Saturday, April 7, 2007

Buying a New Car? Think Again. Used is a Better Value.

I have never owned a new car. I hope I never will. Why? Simply put new cars depreciate too quickly to be a good value. The Saab Weblog has a good example of a typical new car depreciation curve. You will notice that in year one that the depreciation curve is VERY steep. While I like the smell of a new car, the smell of burning dollars more than negates new leather in my opinion.

When I shop for a car I typically try to find one that is 3-4 years old and being sold by a private buyer. The reason to avoid dealers is pretty simple: they mark cars up a lot. A simple look at the difference between private party and dealer prices on the Kelley Blue Book should illustrate this point. While some people feel it is worth the extra money to get a super clean car and have a throat to choke if there is a problem a week or two into driving the vehicle, I think you can still do better with private parties if you take the proper precautions. is a great place to start your search for a private party vehicle.

When dealing with a private party I suggest doing the following things: First, pull a Carfax report on the vehicle. Make sure the title is clean (i.e. not a salvage title) and that the car has not been in any major accidents. If there is a problem with either of these things I would move on to the next car; there are plenty of them out there! Second, I would be sure to ask the owners why they are selling the car. If the answer sounds fishy, I would walk away. Third, ask the owners for their mantenance records and how they cared for the car. If they can't produce records or tell you how often the oil was changed or the car was serviced, I'd look elsewhere. If all these things check out, chances are you will come out ok with the car (I have so far).

Should I finance a car? Generally, I'd say the answer is no. Auto loans fall into a category I'd call "bad debt" where the interest is not tax deductible (in most cases) and the item you purchased depreciates. "Good debt" includes mortgages for a home or loans for education -- look for more on these in other posts. Chances are if the only way you can afford a car is to finance it, you shouldn't be buying a car that is so expensive. Whenver you take a loan the finance company tries to extract a fair rate of return from the money they lend to you. That drives up the cost of owning your car. Generally, I would say the same rules apply for leasing. In most cases you will want to avoid it.

So the next time you are in the market for a "new" set of wheels be sure to remember the smell of burning money is stronger than the smell of a new car and buy used with cash.

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