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Evaluate financing when deciding new car vs. used

Remember the 40% rule: New car value fades that much in just 3 years

By Gary Foreman

The New Frugal You
New Frugal You columnist Gary Foreman
Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website and newsletters. He writes "New Frugal You," a weekly Q&A column about frugal living, for CreditCards.com

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Question for the CreditCards.com expert

Dear New Frugal You,
My car is a really old 1999, and I have had a few problems with it. Right now, the starter has gone bad and I need to purchase one. I do not have any money saved, and I need to purchase a reliable car to get to and from work. Do you suggest I purchase a good used car from a reputable dealership? Or should I find a good deal on a new car? I need reliable transportation, a car that would last, but a price that I can afford the monthy payments. -- A. Walker

Answer for the CreditCards.com expert

Dear A. Walker,
Oohhh, oohhh, let's get the new car! You can pick just the color you want. Bluetooth for your phone. Plus, that great new-car smell. And a warrantee. That's important, too. Yes, that's the ticket ... get the new car!

But, I suppose that, if you insist, we should take a look at some payment info. It's probably not necessary, but we'll do it just so that you can say you "checked everything out" before purchasing the new car.

The best place to start is to compare the cost of new and used wheels. For instance, a new Honda Accord coupe costs about $21,400 before tax, title and all the other dealer foolishness. A 3-year-old model will run about $12,600.

If my calculator is right, that car will lose approximately 40 percent of its value in the first three years. "Depreciation in a car's first year tends to be pretty steep," says Mark Scott with AutoTrader.com. "You pay a dealer's retail price for a new car, but as soon as you drive it off the lot, the car is only worth its wholesale price. Depreciation is actually the biggest car expense you'll incur during the first five years of owning a new car."

OK, so the most expensive drive you'll ever take is the one off the dealer's lot, but maybe the difference in payments isn't that bad. Let's check it out. A 60-month note on the new Accord will cost $465 per month. Ouch! Kinda makes that starter repair look cheap.

A similar 60-month payment on the used Honda would be $275 per month. That's funny. The payment is about 40 percent lower on the used car. The same percentage as the depreciation. We'd probably be pretty close if we assumed at the payment on any 3-year-old car would be 40 percent less than the same car new.

Maybe you should consider the used car, after all. Experts say that buying one doesn't need to be risky. You can buy a 3- or 4-year-old car and still have factory warrantee on many models.

Plus, there are a number of ways to protect yourself when buying a used car. As you suggest, you can buy it from a dealer with a known reputation. If you have a mechanic you trust, ask them to evaluate the car. Most will charge between $100 and $200 for the service, but it's money well spent. Online services, such as CarFax.com, can give you a pretty good idea if the car has been in an accident.

And, if the factory warrantee has run out, reputable dealers will offer extended warrantees (although you might do better shopping around for one after you've bought the car). Pay particular attention to the coverage for your engine and transmission. Those are the really expensive repairs.

So even if you pine for a new car, it can be unhealthy for your wallet. Sadly, even the new car smell is unhealthy

See related: How to buy a used car

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Published: June 10, 2010


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