Wednesday, July 9, 2014

New or Used?

Accidentally enquiring minds want to know: is it cheaper to buy a used car than it is to buy a new car?

This is an easy question. It’s just like this one: is it cheaper to send your children for a Jewish education in Israel than it is in the U.S.?

Obviously, yes. It’s really just a matter of some trade offs.

Cost by Cost

There are essentially six costs for a car: 
  • Money Costs
  • Depreciation
  • Maintenance
  • Insurance
  • Gasoline
  • Registration & “Tests”
This is rather obvious, but I usually write about obvious things: some of these costs change significantly between used vehicles and new vehicles and some of them do not. Understanding how much cheaper a used car will be is simply a matter of understanding the differences in these costs. This actually not that hard at all since many of the costs do not change much.

I don’t even think we will need to use the skipping tags.

Things to Ignore

The easiest costs to ignore are Insurance, Gasoline and Registration & “Tests”. These will not change significantly between the new and used versions of the same car.

For the purposes of this blog, I will also ignore Money Costs. This cost includes anything you have to pay in order to borrow money to buy a vehicle (“interest”). This will obviously vary depending on how much you need to borrow and what interest rate you get.

Also included in Money Costs in the “lost opportunity” for any money that you spend to buy the car. This should be calculated as the amount of investment income you give up by spending the money rather than investing it.

I am ignoring Money Costs because they vary greatly. Also, interest rates are very low right which means that difference in Money Costs between the new and used cars will tend to be negligible for most people at the moment.

The costs that you should not ignore are those for Maintenance and Depreciation

Maintenance Not Like It Was

The common wisdom today is that “cars are more reliable than they used to be.” In fact, I found one nice article about this that you could read instead of reading this blog.

Actual costs are hard to estimate because it will depend on the particular make and model of the car and your driving conditions. However, in order to write this blog, I need to propose something. Here goes:

Years
Maintenance Costs
1-3
As low as possible
4-6
A bit higher
7-9
Probably significantly higher
10+
Lots and lots

This analysis of cost is based on my experience owning the Mitsubishi Grandis, which we bought along with everyone else in my neighborhood just over 3 years ago. During years 1-3, our only maintenance costs where the regularly scheduled oil changes. We did not have anything that needed to be fixed, but if we had, it would have been covered by the warranty. Now in year 4, the only additional maintenance costs we encountered is to replace the two front tires for 800 shekel.

Judging by the way the Grandis drives (“still like new”) and from the problems that my friends have had with theirs (“none”), I anticipate that the low maintenance costs will continue for at least another 3 years.

In years 7-9, my guess is that the maintenance costs will start to rise as parts will wear out and need to be replaced. Beyond year 10, I cannot imagine that the costs will not rise sharply. At this point, it will definitely be time to sell the Grandis to a large family living in a settlement.

Everything else being equal, it would make sense to have the car for just the first few years when maintenance costs are low. Which brings us to…

Depreciation

The major difference in cost between a new car and used car is the amount of value you lose in the depreciation of the vehicle.

The lease on my company car ends this October, and I have already started to accidently research a replacement in the “supermini” category. To give you a sense of the size of a supermini, think “Matchbox” but with a working engine.

To get a sense of the cost of depreciation, I used the price list on yad2 to track the value of the Toyota Yaris with an automatic transmission in the basic trim level:

Year
List Price
Depreciation
New
 101,700.00
---
1
 72,900.00
28%
2
 70,900.00
30%
3
 67,300.00
34%
4
 63,400.00
38%
5
 54,600.00
46%
6
 47,900.00
53%
7
 44,200.00
57%
8
 41,500.00
59%
9
 38,700.00
62%
10
 34,200.00
66%
11
 30,700.00
70%
12
 28,575.00
72%
13
 24,900.00
76%
14
 22,800.00
78%

Perhaps more interesting is to look at the depreciation cost several years at a time:

Year
Total Depreciation
1-3
34,400.00
4-6
19,400.00
7-9
9,200.00

I find this interesting because what it says is that the premium to own the car in years 1-3 of years 4-6 is only 15,000 shekel. That is a chunk of money, but not entirely unreasonable when you consider that the used car will come with somewhat higher maintenance costs and has the risk that previous owner did not care for it as well as he should have.

Or, perhaps stated more simply: you could absolutely make the case that 15,000 shekel is money well spent not to have to talk to an Israeli used car dealer.
                                                                                       
There would be no fault in buying a new car like this. However, before you do, you should consider that not all cars depreciate the same way and there may be a good bargain out there if you keep looking.

Bargain Hunting

It seems to me that there would be a good bargain in the used car market if you can find a car that is both highly reliable and has higher than average depreciation. Fortunately, this appears to be much more than just theoretical thanks to Israel’s #1 car seller: Hyundai.

Hyundai cars are very reliable and sold extensively to rental and leasing companies which has the accidental result of flooding the used car market with discarded almost new vehicles.

In the supermini category, here is the depreciation on the Hyundai i20:

Year
List Price
Depreciation
New
97,800.00
---
1
77,800.00
20%
2
71,000.00
27%
3
60,100.00
39%
4
53,600.00
45%
5
48,500.00
50%

This car already depreciates more than the Toyota Yaris, but the bargain comes in once you factor that the asking price for used cars that are sold by rental and leasing companies starts automatically at 15% below list price.

I don’t know how much further you can negotiate from there, but it seems to me if a rental or leasing company has a lot full of leftover Hyundais, you would be in a very good position to negotiate.

The potential bargain is magnificent:

Discount from List
Price
0%
60,100.00
15%
51,085.00
20%
48,080.00
25%
45,075.00

At a 20% discount to the list price, you would getting a 3 year old Hyundai i20 at less than 50% of the new car price. I’m not an expert, but it seems to me that you are receiving way more than 50% of the value of the car. If this exists, it would be a very good deal.

My Car Algorithm

Buying a new car can be perfectly reasonable. If that is the direction you plan to take, I suggest looking for a car with historically low depreciation. On the other hand, there could be an opportunity to save a lot of money in the used car market if conditions are right.

The way I shop for a car is to first find the car (or cars) that I would be willing to buy new. Then, I look to see if there are any good opportunities to buy it (or one of them) used.  

How much you need to save to make it worthwhile to buy the used car is a matter of personal preference (and I suppose, your level of wealth). I personally will be looking to get a 45% discount from the list price of the new car in order to purchase the 3 year old version instead. 

11 comments:

  1. https://www.youtube.com/watch?v=ZEFwqcaBTHQ

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  2. Two comments:

    1. Older used cars use more fuel so that is a factor. modern cars are more fuel efficient so that is a minor consideration.

    2. Used cars are mostly lease and rental cars as you mentioned, but those cars are treated very poorly. employees take them off road and stress them like they would not do if they owned the car. I think they will have much higher maintenance costs over the long run that is not good.

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    Replies
    1. #1 - Yep, good point. #2 -- maybe. There is definitely some risk, which is why I would want a steeper discount. However, plenty of people do not abuse their cars. For example, I treat my lease car very nicely which would make it an outstanding buy at a 15% discount.

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    2. you are a very rare exception. be warned!

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  3. does the mechif insurance cover your car is hit by a rocket from the Hamas?

    leave the radio on tonight!

    Gush Dan 89.1 or 102 FM

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  4. You have to check the leaflet the people of Gaza send out to be sure.

    https://twitter.com/IDFSpokesperson/status/488208190874480640/photo/1

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  5. Is this a good time to invest more in the Israel market. It looks like the market is very favorable for the Tel Aviv index!

    http://www.bloomberg.com/quote/TA-25:IND/chart

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    Replies
    1. A great accidental question -- added to the backlog.

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  6. The blog must be shut down while we are under attack

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    Replies
    1. Certainly not! Or, the terrorists would win.

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  7. Some great tips, thanks. I need a new car, but wasn't sure what car were any good.

    ReplyDelete