There's something special -- and tempting -- about getting a brand new car. No one else has played street-racer, forced the glove box shut, spilled soda in the cup holders, or left paw prints on the leather. And for a while, you'll look like you've really arrived.
Just understand that even before the new car smell fades and all the little nubs wear off the tires, the value of your vehicle will plunge off a cliff. If you have to part with it early, you'll be dealing with some harsh realities that can leave you underwater in a big way. Unless you’ve bought an exceptionally in-demand model, a new vehicle typically loses about 20 percent of its original value as soon as you take delivery.
"The big cost is that hit the minute you drive off the lot," said Consumer Reports automotive test engineer Jake Fisher.
Dropping Like A Stone
This plunge, called depreciation, doesn't stop after bringing the car home, either. Cars routinely lose a third or more of their original value over the first year of ownership.
For instance, Vincentric, a firm that calculates vehicle ownership costs, anticipates that a 2010 Chevrolet Malibu LS sedan will lose more than 40 percent of its value in the first year. That’s more than $7,600! Over five years, that number jumps to $12,600. Compare this to buying a used 2008 Malibu, if you will. While the new Malibu carries an MSRP of $21,825, Vincentric estimates that it would sell at a market price that’s closer to $18,100. The used model is only about $12,400, and it will lose just $2,600 in its first year, and $8,000 over five years.
However, there are other ownership costs to take into account. Vincentric predicts that repairs and maintenance together (including tires, brakes, oil changes, and everything but gas), will be about $2,900 for the 2010 Malibu over five years, but about $5,900 for the 2008 Malibu over that same period. The company has some other costs they add to their calculations, as well. But when they do all the math, the overall operating costs of the new 2010 Malibu in just its first year, amounts to more than the sales price of the used 2008 Malibu. Sure, the repairs and maintenance went up for the used car, but not enough to offset the tremendous depreciation.
“It’s very difficult to make a financial case for a new car,” said Vincentric president David Wurster.
Paying The Price For Luxury
Luxury makes are particularly hard hit by depreciation. For instance, the 2010 Mercedes-Benz S600 is expected to lose about $55,000 in value from its $150,000 sticker price in the first year. It will continue to depreciate over $40,000 more in the following four years.
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Think of this as the cost of owning the vehicle in its most appealing, attention-getting years. Does it mean that much to you? If you're almost as happy to be seen in a nearly new vehicle as a new one (and honestly, who else is going to tell the difference with a Malibu?), Consumer Reports says that the best values are two- or three-year old models, as they're past the steepest part of the depreciation curve, yet have some of the latest safety features and a lot of service life left.
Making this an even better play is that late-model used cars (up to even five-year-old ones) are more reliable than ever. Consumer Reports found this year that today's five-year-old vehicles have about one-third fewer problems than five-year-old vehicles did in 2005. Three-quarters of three-year-old vehicles have no problems over the course of a year, while two-thirds of five-year-old vehicles have no problems.
Vehicles do typically need some major repairs by their seventh or eighth year, so the ownership expenses go up somewhat. But even on a 15-year-old car with 200,000 miles, what you would spend annually is likely a fraction of that first-year depreciation, said Fisher.
But who wants to drive around in an old beater? To a lot of people, it doesn't matter that the numbers don't make sense. That said, some vehicles make more sense new than others and if you are one of those practical shoppers you should still run the numbers.
For instance, the Toyota Tacoma, known for its strong resale value, suffers about $5,600 of depreciation in its first year, from a $19,205 sticker price (and a $18,200 market price). Allow $2,500 for repairs and maintenance in five years for the new 2010 Tacoma, versus nearly $5,700 over five years for a used 2008 Tacoma that costs roughly $14,000. This lower number for repairs and maintenance actually helps bring the total cost of ownership for the new Tacoma right in line with the used 2008 model, when you calculate it over five years: about $35,200 to $35,000, according to Vincentric. In this case, it certainly makes sense to start with the new one.
New Car Peace Of Mind? Maybe Not
The other advantage of buying new is, of course, that you'll get a full factory warranty and probably won't end up stranded by the side of the road. Vehicles become more likely to have major issues in their seventh or eighth years, typically, but a five-year-old vehicle isn't that much more likely to have a serious breakdown than a one- or three-year-old vehicle. Overall though, you're unlikely to take advantage of the roadside assistance that comes with most new cars, for anything but a flat.
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"If you really want to optimize your value, look at a late-model used car," says Fisher, like a one- or two-year-old vehicle with 25,000 miles. Many might mistake the vehicle for being new, while you won't lose thousands to depreciation.
Concerns about safety are another top reason to want a new car. But if you're looking at the least expensive new cars, you might be safer in a late-model used car.
“You can’t say that a 2008 will have more safety features than a 2007," said Mike Calkins, manager of the AAA approved auto repair program. "But manufacturers have realized that safety sells."
If you’ve been considering smaller cars because of price, but you’re especially concerned about safety, you might want to consider a late-model midsize sedan. “People tend to think about features, but the size and weight of a vehicle is important, too,” said Insurance Institute for Highway Safety (IIHS) spokesman Russ Rader.
Electronic stability control, a lifesaving, must-have safety feature, can be tough to find in an inexpensive small car from just a few years ago, Rader said, as are side airbags in some models, so "if a small car is what you want to buy, it would then be crucial to get a new vehicle."
Beware Finance “Deals”
The other tempting thing about new cars is that automakers often make them easier to buy. Attractive new-car financing, often available only on new vehicles through the automakers own finance arms, can sometimes offer low payments and zero-percent financing options that you wouldn’t be able to get on a used car. But again you'll want to run the numbers, as these offers are typically offered in lieu of other money-back incentives, leaving you paying close to full price in the end.
Calkins agrees that certified pre-owned (CPO) programs, which put late-model used cars through a stringent automaker-supervised inspection, present great alternatives to new cars as you’re “getting more than just the standard warranty, and you do have an added assurance of quality.”
One final aspect to consider is insurance. Be sure to call your insurance company and get a quote for any vehicle you're considering. In a vehicle’s first few years, as long as its financed, you'll need to have the vehicle fully covered. For most vehicles, given the same driver, insurance doesn't cost much less for a five-year-old vehicle than it does a new one.
While this is a lot of dizzying numbers and factors to weigh, the bottom line is that it almost never works out in favor of buying new. But whether a new car is really worth it depends as much on you, what you need, what you want, and what you can afford. "The purchase of a vehicle is far different than buying a toaster," remarked Calkins.
Of course, to salespeople, realtors, and others whose success depends on image, being seen as a trendsetter can make buying new worth it. Otherwise, if you really dig that new-car smell, be prepared to pay. You might be better off getting one of many new-car-smell air fresheners and taking a few deep whiffs.