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Buying a Slightly Used Car Makes More Sense Economically

I woke up one morning to the crashing sounds of a drunk driver smashing into my 2010 Ford Focus. I had it insured and was able to get a check to get a new car. Well not new, but used. I have actually never bought a new car. With this check for about $8,500, I was heavily considering a NEW car. So I did some research and documented it; in this article I’ll recount my findings in regards to new car and used car depreciation.

Asset vs Liability
The first thing I learned in my research was the difference between an asset and a liability. An asset is something you buy that, over time, gains value or adds value to your pocketbook. For example: an investment property, a business or a mutual fund. These are things that over time will most likely gain in economic value, therefore, they are called assets.

A liability is something that loses value and/or takes money from you. For example: the house that you live in may be a liability. If you take out equity lines of credit against the house, making the debt larger than what the house is worth right now, that would be seen as a liability. Also, the car that you drive is, most likely, a liability. As soon as you take a loan out on the car it becomes a liability if what you owe is more than what it’s worth. Also, a car (unless if it’s a classic in good condition) usually loses value every year, that’s called depreciation.

Buying a New Car
I looked at the option of buying a new car. According to CARFAX, when a new car is bought for $20,000 it loses 10% of its value immediately. This means that If I to buy that new Ford Focus I wanted, I would lose $2,000 as soon as I drove it off the lot. Not to mention that it would continue to depreciate, typically by 10% the first year. So in just one year I would have lost $4,000 on my $20,000 purchase. If I don’t sell that car after the first year of ownership the car will continue to depreciate anywhere from 15% to 25% per year over the next four years. I found through my research that it is very common for a new car to be worth 40% less than what it is bought for after five years.

Buying a Used Car
I’m 25 years old, I have a family that I work hard to provide for; everything I do is with them in mind. Long gone are the days I go to buy a car because it’s cool or because it is the latest trend. For me, any major purchase is all about the numbers. Mind you I am no accountant, I had to research in order to make an informed decision about buying a used car. This is what I found.

Through my investigation I found that buying a slightly used car made a lot more sense than buying a brand new one. By purchasing this used car I have let the person who bought it new take the big hit of depreciation I mentioned above in the first few years. This gives me an almost new car at a lower cost. Not only does it make upfront financial sense, but there are other benefits. More often than not slightly used cars are still in good condition, might still be under the original warranty, allow for better finance rates and so on.

Not All Cars Are Created Equal
This is an important thing I learned during my search for the perfect, slightly, used car. I noticed that not all cars depreciate at the same rate. The statistics I mentioned above are just averages and do not apply to all cars.

A good example of this is the Acura ZDX. This car is not a popular car and these types of cars with fewer options will depreciate much faster than cars loaded with options (especially added safety features) with strong brand-name appeal. It’s also true that what’s considered a “hot” used car can change from year to year, so there’s always a bit of a gamble involved. One thing you can always count on, though, is big depreciation on highline cars – Porsche, BMW, Jaguar, Ferrari, Lamborghini, etc.