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Whether you are buying a Chevy Cobalt, or a Mercedes S Class, the premium you pay for the luxury of a new vehicle over a used is steeper than you may think.
Let’s face it; there really is something about that new car smell. A properly conditioned two or three year old vehicle can be as visually appealing as a brand new model, but the American Consumer is willing to pay a great deal more to avoid the stigma associated with the purchase of a used car.
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 $1250 factory rebate. I confirmed this by requesting quotes from dealers in New England, and Houston, TX. The dealers that responded had similarly equipped vehicles within $500 of this price.
My next step was to determine what a similar 3 year old 4Runner with average mileage could be purchased for.
My first stop was Kelly’s Blue Book KBB.com. According to KBB’s website a 3 year old 4Runner with similar options is worth around $20700. 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 $21000.
On the surface it would seem that there is about a $9000 savings when buying the used 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 the vehicle 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) as well, that is based on the cars MSRP price and then depreciated each year thereafter.
The difference in price was almost $12500. To put this in perspective, you are spending $208 more a month over 5 year period for the luxury of that new car smell. The irony is that technically the car is used the second you drive it off the lot in your name.
Some may say 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 over which any major repairs are rare anyway. After that you are on your own. Also, the chances of you having $12500 worth of repairs on your vehicle from normal wear and tear over a 5 year period are low.
