The following post is one of a series of articles I am writing detailing our recent cash purchase of a “new” family vehicle. From deciding which make and model to buy, to closing the final deal, follow along on our car buying adventure!
According to research by Dr. Thomas Stanley of “The Millionaire Next Door”, nearly 37 percent of the 385 millionaires surveyed, preferred buying used vehicles; And rarely (if ever) did these “rich people” finance them. I found this statistic very surprising. I thought to myself “if I had over a million dollars would I purchase a used vehicle?” Before I read Dr. Stanley’s book, the answer would have assuredly been “yes”. So what is it about buying “new” that discourages more than a third of millionaires?
Curious, I decided to do some research to determine how much money an individual can actually save when buying a slightly used vehicle as recommend by many leading financial experts.
To make this comparison as fair as possible I needed to choose a reliable vehicle that hadn’t had any significant changes in design over the last few years. Also, since depreciation would be the number one factor in the savings associated with a used vehicle purchase, I wanted to compare vehicles with a relatively low rate of depreciation. After identifying several vehicles that fit the above description, I settled on the one that I was most familiar with, a moderately optioned Toyota 4Runner 4X4.
According to Edmunds.com the new “True Market Price” for my example vehicle should be approximately $29775 including a currently available $3000 factory rebate. I confirmed this by requesting quotes from several dealers in New England, and Houston, TX. The dealers that responded offered similarly equipped vehicles within $500 of this price without any additional “negotiating”.
My next step was to determine what a similar 3 year old 4Runner with average mileage could be purchased for.
The first stop was Kelly’s Blue Book, a trusted online source for used car values. According to KBB’s website, a 3 year old 4Runner with similar options is worth around $17000. I confirmed this by browsing the inventories of dealers and private party ads and found the average market price for a 3 year old 4Runner was indeed around $17000.
On the surface it would seem that there is about a $13000 savings when buying the used vehicle over a new vehicle but the savings go even further. To fully appreciate the cost savings I broke down what it would cost to finance, register and insure both vehicles in my home state over a 5 year period. Keep in mind that in addition to sales tax, my home state (Maine), has a vehicle excise tax (road tax) that is based on the cars MSRP with adjustments made each year to reflect the depreciation of the vehicle.
The difference in expenses over a five year period including additional finance charges (if I financed instead of paying cash), excise tax, and insurance premiums, was over $3000. This brings our total savings of purchasing a new car to over $16000.
To put this in perspective, you are spending $266 more a month over 5 year period for the luxury of that new car smell. That’s right folks, more than $266 PER MONTH!! The irony is that technically, a “new” car is considered “used” the instant you sign the bill of sale.
Some may argue that I am not considering the better reliability and piece of mind of the newer vehicle, and that any repairs to the new vehicle will be covered under warranty. I argue that most warranties including Toyotas only cover the first 36k Miles, a period during which any major repairs are rare anyway. After that you are on your own. Also, the chances of you having $16000 worth of repairs on your vehicle from normal wear and tear over a 5 year period are extremely low.
Read the Entire Series:
Part 1: We Need a New Car
Part 2: The Case for Buying a Used Vehicle
Part 3: How We Decided Which Car to Buy
Part 4: Determining a Used Vehicle’s Fair Price
Part 5: Our First Attempt to Buy a “New” Vehicle
Part 6: Negotiations With an Auto Dealership WE BOUGHT A CAR!
{ 3 comments… read them below or add one }
Great job! Way to do your research and get the car that’s right for you.
Thanks Miranda!
Be sure to check back this week for the remainder of the multipart series on our recent cash purchase of a “new” family vehicle!
The case for buying a NEW VEHICLE: I own a business, and drive myself. When I had used cars in the past, it was a problem in my schedule to have it towed, get a rental, spend the time at the dealership, etc. Having an new car is not an expense for me, I consider it an asset…….it makes money for me when it is working….just like the other equipment my company owns.
This may not work for non-self employed folks.