Are used cars really cheaper to own?

I really want to buy a used car.  Used cars require less outlay than a new car.  However, they’re used, they have miles, they may require repairs.  Maybe owning a new car isn’t that bad, right?  I don’t have to buy tires or do anything except oil changes for years.  Right?

Also, people say “used cars lose <insert some huge percentage> % of their value when you drive them off the lot”.  Except my 3 year lease has a 67% residual (meaning the manufacturer thinks it will only lose 33% of its value of 3 years).  And when you research 3 year old used cars, they look not that much less expensive than new cars.

What’s up with all of that?

 

Cost to own a car

Lets take a look at Edmunds who put together figures for actual costs to own a vehicle.

True Cost To Own ®

Edmunds True Cost to Own® (TCO®) is proprietary data that helps you estimate the total five-year cost of buying and owning a vehicle – including some items you may not have taken into consideration. A benefit of using our TCO tool is that you can easily compare the five-year totals for different vehicles and make a more informed choice.

I’m going to pick a 2017 Honda Accord Touring.  According to Edmunds 5 Year True Cost To Own:

Year 1 Year 2 Year 3 Year 4 Year 5 5 yr Total
Depreciation $6,902 $3,093 $2,720 $2,411 $2,165 $17,291
Taxes & Fees $2,707 $228 $208 $190 $174 $3,507
Financing $1,318 $1,051 $772 $479 $172 $3,792
Fuel $1,752 $1,805 $1,859 $1,914 $1,972 $9,302
Insurance $1,404 $1,453 $1,504 $1,557 $1,611 $7,529
Maintenance $221 $679 $466 $1,659 $2,258 $5,283
Repairs $0 $0 $111 $269 $393 $773
True Cost to Own ® $14,304 $8,309 $7,640 $8,479 $8,745 $47,477

 

Looking at costs by year:

Its easy to see that by far the most costly year to own a car is Year 1, driven predominantly by Depreciation then taxes and fees.  Interestingly Year 3 is the cheapest, followed by Year 2, then 4 and 5.

But lets get to the heart of the variance.  From the above, its clear that fuel and insurance are small components of the overall model, only a 13.5% increase in Year 5 over Year 1.  Also, Taxes & Fees are unavoidable year 1 costs and would be the same regardless of the age of the car (although will vary depending on the price paid).  Financing, while decreasing year of year, again would be the same regardless of whether the car is new or used, it just depends on the price.

So, there you have it.  Purchasing a 1 year old car results in the best value.  You’ve avoided the biggest single cost (first year depreciation), low maintenance low repairs for the next 4 years.

The maintenance and repair costs in Years 4 or 5 don’t come close to exceeding the depreciation cost in Year 1 but by Year 5, maintenance does start to exceed Year 2.

 

Cost to buy a car

Now lets take an empirical look at the actual cost of the vehicle.  According to Edmunds, in my area I can purchase this same car as a new 2017 model for $29,112 which appears to be a significant discount over the MSRP.  That seems incredibly low, in fact.  Perhaps because it is October 2017 and the 2018 models are available?  Dealer prices are frustratingly opaque without typing in my email address, which I’m not going to do.

Lets try KBB instead looking at prices for a new 2017 Honda Accord Touring.  It has a “fair purchase price” of $32,367.

Ok, so now what about 1 year old used models.  Looking 2016 model year used cars, I’m going to use Carmax, as its very transparent no-haggle pricing is an easy baseline.  Of course you can probably find a cheaper one elsewhere if you’re prepared to negotiate.  I found only 2 models priced at $28,998 and $29,998 respectively.  Taking the cheapest one and calculating the difference off the KBB new price.

(32,367 - 28,998) / 32,367 = 10.4%

Its $3,369 or 10% cheaper than the new car.

Hmm… so where did that Year 1 deprecation of $6,902 go?  Why does the math not stack up?  Well, Carmax has to make a profit, so they’ve got a margin built in there.

We’ll try a different way to value a 1 year used car – take a look at the KBB Trade-in value.  This is what a dealer would pay for the car before re-selling it.  I priced a 2016 Honda Accord Touring with 15k miles:  KBB says $23,488.  Doing the Math again between the new car price and the trade-in value after 1 year:

32,367 - 23,488 / 32,367 = 27.4%

Its $8,879 or 27% less than the new car price.

So that’s closer.  In a nutshell, that 1 year old car really is depreciating but… you can’t buy it at that depreciated price, as the dealer is going to add in their profit margin.  You might be able to get closer by purchasing private party and trying to negotiate to as close to the trade-in price as possible.

Applying that to each of a 1,2,3 and 4 year old car (I couldn’t go back further as it looks like there was not a Touring model for 2012), take a look at the gap between the prior year value and current:

That has the approximately the shame shape as the depreciation graph.  The first drop is huge since its between the new car price and the trade-in value.  Probably to make it a better view I should have taken the dealer cost of the car in each subsequent year, but that’s a lot of KBB browsing (you have to start over every time you change the year) and their site is very slow and bloated with ads and adware.

 

Conclusion

From the above I’m going to conclude:

  • A car will depreciate significantly over its first year and as a 1-yo car buyer you will benefit somewhat from that, but a lot of it will go to dealer profit margin
  • Ultimately, if you’re going to keep a car “forever”, its depreciation doesn’t matter, so if you can get a great deal on a new car you’ll save money on maintenance and repairs over the first few years.
  • Long story short, when you buy any car, you should factor in maintenance repair given its age and over the lifespan that you intend to keep it, not just its purchase price.
  • You’d be doing yourself a favor by purchasing a used car that has the best and cheapest maintenance history.

 

 

 

 

 

 

 

 

 

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