Posts Tagged ‘car buying’

The Late Model Used Myth (Part 2: Import) UPDATED

July 9, 2008

Part one of this series discussed the small difference between the price of a two year old used domestic car and a brand new model that could be purchased with incentives and dealer discounts. The results showed that a little money could be saved on the used model but nothing worth writing home about. Unlike and undesirable car like the Sebring, many models from Honda and Toyota are in high demand due to gas prices. In my opinion this makes buying a used one a dumb decision. I’ll use a 2007 Toyota Corolla as my example.

2007 Toyota Corolla LE with Automatic Transmission and 12,000 miles.

Retail KBB Price: $16,880
Trade In KBB Price: $
14,175
Private Party Price:
$15,495
2009 Corolla LE with Automatic Transmission MSRP: $16,650

Going by these numbers the used car actually costs $30 more than the new one! You would be an idiot to by the used one at the retail price. The new model’s price doesn’t include the $660 transport fee but the 2009 model is a brand new redesign and is probably worth the premium. The car still magically goes up in value once the dealer gets it’s hands back on it but at least the amount between trade-in and retail is a little easier to swallor. With gas prices so high it’s unlikely that a dealer is going to negotiate much on a new or used model like this but some people think it’s easier to get dealers to compete with each other over new cars instead of used. This is because they can compare apples to apples and mileage isn’t a factor. Cars with high resale value like the Civic and Corolla are always going to sell close to their new price and in my opinion it makes little sense to buy a used one.

UPDATE: From the Wall Stree Journal,

“Some used cars’ prices are even approaching the levels of new models. The average 2006 Honda Civic costs $16,118, or 86% of what a new 2008 model costs. The average price of a used 2006 BMW Mini Cooper is about 81% of what a new model costs. And the long-sought-after Toyota Prius costs 87% of the new-model price. Typically, three-year-old used cars cost between 50% and 60% of their new equivalents’ prices.”

Even more evidence that the token advice of buying a late model used car doesn’t make sense a lot of the time.

The Late-Model Used Myth (Part 1: Domestic)

July 7, 2008

Chrysler Sebring

Many personal finance “experts” agree that buying a late model (less than two years old) used car is the best car to buy. They say that buying a slightly used car eliminates paying that dreaded depreciation and keeps money in your pocket. I don’t think this issue is as clearcut as they make it out to be.

I will use a 2007 Chrysler Sebring Touring for my example. Both The Millionaire Next Door and The Automatic Millionaire talk about how financially savvy people drive slightly used domestic cars like the Sebring

2007 Chrysler Sebring Touring

Retail KBB Price: $17,120
Trade in KBB Price: $11,500
Private Party Price: $14,260
2007 MSRP (New): $19,645

Suze Orman says ” New cars depreciate 20 percent to 30 percent the second you drive them off the lot.” That statement is definitely true in this case, but notice how the car magically gains this percentage back once it’s in the dealers hands? Doing the “smart thing” and buying the used model at $17,120 will lose you $5620 if you have to trade it back in.

Some will say that you never buy at the dealers asking price. That’s usually true so let’s say you manage to get the dealer down to the private party value of $14,260. This is a better deal as you will only lose $2760 if you have to trade it back in. The thing is most people never pay MSRP for a new car either. The Sebring has never been a hot seller and right now Chrysler is offering a $4500 cash allowance making the new model $15,145. For a thousand dollars more than a used model I would buy the new one. That’s one full year extra warranty and it won’t have been used and abused like many “fleet/rental/lease returns”. Certified models are an option but you usually pay a premium for it. Buying private party is the best option but most people selling a slightly used car are going to have to sell it for more than they owe, which might not be that low of a price.

Other Things To Consider

1. Dealers buy their used cars at factory auctions and usually pay far less than the KBB trade in value. When I worked at a Chrysler dealer we bought used Sebrings at auction for around $8500. They would often make up to $7000 on some deals. For some people the idea of a dealership making that much money off them may make them want to purchase a new model.

2. Dealers might not even end up offering the full trade in value because they can buy them at auctions for so much less, meaning no matter what you buy new or used, you still stand to lose a good chunk of change if you have to trade it in.

3. A new model is usually always going to end up having 10,000 to 12,000 miles less than it’s used counterpart. In a couple of years it may actually be worth more than the used model due to the lower mileage.