Driving a brand new car feels like driving around in an open billfold with the dollars flapping by your ears as they fly out the window. ~Grey Livingston
This article is one of a 3 part series. After reading this article, you may also wish to consider the “Buying a New Car Can Cost You Millions” or the “ Busting All the Myths Surrounding New Cars!” articles.
How Old Should Your Next Vehicle Be?
In the article “Buying a New Car Can Cost You Millions” I explained how investing money that would have been spent on car payments can make you a millionaire. Now let’s learn how to make vehicle depreciation work to our advantage.
Vehicles Lose Value… FAST
Most people have heard that a new car loses a lot of its value when it’s driven off the lot. The fact is, a new vehicle continues to lose value until it is turned into scrap metal. After 25 years a vehicle will lose about 99% of its original value. Sad, isn’t it? To help illustrate vehicle depreciation, I’ve put together a few tables and graphs. I have tried to be conservative when using the depression values to give the most accurate representation, so because of this most vehicles will depreciate close to the average curve, or between the low and high curves.
What Age of Vehicle Should You Buy?
So, where is the best point to buy? I have spent weeks pondering this question, and have come up with just one answer: It depends. First of all, if you can only afford to buy a car that costs $500, then this isn’t a question that should be asked. If you have lots to spend on a vehicle, then there are several options.
Is warranty important to you? If so, then consider buying a car less than 5 years old. Be sure to read the about the value of a warranty (in the other two articles), as it isn’t always worth it.
Acceleration rate of depreciation. This value compares how quickly the rate of depreciation affects the value of the car.
Year 1) 50%
Year 2) 28%
Year 3) 19%
Year 4) 13%
Year 5) 10%
Year 6) 8%
Year 7) 6%
Note that this value isn’t the depreciation itself, but the CHANGE in depreciation. The first year is about 50%, the second year about 28%, the third year about 19%, and so forth. It is obviously better to buy a one year old car over a new car, but the second and third years sill have stiff changes in depreciation. From year 4, the change in depreciation isn’t as bad. Many cars will still have warranty when they are under 5 years old.
Price of vehicle. Sometimes buyers can find bargains. If you are looking at 5-year-old vehicles and can find a similar 4-year-old model for the same price, then take the newer model. Although this seems obvious, many people buy vehicles on panic (such as after their vehicle breaks down) and don’t take the time to look for deals. Buying from an individual seller will often get you a newer model for the same price as an older one at a used car dealership.
What about upgrading to a better vehicle? Many people can’t afford to buy a good quality used car without debt. For these people, I recommend buying something as cheap as they can stand, and save up. Instead of putting $300 into a car payment, buy a $300 beater car and drive it for a few months, saving the $300 per month until a better car can be purchased. After a few cycles of buying better vehicles and putting money away, you can slowly upgrade to something comfortable, or even enjoyable! If you’re like me, you may just keep your cheap car until it completely dies… this has worked for me, as I’m still driving the car I had when I was 18, and it’s to the point that it would cost more for a potential buyer to get it inspected than it’s worth. 🙂