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Is a used car still a good deal?

Because of a variety of factors, prices are high now.

By MSN Money Partner Jul 25, 2011 10:03AM

This post comes from J.D. Roth at partner blog Get Rich Slowly.

 

Because new cars tend to lose value rapidly, the conventional wisdom is that it usually makes more sense to buy a used vehicle instead of a new one. But is this rule of thumb always true? Has it changed in the past few years?

 

That's what Lily wants to know. She writes: 


Post continues after video.

 

Time Moneyland recently reported that used vehicle prices have hit a 16 year high. On the radio, car companies are asking people to trade in their used cars because their inventory is low. When I look at used cars, I can't believe how much they're selling for. For example, one car dealer is selling a 2010 Honda Civic LX with 44,000 miles for $17,575!
If I were to buy a new Honda Civic (with no miles, without any discounts, and using only the features I care about), its MSRP would be $17,715 (including destination charge) for a 2012 version. (Or $18,925 MSRP for the DX.) I keep hearing that if you want to save money, you should only buy a used car. But is this only true for some makes and models?
I'm looking for a reliable, standard, low-cost model that will last for 10 years. I don't care about adding a lot of features to my car. Is that why some of these used cars cost so much? Because they're loaded with extra features I don't care about?
I guess my question is: When looking for reliable transportation in a standard low-cost car, is it better to buy new or used? And if used is better, do you have any advice on getting the prices down and finding a good car that isn't a lemon?

In general, new cars do lose value quickly. But due to a variety of factors, prices on used cars are indeed high right now. As with many personal-finance rules of thumb, the "new cars drop in value the moment you drive them off the lot" guideline isn't true all the time. Your specific circumstances may differ. In your town, the car you're looking for might hold its value better (or worse) than average.

 

Also, a new car isn't always a bad idea. If you intend to own the car for many years -- to drive the thing into the ground -- then a new car can often be a good choice. My wife prefers to buy new cars, and I think they're a fine choice for her. My next Mini may be purchased new, too.

 

The key to making a smart choice is to take your time and crunch the numbers, just as Lily is doing. If you're in the market for a vehicle and not sure where to start, do some online research. When I was shopping for a used Mini Cooper a couple of years ago, I spent a lot of time playing with Web tools like these:

  • MSN Autos has a list of best and worst depreciating vehicles. (The best? The Mini Cooper, which holds 67% of its value after three years. The worst? The Ford Freestar, which loses 75% of its value.)
  • Consumer Reports has an even more detailed list of the best and worst used cars. If you're considering a used car, this is a great place to start your research.
  • The Edmunds True Cost to Own calculator lets you see how much it costs to own and operate an average vehicle. You can enter the year, make and model of the car you're looking at, and the calculator will break down a number of costs, including depreciation. (Also see: How does your vehicle compare on insurance rates?)
  • Kelley Blue Book can help you determine whether the price on the used car you're eyeing is too high (or if it's a steal). The site also now has a perfect car finder tool.

Once you've picked some candidate cars, you actually have to make the purchase. It's here that even the best-laid plans can fall apart. Buying a used car can be filled with all sorts of pitfalls. It helps to do be as prepared as possible.

 

Last December, Consumer Reports posted a step-by-step guide to buying a used car. Once you've done your initial research, use this guide to help you score a good deal on a used vehicle. It'll help you be aware of common car dealer tricks and better negotiate a fair price.

 

All of this is theoretical, though. Lily wants to hear actual reader experience. Where do you come down on the new car vs. used car debate? Have you purchased a used car? What was the process like? If you bought one recently, did prices seem high? Do you have any hints or tips to help Lily find a good used car at a fair price?

 

Extra! Here's an old article from Edmunds that describes how to drive a (nearly) new car for (almost) free. Though a new car loses value quickly, many models then maintain their value for several years. Buy one of these models -- and sell it before the value starts dropping again -- and you can minimize the effects of depreciation. (See also Dave Ramsey's "Drive Free, Retire Rich" presentation.)

 

More on Get Rich Slowly and MSN Money:

13Comments
Jul 25, 2011 6:45PM
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The new/used debate will be entirely regional.  If I lived in Detroit, I would look at used entirely different than I do in the Southwest.  Down here, there are no harsh winters with road salt, high-humidity summers, salty sea air or clearcoat destroying ozone pollution.  I buy 100,000 mile cars all the time and, since I have been logical in my purchases - buying models more likely to be bought new by mature, meticulous people with funds and time to ensure the cars are maintained, I have had very little in upkeep costs. 

I kept the Subaru for 10 years and an additional 90,000 miles.  My major repair was the A/C compressor.  My Ford Thunderbird only had the A/C and clutch die, while my Dodge Ram had to have the $8 thermostat and both radiator hoses replaced at 170,000 miles.  These were original pieces from the factory.  One of the Hondas was  in my possession for 35,000 miles and 4 years.  The timing belt jumped 4 teeth, causing all sorts of valve damage, but the shop that changed it as part of routine service covered the repair under its own service warranty, incuding sending the head out to a machine shop.  The other Honda was bought with over 165,000 miles on it, and sometime around 200,000 miles I killed off the transmission.  After repair, I sold it for as much as I bought it for with 240,000 miles on it, so my only real cost over the 5 years was the $2400 for the transmission.  I've made bad purchased, too.  The Hyundai, Eagle and Dodge Daytona were all well abused before I bought them, but I was more naive then.

Of course, when a car is old and has high mileage, if a catastrophic break down occurs, you have spent much less and can move on more readily than if you bought a new or barely used car and have the same thing occur.  But this only works in some parts of the nation.  In other regions, the elements wear a car down so severly, its nearly worthless after 5 years.  Some places it only makes sense to buy new.

Jul 26, 2011 1:55PM
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I'm just going to say this... your an idiot if your buying a car for an investment. You buy a car to use it, so use it. That is all.
Jul 26, 2011 2:23PM
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In 2006, I bought a 1987 BMW 325is with 49,700 miles on it for $5,000.  Today it has 98,000 miles on it and runs perfectly.  Of course I do all my own regular maintenance.  The only thing I've replaced is the master and slave clutch cylinders.  It's also in mint condition physically.   Read a book called, "The Automatic Millionaire".  One of the first points the author makes is NEVER tie up a lot of your cash into a depreciable asset (like a car).  There are great used car deals out there, you just have to dig for them.  Of course, if you've got the money to buy a new car with cash, go for it.
Jul 26, 2011 2:27PM
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Depending on your credit, even a low 7% rate on a used car add up to thousands of dollars in interest over the life of the loan. I bought an 11' Ford Mustang GT at 0%.  For me, the new Mustang was cheaper than the used one over the life of the loan, plus I get the full warranty.  GM has 1.9% on select vehicles now and I saw 0% on Silverados recently.  If you are financing a car, sometimes its a much better deal to buy new.  The only way to find out is to get a loan calculator and take a look at the total of payments either way and see.
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There are a lot less used cars around because of the governments failed "Cash For Clunkers" program. This removed far  too many good used vehicles from the roads and from the market.
Jul 26, 2011 3:00PM
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They may be selling for lots, but the dealers aren't paying lots.  We took our 2005 Mini Cooper S Convertible to a dealer for an appraisal, wanting to trade it in on a larger car.  The dealer had a near-identical car on his lot (same year, convertible, fewer options, 10k fewer miles) that he had listed for $18,900.  He offered us $13,500 for our car AND refused to budge on the price of the price of the car we were interested in.   Needless to say, he can keep his larger car. 

 

It's just hard to beleive that the auto dealers are STILL playing the same games.

Jul 26, 2011 2:01PM
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In 2000 I bought a 98 windstar for $10,000 less then its original sticker, I am still driving it. Just recently put big money into it.  Buy used and keep them up and it will pay you back. i always figure it cost 300 a month for new, so any repairs that average less then that are worth it.
Jul 26, 2011 2:57PM
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Purchased a 2009 Prius w/ 50,000 miles on it for $14,500 last year...It appreciated to $18,500 last month.  After doing the math and considering how much cash  I would have to come up with I decided to trade up to a completely new 2011 model Prius and keep it for a decade.

 

Question is...What greater fool is going to buy my old one with 55,000 miles at the dealer for $20k when another $4K buys a brand new one with only 15 miles and warranty on it???

 

Strange days we live in folks...Up is down,black is white & Wrong is Right

Jul 26, 2011 2:56PM
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This is going the way of the real estate market did.  People are going to be upside down on their loans when the bottom falls out if they buy at today's over priced value.  Also banks only finance up to a certain amount before you need to kick in more cash.  the books are not keeping up with the market. 

 

Also banks are not loaning money like they were if you had a pulse, thus less new car buyers trading in their like new ones for the used car market.  Also less new car inventory.  Dealers are no longer going out on a limb either to fill their lots with all the colors and options. 

 

Some people blame the Cash for Clunkers program.  That does have some merit, but it's not all related to that program. 

 

People need to shop the vehicle and not buy the first one that comes within eye site. That's impluse buying, a want vs. a need!

 

 

 

 

 

 

Jul 26, 2011 4:48PM
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most of the used trucks I have researched and some of the cars that are 0-3 years old are priced within 5k of new ones.  Not really worth it IMO.  Might as well buy new.
Jul 26, 2011 3:32PM
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OK Eric Wilmot, I read the article, followed by your post: "I'm just going to say this... your an idiot if your buying a car for an investment. You buy a car to use it, so use it. That is all." 

So with that logic, then anyone who doesn't hand over an extra $2000 cash to the dealer or owner for no valid reason is also an idiot.  The entire point of the article is to minimize your loss.  All vehicles depreciate from new.  Some bottom out and appreciate (like a $2.5M 1970 Hemicuda convertible) but nearly all the rest DON'T.  So, trusting that your vehicle will be worth less when it is time to replace it, why not attempt to minimize the difference between what you bought it for and what you sold it for?

Jul 26, 2011 2:53PM
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Through my lifetime, most of the cars I have bought were used and affordable enough to pay cash. Buying a car is a hit and miss purchase that you should have an expectation of having a cash reserve to pay for minor repairs or replacements, such as a brake pad replacement, tires, fuel pump, alternator, or water pump. The used cars I have mainly purchased are Chevy trucks and cars from the simple fact of being easier to repair and find the needed parts. Saying that, I recently have been helping my children find used cars and what I have thought were good purchases ended up being nightmares with in a few months to a year. I have lucked out with a fairly stripped down Chevy Cavalier which continues to run great with great gas mileage. So, I guess you need to consider how much you are willing to sink into a used car after the purchase to determine the cost effectiveness and whether or not you are good at not being taken on the deal.

Jul 26, 2011 1:41PM
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the reason why used cost more is because of the idiot president with his cash for clunker to boost auto dealers. now their isn't as many used, like 1000 specila, i have a 1999 gmc jimmy 212,000 miles and in ct. dmv tells the town it is worth 3150.00 if i drove that to the dealer he would maybe give me 500 for a trade in, but he also can turn around and sell it for whatever because their isn't cash for clunkers anymore, they were suppose to go to the scrap yard.
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