1. In order to run for 15 years, or 225,000 miles (with the national average of 15,000 miles a year), you must buy a new car and maintain it regularly.
2. Many new cars, even with proper maintenance, do not survive 200,000 miles. The “good bets”, according to the article, are SUVs, pick-up trucks, and hybrids. This leaves out the significant segment of standard mid-sized sedans, a preferred choice of many average American families.
3. The price comparison is made with a Honda Civic EX bought every 5 years, accounting for depreciation, insurance and maintenance cost.

This is a great advice for those who do heavy driving. In an earlier post, I suggested a similar “buy and hold” strategy for new car buyers. But my main suggestion there is to get a reliable used car every 5 years (or after it dies on you, whichever is later). This is for those who have a relatively short time horizon with the same car, mainly because of changed circumstances in family, job and such other that cannot always be foreseen.

1. Edmunds: A great site for information on all kinds of new and used cars, excellent reviews and how-to-buy guides.
2. Kelley Blue Book: An excellent place to look up used car prices, and also has lot of other information on both new and used cars.
3. CarBuyingTips: A definitive source for tips for buying new and used cars.
4. Samarins: Another source of car buying tips that is my favorite.
5. CARFAX: The place to visit for used car history.
6. Buying a used car: A Federal Trade Commission site offering facts for consumers.

You want to buy a used car (why? because of this and this), and have a budget of $10,000. Which one car, among the several hundreds of different types out there, should you choose? For the sake of this discussion, we narrow the field down to the 4-door sedan cars in mid-sized segments. (Everything said here holds for most other types of cars as well.)

While choosing the car, first think about your needs. Do you drive a lot? With gas price touching $3 a gallon in most places, a car that gives 25 miles a gallon costs $450 a year less than another that gives only 20 miles (assuming a yearly driving average of 15,000 miles) – a net saving of $2250 over 5 years. If you drive on snowy roads, you may need ABS (“anti-lock braking system”) fitted to your car. (ABS comes standard in most new cars these days, but it was offered as an option in older models.)

After you have made your choice of the type, it is time to hit Internet. Look up the online inventory of all new car dealerships in your neighborhood (leave out used car dealers – it is harder to find a reliable car there), and also check out personal sales ads such as craigslist and classifieds in your local newspaper. New car dealers keep a variety of used cars that are traded in by customers who swap them for new cars. These are privately owned, and generally well maintained.

Besides, dealers may add a few months of warranty (more on this later) that gives you some peace of mind. The downside is having to deal with the dreaded salespeople, if you are not well prepared (worry not, this guide will teach you enough to face him with courage). A private seller, by contrast, is ready to sell without much hassle and also the car is usually cheaper. But the problem here is that you must buy his car “as is”, without any accompanying warranty.

Make a list of at least 10-15 cars based on your budget and other needs. (Dealers often “mark up” the price by several hundreds and even a few thousand dollars, which can be negotiated down. So if you like a car in the inventory that costs more than your budget, do not discard it just yet.) Ask for the VIN (“vehicle identification number” that uniquely identifies every car on the road) and odometer reading (number of miles the car has been driven so far) for each car on your list. The lower the mileage on the car, the less is its wear and tear (a rule of thumb is that the total number of miles should not exceed 15000 multiplied by the car’s age in years).

It is time to research your car »

We have seen in the last post how depreciation eats away at the asset value of a car. Still, there are surely other benefits of owning a new car? Let us start with the obvious one.

1. New car lives longer than a used car. Ask yourself: How long am I going to use the same car? Most people do not drive theirs for more than 5 years, and many in fact change cars after every 2-3 years. There are several reasons for this: change in family circumstance or job requirement, or simply the urge to own the latest “People’s choice of the year”. Technology has made modern cars quite durable, and a 3-5 year old car that is well maintained can easily run for 5 or more years relatively trouble-free.
2. New car gives less trouble over long term. As I just said, a well-maintained and low-mileage used car, with regular care, can run several years just as trouble-free as the new one, and costs several thousand dollars less to own.
3. New car comes with few years of factory warranty. Most new cars have at least 3 years of comprehensive factory warranty, and additional years of “powertrain” warranty (which covers the engine and some other parts that rarely give any trouble over the warranty period). But, thanks to companies like Warranty Direct, you can get an extended warranty for your used car that costs only $1000 or thereabout, and is just as comprehensive. Also, a car that is less than 3-year old often carries the remaining part of its factory warranty that you can still use (more on warranty issues later in this series).

Still, if you know that you are not going to change your car in the next 10 years or more, buying a new car probably makes better sense. But, it is hard to predict what can happen over the next decade; as I said above, your job or family circumstance may change that may make you get a bigger or more fuel-efficient car. In such cases, keeping a 3- to 5-year time horizon in mind while shopping for a car is a good idea, and a used car is a better choice.

On to Picking a budget »

Let us look into car depreciation more closely. Depreciation, as we all know, means gradual decline of the value of your car as time passes, due mostly to wear and tear. New car dealers do not want to talk about it, and new car buyers certainly do not want to think about it. On the other hand, those of you who want to buy a used car can get good benefit out of it.

The picture below shows how the purchase price of a car depreciates as it gets older, from the time the car rolled out of the factory till when it is 10 years old. (I used Money-zine calculator to make this graph.) The dark blue line gives a low rate of depreciation, as you would expect with a reliable car such as a Honda Accord or a Toyota Camry. The red line shows a high depreciation rate, for example with a Ford Taurus or a Hyundai Sonata. The graph assumes that the purchase price of the new car is $22,000, which is typical for a mid-sized family sedan without any luxury feature.

In the first year itself, the price falls an astonishing 18-28%. In fact, as soon as the car is driven out of the dealership lot, its retail price (what you paid the dealer) drops to the wholesale price (what the dealer would pay you to take the car back) – the substantial dealer fees and any licensing fee and tax that you paid are already lost. After only five years, the car is down to half its original price, and can even lose 70% of its value. And by the 10^th year, you can buy it for as low as $2000 to $6000.

Is there a lesson here? You bet. What it tells us is that, instead of paying $22,000 for a new car, if we choose one that is only 1-year old, we get practically the same car for $4000 or even $6000 less! At 5 years age, the car is available for under $10,000. That is a saving of $12,000 which, if invested at a gettable 8% per year (compounded), will grow to over $17,600 in the next 5 years.

Of course, depreciation alone may not settle the issue in favor of a used car (after all, a new car is a new car is a new car). So, read on to why you should buy a used car »

Now you know why I do not like paying extra thousands of dollars for a new car, when a reliable used care can do just as fine. Looking at the larger picture, the used car industry in America is twice the size of the new car industry in terms of the number of vehicles sold each year. Most of these buyers choose a used car because of budgetary reasons. For those of you who can easily afford a new car, I am going to argue in the next couple of posts that it still makes better investing and practical sense to own a used car instead.

If you already made up your mind to buy a new car no matter what, here is a short list of some excellent resources that will hold your hand through the process step-by-step. For the rest of you, picking the right used car demands some time. (We often spend a week planning a $200 vacation; we can surely spare a weekend researching a $10,000 car.) This guide will hopefully make the process easy and relatively painless. It is divided in the following eight posts, and I recommend reading them in sequence (at least from step #3):

1. A close look at car depreciation.
2. Why should I buy a used car?
3. Picking a budget.
4. Making a list.
5. Researching your car.
6. Checking the car out.
7. Wrapping it up.
8. A note on extended warranty.

Let us begin by taking a close look at car depreciation »