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| The Basics |
How to save $10,000 on your next
car
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Buying used is only the beginning. You'll
save thousands on depreciation, finance charges and insurance
-- and thousands more by putting what would have been monthly
payments to work.
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By Jennifer
Mulrean
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 | If you're like most people who set out to
buy a car, you wander onto a dealer's lot and before you know
it you're driving away in a shiny new car with an equally
shiny new car loan for an amount somewhere north of $10,000.
But before you plunk down thousands of dollars to buy
your next car, ask yourself this question: Would you rather
have a brand-new car or a late-model used car and $25,000 in
cash?
That's how much you can save by buying a used car
instead of the latest model and then investing the money you'd
otherwise be paying on a new car loan.
The hidden
factor here is depreciation, the steady decline in the resale
value of any vehicle that you buy. Take a look at the chart
below, and you can see what happens to the value of a typical
new car.
As a rule of thumb, figure that a car's value
drops by half every four years. For new cars, the bulk of that
depreciation occurs in the first year of ownership. A new
$30,000 car is worth only $22,500 after just the first year --
a full 25% less. Over the next three years, its value will
fall by another 25% off the original price to
$15,000.
The longer you own the car beyond this, the
smaller the bite taken each year by depreciation. If you
bought the same car when it was four years old for $15,000 and
resold it when it was eight, it would be worth about $7,800,
according to CarPrice.com's Depreciation Calculator. So you
save almost $8,000 over four years just on depreciation by
buying used, to say nothing of added savings from insuring an
older vehicle.
(To compare the costs of insuring two
different cars, you can get free insurance quotes online from
sites such as MSN Money and Progressive. Both sites offer
quotes from multiple insurance companies. Also, Esurance
allows you to compare insurance costs for up to four cars at
once.)
But that's just part of the story. Let's take a
look at the difference between buying a 2003 Lincoln Town Car
and a similar 1999 model. The invoice price of the 2003 model,
according to Edmund's.com, is $40,661; the cost of a 1999
Lincoln Town Car is about $16,000. The table below shows you
the net cost of buying new versus paying cash for a used car
and investing the difference. Overall, you come out almost
$25,000 ahead!
| New vs. used |
| Lincoln Town Car |
New 2003 |
Used 1999 |
| Purchase price |
$40,661 |
$16,000 |
| Tax & license (8%) |
$3,253 |
$1,280 |
| Total initial cash outlay |
$17,280 |
$17,280 |
| Amount financed |
$26,634 |
$0 |
| Total finance charges* |
$3,980 |
$0 |
| Maintenance** |
$610 |
$5,651 |
| Total 4-year cost |
$48,504 |
$22,931 |
| Resale value after 4 yrs. |
$20,310 |
$8,352 |
| Net cost after resale |
$28,194 |
$14,579 |
| $638 monthly payments invested over four years
at 10% |
$0 |
$37,132 |
| Cash available for on next car purchase |
$20,310 |
$45,484 | | *48-month loan of $26,634 at 7% with monthly
payments of $638 for a total of $30,614. Despite the
proliferation of 0% financing, many buyers simply don’t
qualify.
**Maintenance costs
driving 15,000 miles per year, based on Runzheimer estimates
for 2001 and 1997 4-door sedans. First three years of new-car
maintenance covered under warranty.
Your total
net cost after four years is more than $10,000 less for the
used car. And by investing your monthly payment instead of
repaying a car loan, you've saved enough to pay cash for a
brand-new Lincoln, if you want. The caveat, of course, is that
you could be unlucky enough to suffer the early demise of your
transmission or need some other major repair that blows a hole
in your estimated $1,400 annual maintenance budget, though
certified used-car programs are a great way to combat this
(see below). Also, the 10% return on your investment is a
historical average, and can be hard to come by in bear market
like we've had for the last few years. But even cutting the
annual return to 3%, you still come out with $32,468 in
savings after four years of investing your $638 monthly
payments. Add the $8,352 you get from selling your used car
and you end up with $40,820 for your next car purchase --
roughly $20,000 more than you'd have after selling the newer
model car.
Not all cars age
equally
Keep in mind that depreciation is a function
of supply and demand. Some cars lose value faster than others,
which can create bargains for used-car buyers. A 1998 Saturn
SL2, which had an invoice cost of $11,480 new, will cost you
close to $8,600 even with the 40,000 miles on it. But a 1998
Cadillac Sedan DeVille, which had a dealer invoice cost of
$34,646 new, can now be bought in good condition with 40,000
miles on the odometer for about $20,000, according to
Edmunds.com.
You can check IntelliChoice.com for a
list of "best values" for new and used cars and trucks. J.D.
Power also does an annual study on the most dependable older
vehicles. For 2002, Lexus won for the eighth-straight year.
Infiniti, Acura, Honda and Toyota rounded out the Top 5. You
can also look up reliability ratings on MSN Autos. These will
give overall ratings and itemize the types of problems that
different makes and models experience.
Used-car shopping in the 21st century
Now that you're convinced that used cars are the
way to go, where can you look for the best deals? You can
search by price, specific car make and model, or by category,
such as "passenger cars" or "sport utilities," on sites such
as MSN Autos, AutoTrader.com, Autobytel, AutoWeb and
CarsDirect. Most offer detailed vehicle write-ups and
classified listings you can search by geographic area. And
Edmunds.com's "True Market Value" calculator will give you an
idea of what people are really paying for a specific car in
your area.
The advent of "certified used cars" has
changed the used-car landscape dramatically. Because these
cars must pass inspections, they are usually in excellent
condition. According to the J.D. Power study on dependability,
the differences between certified and non-certified vehicles
are especially apparent among non-luxury car makes.
Twenty-five percent of non-luxury buyers of certified used
cars rated their vehicle outstanding, compared with 16% of
those who bought non-certified cars, the study said. Even
better, certified cars come with warranties, thereby
eliminating one of the major worries many people have when
buying used.
You can check specific program
requirements at IntelliChoice.com. It rated Honda as having
the best pre-owned certification program for non-luxury makes
in 2002. Jaguar was the top-scoring luxury
program.
Even when not buying a certified used vehicle,
there are some ways to eliminate unnecessary risk. One is to
run a "lemon check," which is offered for free by Carfax on
most auto sites. Autopedia also has a good table of the
specific state-by-state requirements for what qualifies as a
lemon (use the link at left).
A more extensive Carfax
report costs $15 (or $20 for an unlimited amount of reports),
for which you'll need the vehicle identification number (VIN).
Among other things, this will reveal whether the car was
salvaged, had a history of odometer fraud or had multiple
owners, allowing you to debunk any 'grandma from Pasadena'
hard sells.
Fuel
economy
Given current fuel costs, it doesn't hurt to
research this before making your final decision. You can look
up individual cars' annual gas costs and make side-by-side
comparisons with other makes on the U.S. Department of Energy
and the Environmental Protection Agency's Fuel Economy site.
The site also lists the amount of carbon dioxide emitted
annually in addition to a car's miles per gallon -- for the
city, on highways and a combined rate. (These calculations are
based on 45% highway driving, 55% city driving, 15,000 annual
miles and a fuel cost of $1.70 per gallon, though you can also
customize these values.)
It also has a list of least
and most energy-efficient cars, including diesel, electric and
electric-hybrid vehicles, and a fuel-cost calculator. Using
the site's example of a car that gets 20 mpg versus one that
gets 40 mpg, both burning $1.70 gas, driving the 40 mpg car
would save you $2,550 over four years (based on 15,000 miles
per year).
So next time you're in the market for a new
car, stop for a second and consider just how much you're
really willing to pay for that new-car smell.
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