good condition (e.g., broken antennae, scuffs in the trunk from our travels and house work, a broken door arm rest from where the dog would stand on it to look out the window). Even though the car’s cosmetic issues were factored into the fair market value cost, it’s hard to say we would have been able to get $6,500 selling it personally. When the dealership offered me $5,000, I accepted it. The vehicle looked good, but it was those small details that would add up to any private buyer with a fine tooth comb, and I didn’t think I had a leg to stand on to negotiate over a few hundred dollars with the dealership.
OUR RECENT USED CAR PURCHASE EXPERIENCE
We found our used vehicle through cars.com. There are several online search tools you can use, as well as just showing up to a dealership. My search parameters were fluid: I’m willing to pay for the right value, versus “I have $20,000 to spend, what can I get?” I wanted a van, probably a Pacifica, with relatively low miles (I’m talking about averaging less than 12,000 miles per year), and somewhere around $20k. The Pacifica is set up where the base model has all the features I’d want, so I didn’t have to do a lot more manipulating of features (Chrysler has a lower tiered minivan with less features, versus 6 or more levels within the ‘Pacifica’ itself). The biggest deal breaker for me was leather seats – in that we did not want leather seats. I’d trade off the slightly more effort in cleaning the seats for not feeling extra cold or extra hot when we get in the car (and I have car seat mats under my kids’ car seats that protect the fabric anyway).
The dealership that had the van that best hit our search parameters was just over an hour away. We weren’t able to get there until near closing time, so I rushed through the review of the vehicle. In the future, I plan to do the following better:
- Check all doors open and close correctly, without rattle, several times. Drive the car somewhere else, and open and close all the doors again.
- If you have removable and/or movable seats, move them. Spend the time figuring it out. I couldn’t figure it out, so I just gave up and said “it’ll be fine.” They’re not fine. I didn’t know it because I didn’t know how it was supposed to work, but after using it a few times, I figured out that one works right, and the other gets the job done, but isn’t ‘right.’
- Look for dirt. Don’t assume that a dealer’s deep clean is deep by any means. The car was dirty, but I put faith in their final ‘detailing’ process. They didn’t even wipe the dirt off the driver’s side arm rest or the back wall of the trunk. But they cleaned an obvious orange stain on the carpet.
- Drive it on the highway. I get nervous about taking the car too far from its ‘home’ before it’s mine. Do it. See how the car operates at highway speed for more than a mile. Two kids at the dealership, COVID precautions, and it being near closing time meant I rushed myself. There’s a rattle that I should have noticed, but I didn’t drive the van more than a few miles up the road.
- I negotiated a buff out of scrapes (maybe as far as gouges) on one of the panels of the van. They said they would ‘attempt’ it, but they weren’t making any promises because the paint was gone. But they did it! The panel looked brand new, and I’m so glad I got something right!
The average cost of a 2017 Pacifica was around $21,000 on these websites (the sites themselves give you a lot of data to see this type of information). The one we went to see was listed just below $18k, so I knew it wasn’t going to be in mint condition. The question is always: what is your tolerance and is the as-is product worth that value to you? It was to me.
We were about to trek all over for two months with a lot of our stuff (like an entire crib and mattress), two kids, and a dog. I wanted the van. During my test drive of the van, I noted quite a few scratches (possibly in the realm of gouges) on one of the door panels. I really didn’t know what I could or couldn’t ask for, so I countered their offer with $17,000, buffing the door panel, and detailing the vehicle. They accepted! I was happy with the imperfections against the price and was now the proud owner of a 3 year old van.
I’m 7 months in to owning the van, and I love it. I got its first oil change a couple of months ago, and the mechanic said the car is in excellent condition and then was surprised when I said I bought it used. We have put the van to the test with all our travel and house work. I hauled 12 sheets of drywall, a bath tub, a toilet, and a vanity with its counter.
STORIES WE’VE HEARD
“I’m looking for a new car because I just made my last payment on this car.” What? You WANT to always have a car payment? Is your car broken or not functioning well? Is it worth purchasing another brand new vehicle, paying the loan for 5 years, and then repeating the cycle? In my opinion, it is not. Try relishing in your newfound $300, $500, $700 each month that you don’t have to pay towards a car. Enjoy the car that you know you can rely on. You’re still paying all the maintenance costs on a vehicle, so you’re not really saving anything, unless you’ve planned it so that you drive so little that your tires last you those 5 years. Another variation: “We get a new car every three years, but it’s ok because we pay it off early so we own it outright.”
“I’m going to lease so I can get a new car every 3 years.” Why do you need a new car every three years? The dealer is loving the fact that they can count on you to rent the car from them for the car’s three most expensive years of ownership, only to give it back to them and do it all over again, and again. Is your goal to keep up with the Joneses or to make solid financial decisions?
LONG TERM COST OF OWNERSHIP
Manufacturers have reputations, based on years of empirical evidence, dictating how long their vehicles usually last and how well they hold their value in the resale market (e.g., Toyota is known for retaining value well). If you can avoid the early stages of a car’s life by buying something a few years old, keep it for many years, maintain it well, and choose a brand that has a strong track record for resale and “car life,” then you can hit the trifecta of a smart purchase.
Mr. ODA is still driving his first adult car. A Nissan. While it was bought new, he has kept it for 11 years thus far and it still runs strong. Each year he owns it, the original purchase price compared to the depreciation to date lowers the average annual cost of his ownership. Since 11 year old cars are depreciating at a very slow rate, if he keeps it maintained, he can save a lot of money compared to the other option of ‘upgrading’ to a newer car that would inherently cost him more money to own each year. Had he bought it 3 years later, it’s possible he could’ve purchased for half the price and still would have owned it for 8+ years while cutting 5 digits off the total cost of ownership. In hindsight, and with our view looking forward, that 3 years of owning it “new” isn’t worth $10,000+.
The main point here is to be aware of the immediate depreciation of a brand new vehicle’s value. Allowing someone else to take that large value decrease by driving it off the lot can save you money, while still getting a fairly new vehicle. Through Certified Pre-Owned programs, you may even still be covered under vehicle warranties as if you purchased a new vehicle. Or, you can pay still a little less, accept a bit more risk, and get a used car that hasn’t gone through the CPO process. When making the decision on whether to lease, buy new, or buy CPO/used, be sure you’re well informed and weigh all the factors against how this purchase will affect your money, both in terms of cash flow and net worth.