We have 2 vehicles – mine was financed and is now paid off, and my wife’s is a lease with 6 months left. As we prepare to turn in that lease, we are researching what vehicle to pick up next to replace hers. When it comes to buying a car, there are many choices. What are some of the pros and cons of each? We discuss!
What are the options?
1. Buy a brand new car
Pros
It is very easy to get excited about driving a brand new car off the lot. Exciting, new, the feeling of being inside a state of the art motor vehicle that nobody has owned before, just for you, is powerful! Plus, since this is a car for my wife, isn’t this an expression of my love for her in a way? It certainly feels that way every holiday season when those cars wrapped in giant red bows show up on TV commercials.
Sentimentality aside, the obvious pros for a brand new car are that you have the manufacturer’s warranty for its full period, there’s no risk that any previous owners abused it in some way, and it will have the latest technology available.
And perhaps the biggest pro of all – if you’re short on time to research, the car buying choice stops and ends here.
Cons
Can anyone say “depreciation”? The value of a new car can drop by more than 20 percent over the first 12 months of ownership. This means that after only 1 year of driving around a $20k vehicle, you likely would not be able to sell it for more than $16k. That $4k is lost to depreciation. I started entering this information into a spreadsheet using a sample car we are considering, the Mazda CX-5, and then I found there’s a site that will do the math for you! Check out the below 5-year estimate using Edmunds online calculator.
That True Cost to own of $34,237 is in addition to the initial cash purchase price of $25,773. Obviously the calculations make some assumptions, largest of which is that you drive 15,000 miles/year, but I draw your attention to the largest component of the $34k – depreciation. Is anyone surprised that depreciation is the #1 cost of owning a vehicle over 5 years? More than the cost to fill it with gas and insure it over that span!
2. Lease another car
Pros
All the excitement and new car smell without the full commitment. You’re not on the hook for the full price of the car, as you are ‘renting’ it for a period of 3 or 4 years. You agree to an allotment of miles per year, usually 10-15k, and at the end of the lease period you give the dealer the keys and walk away. If the car hasn’t been damaged and you don’t exceed the miles, there’s no other obligation. Of course, you have paid hundreds of dollars a month for that ‘leasing’ privilege, but those monthly payments are lower than if you would have financed it, allowing you to “afford” a more expensive vehicle. At the end of the term, you’re in search of a car again.
I leased 2 vehicles between the ages of 20 and 23, and my wife is on her 4th consecutive 3-year lease. If you’re trying to “make the monthly payment work”, are not mechanically inclined to service or repair cars yourself, or maybe are just too busy to really look into the true cost, leases are very attractive.
Cons
Leasing a vehicle is the most expensive way to own a vehicle. A good summary on the math is here on this listener’s call into Dave Ramsey’s radio show. (and don’t dismiss that bike-riding mention) The danger with leasing is that it’s proposed by dealers as a ‘low cost’ way to get into a nicer car – who wouldn’t want that? But in reality, if you can’t afford to pay for the car outright, leasing car after car will be counterproductive to your long term financial goals. You need to look longer than the monthly payment, which can be hard to do if you’re still getting your finances in order. (but you’re reading this blog, so that’s changing as we speak!)
3. Buy a used car
Pros
Whether buying used from a dealer or a private party, we saw from the 5-year breakout above that allowing “someone else” to pay for the first few years of a vehicle’s depreciation means you don’t have to. That sounds pretty good. What also sounds good is that after a few years we have a better idea of the reliability of a vehicle, because more of them have been out on the road.
My wife pays a $7.99/month subscription to Consumer Reports, which we have been using to research things like this. One great feature they have is the “Comparison” of multiple vehicles at the same time. Take a look at the below image and tell me it wouldn’t help you make a better purchase decision! We probably don’t need to keep this membership all the time, but it does make sense to get it as you get closer to a larger purchase like a car.
Cons
To be honest, I haven’t bought a used car since high school! And that one my parents did for me. (shout out to my maroon 1989 Chrysler LeBaron convertible) Buying pre-owned definitely carries some uncertainty about how the car was maintained by the original owner. Did they smoke in the car? Occasionally have a drag race? Was using the right motor oil a concern of theirs? Who knows! From what I’ve read online, the recommendation is to bring the car you’re considering “to your mechanic” to have him look it over before buying. I don’t really “have a mechanic”, and would need to put some thought to that. How would it work? I am out test-driving a vehicle with the owner or a salesman, and I pass by a service shop and ask for a once-over, while the owner waits?
If you typically buy used cars, I would love to hear the steps you take in this area.
4. Share one car
How about don’t replace the car and go down to one? I actually love this idea of a husband and wife sharing one vehicle.
We have friends in Miami that survive off one car – the wife takes the car to work while the husband takes a free trolley from a stop that’s one block from their house to the metro, which takes him downtown within a block of his work. Is the whole arrangement where you coordinate your daily plans around one vehicle worth the savings? The answer is different for every family. With the “True Cost” data above, you can really put some numbers behind that decision and make an informed one, which ultimately is all we’re trying to do. It’s a healthy habit to challenge the norm in America where “everyone has their own car.”
Taking that further, using public transportation and owning no cars is hard to imagine for our area. There is a commuter rail that travels North and South, but it’s non-existent East and West. Definitely something to explore one day though.
5. Bike to work
Forget the car-sharing, I love this even more. We live only 2.6 miles from my wife’s work, in a beautiful tropical climate, she loves to exercise…. sounds like a slam dunk, right?! For those about to interject that South Florida is too hot, may I add that her work facility has a full gym and locker room?! Couple that with a $6 Uber on the days its monsooning out, and you’ve got a plan!
Just kidding. My wife would never go for it. In general though, it’s nice to live close enough to work where it’s even an option.
Final takeaways
- Making the transportation decision is a big one! After a house, cars are most people’s second largest purchase.
- Luke 14:28 says “Who of you wanting to build a tower does not first sit down and calculate the expense to see if he has enough to complete it?” The key to applying this wisdom is to give yourself enough time BEFORE a big purchase to actually do it!
- As far as paying for it, we said goodbye to debt about a year and a half ago, so paying cash is the only option for us. We’ve been saving up to have enough by February 2020 to make the purchase, which will likely be a 2-3 year old car.
How about you? Any big purchases coming up in your life? Would love to hear how you’re preparing for them!
I think the fear of not having the warranty in effect is a bit scary though when not buying a new car. I bought my car pre-owned, but I made sure it was certified so I could still have the benefits of paying less and the benefits of having parts of the manufacture warranty. When my car needed a brand new engine head, the warranty took care of it for me. So there are ways to overcome the fear of not getting a new car.