Friday, July 25, 2014

Driving forces: When buying a new car is smarter than buying used

By Michael De Groote, Deseret News National Edition

Published: Mon, March 3 12:45 p.m. MST

 Financial responsibility gurus often recommend buying used cars, but are there situations when a new car makes more sense?

Financial responsibility gurus often recommend buying used cars, but are there situations when a new car makes more sense?

(Wavebreakmedia Ltd, Getty Images)

Robert Kissell Jr. wasn't planning on buying a car — until he fried his Volvo's electrical components in 2012 by driving through a large puddle. This came after a move to a new state and also after spending $2,000 on a pet's veterinary bills — not to mention monthly student loan bills.

"The repairs outweighed the costs of getting another car," he says. "I didn't have a lot of income."

Kissell, who lives in Nags Head, N.C., and often drives eight hours to visit his family back in Pittsburgh, had to decide which would be the more frugal car to buy — new or used.

It is a decision made every day across the country. Nearly 35.6 million used cars were sold in 2013 versus 15.6 million new cars, according to auto information company Edmunds. Edmunds also found that 43 percent of car shoppers say they would only consider buying a new car, and 24 percent say they would only consider buying a used car, while 30 percent they are open to both. But which is wiser, the used car crowd or the new car crowd?

Old wisdom

"So many people still believe in the old wisdom that it is better financially to buy used than a new car," says LeeAnn Shattuck of Fort Mill, S.C. "It is not. It depends on what car you are looking at."

Part of the reason the old financial advice to buy used no longer applies is because the market and economy have changed, says Shattuck, who is also known as "The Car Chick" and runs a consulting service that helps people buy cars.

For example, she says there was a time when nearly 6,000 to 8,000 cars would go through a car auction in Atlanta in one day.

"Now it is about 2,000," she says. "Dealers are keeping all the good used cars."

The economy made people hold on to their cars longer, Shattuck says, and with the government's Cash For Clunkers program, the supply of used cars went down.

"This tanked the bottom of the market," she says. "What should be a $3,000 car is now a $6,000 car."

When some of her clients ask her to see if she can find a $3,500 car for them, she says, she laughs and says, "Do you want an engine in it?"

Shattuck thinks the used car market is slowly getting better but will still take years to fully recover.

Best deals

Jerry Mason says great deals can still be made buying a used car.

"The best deals and the worst deals come when buying a used car from an owner," he says. "The second-best deals come from buying a used car from new car dealers — if it is a different model than the new cars they sell."

On the other hand, Mason, an associate professor at Utah Valley University in Orem, Utah, who teaches personal finance, says his last two cars were new.

"I got 250,000 miles out of each of them," he says.

The advantages of a new car outweighed some of the financial benefits of buying used. One item on his list was the amount of time it might take to find a good used car and the time that might be lost in potential repairs. Mason commutes to UVU from his home in Cedar City, Utah, and so he needed a reliable car. And with a used car, the greatest risk is not accurately knowing its condition.

Managing risk

Kissell was particularly concerned about the risk of buying a used car and then having expensive repairs, like the $700 repair his wife's Pontiac Grand Am recently needed to fix a transmission line.

Shattuck says people need to look at the history of a used car, perhaps by purchasing a vehicle history report from CarFax.com. They also need to bring the car into an independent mechanic who can look for problems and determine how well it has been maintained. A car that has been driven only 10,000 miles is a much lower risk, she says, than a car that has been driven 80,000. The more mileage, the more critical it is that the car was well maintained.

"Did they bother to change the oil?" she says. "Fluids are the most important thing. Cosmetic problems (such as dings and dents) can be fixed."

Mason recommends looking at the April issue of Consumer Reports, which lists the long-term reliability of various car models.

"Some people simply trust a new car more," says Rob Drury, the executive director of the Association of Christian Financial Advisors. "As in an investment portfolio, it is important to make financial decisions that will allow one to sleep soundly at night."

Other factors

Depreciation is a big factor to consider when buying a new car. Shattuck says cars in the $50,000 range lose value quickly. This means that buying a slightly used Lexus or Mercedes could save a lot of money over buying a new one.

Other cars, however, may not depreciate as quickly — lowering the difference between new and slightly used.

Mason had his class look at 2009 Honda Accords. They found that for cars with about 50,000 miles, the average price was $15,600. Compared with the price of a new car, the difference of about $7,000 might make someone think it was close enough to buy new instead, with its fuller warranties.

"The used price could be relatively pricier than you think," Mason says.

Shattuck says oftentimes the difference between a new car and a slightly used car can be as low as $2,000.

"If you can buy new for $2,000 or $3,000 more, you may wish to consider it," she says. "Then you have a brand-new car with exactly the features you want, plus a full warranty."

The tipping point that would make Shattuck advise someone to buy a used car is if the difference is around $6,000 more. But other people may feel the cost savings would have to be higher before they would buy a used car.

Budget considerations

Shattuck warns people to not get too far into the monthly payment mindset. She said there is a big difference between making a monthly payment for 36 months and making one for 72 months. "Don't go any longer than 60 months if you can," she says.

But if people have a low budget, their choices narrow, and that low budget may decide for them whether they buy new or used, she says.

Negotiation is easier with new cars, Shattuck says, because there is so much information available on the Internet. Used cars are trickier because it is hard to know the ultimate condition of the car and how much money the dealer put into it.

If someone can only afford a $3,500 clunker, Shattuck says finding a decent car takes a lot more work. She is helping a client buy just such a car, and she has eliminated about 90 percent of the cars she has investigated.

Kissell ultimately decided to buy a new car because its warranty would allow him to better manage repair costs. He has been happy with his metallic black Chevy Sonic, and should he encounter another puddle the size of a lake, he won't be too worried.

"If it fries, it will be covered under warranty," he says. "And I can sleep at night."

EMAIL: mdegroote@deseretnews.com Twitter: @degroote Facebook: facebook.com/madegroote

Recommended
1. SillyRabbit
Layton, 00,
March 3, 2014

Sorry, no sale.

Which is it? :
Used cars might need repairs, or
New cars might need repairs.

If you are buying a new car because of the warranty, you are signing on the dotted line as an indication that you are expecting repairs on a brand new piece of machinery, therefore, you want protection from that impending cost. They call it "Peace of Mind."

When you buy a used car from a private seller, you can go and get the same mechanical inspection that the car dealer can claim they performed, talk with the person who drove the vehicle daily, and save yourself from the $2000 markup.

So, if you do need a $2000 repair within the dates that the warranty would covered, the difference is nil.
If you don't need the repair, you saved $2000.

Do your due diligence when buying.

2. samhill
Salt Lake City, UT,
March 3, 2014

The best deal I've ever made on a car was buying a brand new but hail-damaged Toyota Avalon in 1995.

It had 40% knocked off the sticker price and with body work to restore it, the total was still about %30 off the sticker. It has a "salvaged" title which hurts its resale value, but since my policy is always to drive a car into the ground, that was never a concern.

For almost 19 years it has performed flawlessly and been an absolutely **terrific** car and, apart from someone getting a car as a gift, the best deal I know of.

3. SundanceKid27
OREM, UT,
March 3, 2014

The finance professor teaches at UVU but lives in Cedar City?

Seems like a waste of money. More likely driving 6 hours a day to commute and this guy is giving financial advice?

4. Z
South Jordan, UT,
March 4, 2014

For years my dad would by worn out cars because they were cheap, then spend more on lost time and repairs than if he had bought a new car off the lot. I finally talked him out of that.

A cheap car isn't really cheap if you have to spend a fortune to get it running and keep it running. These days, if someone is selling their car most likely there is something wrong with it. How much time and money are you willing to invest to figure it out and fix it?

5. sknny tires fat skis
Cottonwood Heights, UT,
March 4, 2014

I've had lots of luck buying BMW's Toyota Avalons and even suburbans with 60-80K miles on them. They work great, saved me money. In fact, I looked at selling mey 2004 Avalon the other day on KSL and found it has not depreciated much in the lat 3 years. I was shocked. Not the sexiest car, but non-depreciating car is always attractive? Who even knew they existed?