What is the risk involved in buying a used car vs new?

Question

A depreciation chart tells us that buying a two year old vehicle will save us a heavy cost of depreciation. However, if I keep the vehicle for 10+ years this initial cost averages down a good deal. With the added benefit of keeping the car an extra two years. What does statistics say about the risk of buying a new car vs used? For example, the average person that flips a car after only two years may not care about the the long term damage caused by negligence of regular maintenance. Similarly for a short term lease. What is the demographic of people that keep cars for two years?

I want to analyze this risk and compare it to the cost of buying a new car where I will personally guarantee quality maintenance for the life of the vehicle.

Answer 1

There are several distinctions that need to be made in order to properly address this question. For one the make and model needs to be considered. Each such make and model have different rates of depreciation. Another is the age of a car made in comparison. You cite a two year old car, but the variables will be quite different if you buy one that is five years old, then one that is ten or two. Also a well maintained five year old car can easily also last 10 years, the time you cite owning of a new car.

However, in general, these are the things to consider in evaluating the risk:

1) Asset loss. If you own the vehicle to term, and sell, you will realize the loss of an asset. You buy a 30K car, and in 10 years it will probably be worth around 5K. About 2500 per year. You will lose less buying a 2 year old car, and driving it 8 years. To really avoid asset loss buy a 10 year old car and drive it for 3 to 5 years.

2) Being forced to sell prior to term. While there is probably not much difference in the asset loss of owing a new car 10 years, and owning a 2 year old car 8 years you might be required to sell prior to the term in question. Most often this will happen because of destruction of a vehicle. A loss in the first couple of years of ownership is especially devastating because of the rapid declining in values.

3) Higher ancillary costs. When you pay more for a new car, that sales tax amounts to something. Additionally you may pay higher insurance or licensing fees.

In some occupations or status in life you may be better owning a newer car. Salesmen who have to portray a level of wealth in order to make sales should drive only late model "clean" cars. The same may hold if you are single and on the hunt for a mate.

In short there are a lot of assumptions and variables one has to make. Very difficult comparison to make. However, if you save up and pay cash for a car, you know you can afford it!

Answer 2

There are no guarantees with used or new cars, regardless of who owns it; they can all suffer mechanical problems. A used car, that still is under the manufacturer's warranty because of low mileage is likely the best scenario for you. Get it checked out by a mechanic to ensure nothing glaring is wrong with it before purchasing. Various publications, such as Consumer Reports, discuss the makes/models/years of cars that are, statistically speaking, the most reliable over time.

Keep in mind that lease agreements do require lessees to keep their car in a certain condition, else be subjected to hefty fees. Most people that lease vehicles are low-mileage drivers and just like to have something shiny and new ever couple of years. That being said, I don't think there's a "demographic of people" that this encompasses. Some people end up not being able to afford their car, some have to relocate and can't take it with them, some have an unexpected life event (oops, triplets!) and need a different style of vehicle, etc.

The best way to mitigate the risk of a used car is to do your research about what make/model is best for you, what is a fair price for said vehicle, and have a mechanic check it out before purchasing. Who knows, that car could get crushed by a piano next week anyways.