Friday, September 10, 2010

New cars are cheap! : Part One

So, I decided to sit down and crunch the numbers on how much a new car really costs over time. The results were astounding and completely unexpected. I had always thought of new cars – even cheap new cars like Hondas - as a luxury… something you had to pay much more for than a used car, the “uneconomical choice”. But it’s looking like, when done right, it can actually be very affordable.

To come up with these numbers, I started with the price of the new car. Then, I went on and searched listings for one, two, three, etc –year-old cars and recorded the average prices out of thousands of national real-world used car listings (the site does this for you at the bottom of the page so it’s just a matter of typing in the year, make, model, and trim and copying the result). To find the overall “cost per year” at any given point in time, you simply subtract the corresponding value of the car from the original price and divide it by years of ownership. For example, if you buy a $20,000 car and it is worth $14,000 three years later, you divide 6000 (the difference in value) by 3 (the amount of years you’ve owned it) and find that you have spent a mere $2000 per year to own that car.

The chart above is for my Camry. The original transaction price was $21,900 (in retrospect I could have gotten a much better deal… but I digress), the other figures all come from the average Autotrader values (4-cylinder LE models only). First year depreciation is steepest, after that it levels off at a slower rate. The sharp 5-year-mark dropoff is no doubt due to that being the older generation (2006 model), from there onwards it declines rather steadily.

Granted, there are a lot of disclaimers here. For one, these result only apply if you pay in cash, since financing will not only cost more over time but also bind you to the car for a predetermined amount of years… I think 60 months is the typical term now, depressing as that is. I have yet to finance any car so I don’t really know.

Second, this can only really work if you choose a car that’s affordable in the first place (i.e. well under $25k) AND has stellar resale value, which these days pretty much limits your choices exclusively to Toyotas and Hondas. Again, fine by me, I decided quite a bit ago that those are the only the way to go for various other reasons.

Of course, maintenance and upkeep are not taken into account here either, but up until year five these costs should be minimal. My Camry actually has completely free maintenance for the first two years, courtesy of Toyota. Even if maintenance wasn’t free, assuming you have oil changes every 5,000 miles and that you drive no more than 10-12K per year, the cost will be under $100 per year. Hardly worth taking into account. By year four or five, you may have to start to factor in brakes, tires, and major services such as the 30K and 50K scheduled maintenance intervals (which will run in the hundreds), at which point it will be somewhat more expensive. Until year five any mechanical repairs will be covered under warranty, after that, they have the possibility to show up. Given that the cars in question, though, are Toyotas and Hondas, they should be able to easily make 100,000 miles (about 8 or 9 years) without any mechanical issues. Actually, some American and Korean cars are even able to that these days, but they still won’t be worth as much when it comes time to sell.

So, what conclusions can we draw from this? Well, the perfect amount of time to own a new car looks to be five years. At this point, the depreciation curve has leveled off, but additional costs in maintenance and repairs haven’t reared their ugly heads yet. By keeping it more than five years, you are risking repairs out of warranty that could add significantly to the overall cost of owning the car. Even so, plenty of people do this, and it is not unlikely that you will reach 10 years without too many out-of-pocket costs. To be safe, I’d pick five years since the “cost per year” (sans maintenance/repairs) is only a bit higher than in year 8 or 9, and there’s a lot less risk since it will be under warranty. Plus, that way, your car will never descend out of “late-model” territory, which is certainly a nice benefit.

For around $2000 per year you can buy a brand new car every five years. Sounds too good to be, true, doesn’t it? Just remember to choose a CamCord, pay in cash, don’t drive more than 12,000 miles per year, and it keep it for at least 5 years.


Martin van Duijn said...
This comment has been removed by the author.
Martin van Duijn said...

Some good information you give here. I buy new, pay cash and have litte costs. I only tend to keep my cars for a very long time, even though it would be more rational to trade after five years or so. Still, my first MX-5 fetched 1/3 of its new price after nine years and 120,000 kilometers - but that has to do with the fact that it is a very popular car to buy used, as it is an extra 'fun' car for most.

But despite reason, 20,000 - 25,000 euros to buy a new car is still a huge amount of money for most of us, and a I yet have to convince myself to go to a dealership to replace the ancient Honda. That has also to do with the fact that the right side of my brains wants a Fiat, but the left side tells me to buy a hybrid Toyota.

Max P. said...

Indeed, $20,000+ isn't a small amount at all, and getting that together (and parting with it) is certainly the most difficult part of the whole process. It will probably take me at least three or four more years to build up that amount, and given that I will still be in college (and that my Camry will still be quite new at that point) I doubt I will want to empty it all at once on another new car.

Having said that, the point I was making with this post was that it isn't as much as it seems in the long run, you just have to look at it as though you will be getting most of that money back when it comes time to sell. So while you may be parting with 23,000 at first, you will really only be spending 10,000 or so over the next five years.

Mark Brown said...

Certainly an interesting and compelling way to look at it. There are many people who subscribe to this method as well, and very successfully so. And for those who can't buy a new car with cash (ie. most people), new cars these days are still often cheaper, or very similar in price, to late model used cars, as financing interest rates are hugely better on new cars. Then you can take into account any available incentives...the list goes on. It's quite surprising how cheap new cars can be.

Unfortunately, I also have a house, etc., to pay for, and kids haven't even come along yet, so buying a new car with cash is not currently an option for me. I also drive more like 25,000 miles per used unfortunately remains the best option for me.

Mark Brown said...

When I commented before I forgot about this, but many people choose the Year 2 - Year 5 route as well. Buy the car after it's two years old and sell when it's 5 years old. That way you still get the warranty and such, and you have a current or else late-model car, and you avoid the big depreciation hit.

Using your numbers and methodology here, doing the 2-5 equals a cost of only $1,398, even lower than the year 10 value...

Max P. said...

Thanks for doing that calculation, Mark. The "come in at year 2 or 3" method was going to be Part 2, but I hadn't crunched the numbers yet.

So it appears that late-model used cars can be even cheaper yet, though still not quite as much as I would have thought.

Another thing about this is that it all hinges on these values being exactly right... if you can't sell your car for such-and-such amount at year "X" for whatever reason, this chart doesn't mean much at all. Actually, the whole concept of resale value is largely based on prediction in the first place... just because a 2006 Camry is worth $11,000 when it is five years old does not automatically mean that a 2011 Camry will be worth $11,000 when it is five years old.