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Time to Buy a Vehicle — New vs Used

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Wanderer Financial Stock Trading Newsletter - Buying a used versus a new vehicle

New vs. used and how long to keep a vehicle before replacing it are both issues I’ve pondered over the years. There’s no right or wrong answer and no one can definitively say, “This is what you need to do.” Breaking it down to a cost-per-mile basis helps put it in perspective for me, and it may help you too. Price and depreciation matter, but when we factor in how long we intend to keep it, we can paint a better picture. Sometimes it makes sense to buy a used vehicle, but there are also times where a new vehicle may be the more economical choice. Let’s do a cost-per-mile comparison on a couple of vehicles I’ve bought to see what my true cost was, and you’ll see what I mean about an “economical choice.”.

To make this comparison, you’ll need to make a couple of assumptions. First, let’s assume that for any given vehicle, its most trouble-free miles are the first 150,000. After that, the vehicle is basically a $4000 clunker. It’s possible you could get a little more or a little less for it, but a vehicle in decent shape with 150,000 miles currently averages about $4000 in the used car market. We could use a different amount of miles and a different price, but we’ll stick with 150,000 for this exercise. If you always sell your vehicles before they reach that many miles, you would simply need to find what the market rate is for a vehicle with the amount of miles yours has when you try to sell it.

If we keep the vehicle for the full 150,000 miles, it means that our net cost for the vehicle will be our purchase price minus our sales price, which we already assumed will be $4000.

Back to our examples and the two vehicles I purchased. One vehicle I bought new, and the other I bought used. The idea here is that we want to see if we get a better deal on a per-mile basis when we compare new vs. used.

When it Makes Sense to Buy a New Vehicle

The first vehicle we will look at is a 2007 Toyota Sienna minivan that I bought brand new. At the time my boys were in middle school and their friends came with us everywhere we went. We wanted the space and convenience that a minivan offers. I new I wanted a Toyota Sienna, and now I just needed to find one. My dad had instilled in me to “never to buy a brand-new vehicle” because of the amount of depreciation that occurs the moment it leaves the lot. While that’s true, it is varies vehicle to vehicle, and that variation plays an important factor on the used car market.

Out of habit, and with my dad’s voice in my head, I began my minivan search by looking for a used one. At the time, the average used Toyota Sienna mini van with 75,000 miles had an asking price of $17,000. They just didn’t depreciate at a rate that favorable to used buyers. That got me looking at brand-new minivans with zero miles. At the time, a new one was going for $26,000. Although the purchase price of the used vehicle was lower, when I did my comparison math, the cost-per-mile ended up being higher.

 

Toyota Sienna New Van Used Van
Purchase Price $26,000 $17,000
Value @ 150,000 miles $4000 $4000
Net Price $22,000 $13,000
Miles available 150,000 75,000
Cost per mile  $0.147/mile  $0.173/mile 

 

Another problem with the used vehicle was that someone else had already used half of its most trouble-free miles. At $17,000 minus the $4000 we will get back when we sell it, the net cost is $13,000 for the remaining 75,000 “good” miles. This equates to $0.173 per mile. Let that sink in for a bit. The person who bought it new got the best miles out of the car, at a lower price than the person who bought it used! They got to advantage of the warranty, the new car smell, and the enjoyment of a brand new vehicle. In this case the resale value (depreciation) of the vehicle really matters. If we applied the same exercise to a different vehicle or vehicle brand, the result would be different because the resale value is different.

When it Makes Sense to Buy a Used Vehicle

After my boys grew, their friends got vehicles of their own, and my van had reached the 150,000 mile mark, I sold it for the expected $4000. But what to replace it with? With my boys driving their own clunkers, my requirements for a vehicle changed. I decided on a jeep. I need to be able to plow snow, my wife and I like to do a little off-roading, and well, I’ve always wanted a jeep. This time I found a used Jeep with a plow and a treasure chest of aftermarket accessories that had 14,000 miles on it. The original owner paid $45,000 for the jeep with all of the goodies. I was able to pick it up for $24,000. Let’s do the math.

 

Jeep Wrangler New Jeep Used Jeep
Purchase Price $45,000 $24,000
Value @ 150,000 miles $4000 $4000
Net Price $41,000 $20,000
Miles available 150,000 136,000
Cost per mile $0.273 $0.147

 

With 14,000 miles, the used jeep still has 136,000 “good” miles left before it reaches clunker status. The remaining miles will only cost 14.7 cents per mile. At that price, we can see that the miles are much less expensive when buying this vehicle used. The story for the original owner isn’t as favorable. After spending $45,000 and receiving $24,000, he paid a total of $21,000 for 14,000 miles, or $1.50 per mile! Compared to the remaining 136,000 miles, those first 14,000 miles were very expensive.

 

Purchase Price $45,000
Sales Price $24,000
Net Cost $21,000
Miles when sold 14,000
Cost per mile $1.50

 

The next time you’re in the market for another vehicle, figure out the cost-per-mile on a new vs a used one. You’ll gain a greater perspective.



Wanderer Financial