11/30/2005

New vs Old

I don’t know about you, but I have NEVER owned a NEW car. I think that my parents have purchased only one car new and that car was the family car that we drove for 13 plus years until someone broadsided my Mom when she was making a routine trip to the grocery store. According to this article new cars seem to have problems just like older cars, according at least to a sample of AAA where of 79,000 cars about 5,000 were brand new. I have owned my car now for 4 years, it is 10 years old with average miles and I have yet to make a major repair. Keep on truckin’

5 comments:

Nate said...

One of the things that makes owning a new car intriguing is the warranty that is given to the owner. If the car breaks down or has any problems they will fix it for you at no additional cost. Granted you pay more for a car that is new off the lot, and it immediately depreciates, but it may be worth it to know that if there are any problems you get them fixed for free.

Frank said...

I don’t think any new car is worth the price. Just the depreciation from driving it the first time is enough to make me sick. Stick to cars that were made in large quantities for many years and you can’t go wrong.

Dr. Tufte said...

The depreciation on used cars drives people crazy, but it is often misinterpreted.It comes about from two sources.

1) Once you drive off the lot, you have asymmetric information about how you treated the car. This creates an adverse selection problem, where a potential buyer is probably not going to offer you as much as the car is worth. Used car dealers face the same problem.
2) At least with American auto makers, a problem has been the flood of cars produced and sold at low margin to rental car agencies. When these cars enter the used car market they further depress prices.

Blake said...

I believe that buying a car new, or used can be beneficial, depending on the purchaser's behavior. If I were to buy a new car, I would change the oil every 3,000 miles, and would keep up on its regular maintenance to ensure that I can keep the car in working order for as long as possible, and possibly avoid big ticket problems in the future. I would also drive the car into the ground, helping to lower the average cost per mile. On the other hand, if I were to buy a used car, although cheaper, I would realize that the life of my car would likely be a fraction of a new car, and thus would require me to buy more cars, more often. In taking costs associated with more frequent car purchases into account, I would also have to consider the possibility of more expensive repairs than a new car. All that being said, the overall costs may end up being about equal. Most importantly, I believe that you should try to keep a car as long as it functional and safe, because it makes more economic sense to invest money in a cd, or stock market, etc, than to continually throw it away into car payments when it's not necessary.

Dr. Tufte said...

-1 on Blake's comment for poor grammar.

The point that you made about it costing the same over your lifetime to buy used or new cars is called arbitrage. We should expect it to hold just as well with cars as with other assets.