What to buy: New or used?
Used cars sitting in a lot
Tess Vigeland: OK, back on the road and time for a quick pit stop. Come to think of it, while we're on a detour. Let's swing by Santa Monica. My friend Phil Reed of Edmunds.com is out this way, and he's the perfect person to ask the perennial car question: What's better for your wallet: New or used?
Yeah, yeah, going without a car is the best, we know. But this show is for people who have them or want them. So let's pull into the lot here at Santa Monica Ford. The new car lot.
Vigeland: Hello again Phil.
Phil Reed: Hello Tess.
Vigeland: We wanted to talk about the finances of buying a new car versus a used car. So let's start here with new. We've already talked about depreciation and is that just one reason to never buy a new car?
Reed: Yes, it's probably the most significant reason is that the 20 percent when it drives off the car lot, that's essentially what you save by buying a one-year-old used car.
Vigeland: Wow. That's a lot of money to save.
Reed: It is, and it's actually, if you wait one full year, you have one year's worth of depreciation and one year's worth of mileage, os it's like 30 percent. Not only that, but from there on in, that used car depreciates less than it did in that first year.
Vigeland: Well then, I know this is going to be antithetical to your very being, but tell us why you would want to buy a new car -- 'cause aren't you buying a new car?
Vigeland and Reed laugh
Reed: You got me. This is "gotcha!" journalism. Alright, sometimes you want to be an early adopter and I am buying a Nissan Leaf when it finally makes it over here from Japan. But the reason I'm buying new is because I want that car when it still has all the government rebates and when it still has access to the carpool lanes. And I think that after a year or two, that may not be available.
Vigeland: Alright, any other reason why you would want to buy a new car?
Reed: If you can buy a new car that doesn't depreciate steeply, then you don't suffer that 20 percent or 30 percent in the first year. There have actually been several times -- sometimes in recent past -- where when the Mini first came out, you could buy one, two years later, you could almost sell it for the same amount you bought it at. But it's a gamble and not every car is like that.
Vigeland: One of the other things that you do get with a new car is some sort of service program.
Reed: Absolutely. Warranties factor very strongly. People love the piece of mind of having a bumper-to-bumper warranty. However, if you buy a one- or two-year-old car and it has a four-year warranty, the warranties are transferrable. So really, maybe the sweet spot of used car shopping would be about two years, to buy a two-year-old car, own it for five years and then you would be owning on a very flat point of the depreciation curve.
Vigeland: Alright, shall we venture a little ways down the street to the used car lot?
Reed: Let's go see what hidden treasures are available.
Vigeland: Alright, so here we are at the used car lot. You've already given us the case for buying a used car. What are the downsides?
Reed: Well, the downside is that you don't get current technology. And of course, for most people the downside is -- there's all kinds of expressions, like you're just buying somebody else's troubles. It makes me so mad when I hear that.
Reed: Well, it shows that people are not willing to accept a small risk in exchange for a big reward. And the big reward is the cost saving of it. So you save on the purchase price, the registration costs, the insurance costs. The only place you begin to start losing is on maintenance and possibly repairs.
Vigeland: So many of these car dealerships promote certified pre-owned. Is there a difference between buying that and buying just some car either off another lot or from a private person?
Reed: Certified pre-owned makes the whole car shopping experience much easier for the ordinary person. And that is because it certifies that it's in excellent condition, so you don't have to take the car off the lot to your mechanic, have him inspect it and if they missed something, it's covered by an extended warranty. Basically, it takes used car shopping and turns it into a new car buying experience.
Vigeland: What about financing though? Isn't it true that you're going to get, say, a better APR buying a new car than you are a used car?
Reed: In most cases yes, and that's been one of the negatives to buying used cars. However, that's beginning to change a little bit. But it doesn't offset the initial large savings that you get in the purchase price.
Vigeland: Phil Reed of Edmunds.com. Thanks for meeting us out here on the lot.
Reed: My pleasure, thanks.