3

New or used?

Question: I wasn't sure whether to ask you or the Car Talk Car Guys about this - Maybe a joint consult? I just got half a book advance, and have $15,000 to do something with. My finances are secure - no credit card or other debt, own my home with an easy mortgage payment as well as a paid-off condo. I live off secure rental incomes and have $10,000 in regular savings account.

I've always invested in real estate and have no experience in, or much desire to get into stocks, even if they weren't so crazy these days. I'll get another $15,000 in September, but even $30,000 isn't much to work with in real estate these days. Meanwhile, I have a 1994 Honda Accord with 105,000 miles. It runs fine, but I'm thinking since I have the money and no real interest-earning investment ideas, perhaps I should buy a newer, lower-mileage, but still used Honda Accord.

Then a friend said for that price I could just buy a brand new Toyota or something. But I've always understood that the moment you drive a new car off the lot you loose 1/4 of its value. Is this still true? I'm not a new car person, just looking for another 15 year run of trouble-free driving and the best "investment" of my money. What should I do?
Thanks, Victoria, Washington, DC

Answer: When it comes to cars I'll defer to the Car Talk guys. But since you asked I'll throw in my two cents. Right now, there are good deals for both new and used cars.

It's disconcerting to think that when you buy a new car and drive it off the lot for the first time its value falls by some 20%. And that is after you've done comparison shopping, online research and final negotiations to get the best price possible. Still, it's an irrelevant fact if you buy new and own the car for a long time, driving it into the ground. How fast and how much it depreciates doesn't really matter.

Used car prices are cheap, and the used car business has become far more respectable over the past decade. Still, the one thing to remember when buying used is that you're inheriting someone else's problem with the car. I know nothing about cars. Engines are a mystery and repair shops are an alien. That's why I've always been a charter member of the buy new and then own for a long time school of car ownership. Some of my more car savvy friends would never purchase a new car, however. But they know what they are doing. I don't.

Here's my real question: Why spend the money? Why not just save it for now? Sure, you'll make a fractional rate of interest on the savings. But so what? Your car is fine. There's no need or rush to replace it. I would just put the money into your savings account, let it lie there safely and, when a good investment opportunity or a smart purchase comes along in the next couple of years, you'll have the money to tap.

By the way, what is the book on?

About the author

Chris Farrell is the economics editor of Marketplace Money.
Log in to post3 Comments

Chris

I always look carefully at your advice. Rarely have I thought you were off base. With this, I really think you are right on (as usual). I really appreciate your down-to-earth advice.

Thanks.

I'm a 57 year old car nut and I also agree that Chris' advice is right on the money. I'll add a few observations. First off, if you don't already have a regular, independent mechanic that you trust, find one. You can use the Car Talk web page to find recommendations for one in your area. Not only will a good mechanic keep your old car running reliably, but s/he will tell you when it is time to start thinking about getting a replacement.

In the meantime keep that money in the bank. When it comes time to replace the car, give yourself the car loan. That is, pay for the car from your bank account, and then set up 'car payments', including whatever interest you would have paid the bank, and make that payment to yourself every month. That way you'll always have money to buy the next car and you get to keep the interest rather than the bank!

Finally, that good mechanic gives you an important option when it comes time to get new wheels. If you really want to save money, find a nice 2-3 year old car and take it to your mechanic to check out. An inspection by a good mechanic will greatly decrease the odds of you getting a lemon. Ask your mechanic if s/he would buy the car.

On the other hand, there is something to be said for buying a new car. Owning a new car is just plain fun. If you don't need to save the most money possible, Chris is right that the depreciation really doesn't make any difference if you plan on driving it into the ground. And with a new car you can get just the color and features you want and you'll know that it has always well taken care of because you'll be taking it to a good mechanic.

As for picking out the right car, new or used, be sure to check Consumer Reports and pay close attention to the reliability ratings. These ratings are gathered from owner surveys and I have always found that they track very well with my own personal experience with my own cars and those of my friends and neighbors.

With Generous Support From...