New Car every 10 years or Used Car every 5?

[tags]General,,[/tags]

David asked an interesting question in the comments section of "Best and Worst Used Cars of 2007", the question was:

;.. is it cheaper to buy a used car every 5 years, or a new one every 10 - 12? I currently have a ‘95 Dakota (needed a new rear diff this year (caused by towing?) and the ECU died). Once the loan was paid, I had 7.5 years of trouble-and repair-free driving. I still have it, but bought a smaller vehicle this year (also new) which I expect to keep for a similar lifespan. The new vehicle has a 7 year bumper to bumper warranty, so I should have no repair expense during that time.

Doing some research around the net, it seems that cars depreciate 20% right off the lot in addition to the regular 7-12% depreciation / year. ; Of course this depends on the make/model of your car, features, colour, KM's etc. ;

For the sake of simplicity, we'll assume 32% depreciation in the first year, along with 12% depreciation every year after that. ; You guys can check the Canadian Black Book to confirm the depreciation of your favorite car maker/model. ; I tested these numbers on Hyundai's and they are spot on. ; However, Honda's/Toyota's hold their values better.

Year : Residual Value
MSRP: 100%
1st year: 68%
2nd year: 60%
3rd year: 53%
4th year: 46%
5th year: 41%
6th year: 36%
7th year: 32%
8th year: 28%
9th year: 24%
10th year: 22%
11th year: 19%
12th year: 17%

The biggest factor that we need to account for between new and used cars are the repair costs. ; These costs typically start after the new car warranty expires. ; We'll assume the bumper to bumper warranty expires after 3 years at which time the repair bill starts rolling in. ;

We'll start the repair/maintenance costs at $600/yr increasing by 15% every year, starting @ year 4. ; In terms of the car, we'll pick a fairly economical car that has an MSRP of $20,000.

Year	Residual Value	Repair Cost
1	$13,600	0
2	$11,968	0
3	$10,531.84	0
4	$9,268.02	$600
5	$8,155.86	$690
6	$7,177.15	$793.50
7	$6,315.90	$912.53
8	$5,557.99	$1,049.40
9	$4,891.03	$1,206.81
10	$4,304.11	$1,387.84
11	$3,787.61	$1,596.01
12	$3,333.10	$1,835.41

Buying this new car every 10 years would result in a total cost of (not accounting for financing charges): ;

MSRP - residual value + repair costs
$20,000 - $4,304.11 + $6,640.08 = $22,335.97 (could be more if you get low-balled on your trade-in)

Buying this car once it's 2 years old for around $13,000 (after small dealer markup) and keeping it for 5 years then buying another 2 year old car for another 5 (for a total of 10 years of driving):

Purchase price - residual value @ year 7 + repair costs (from years 2-7)
$13,000 - $6,315.90 + $2,996.03 = $9,680.13 x 2 = $19,360.26

Conclusions: ;

It appears that buying a used car every 5 years would be less expensive than purchasing a new car every 10 years. ; Of course, pretty big assumptions were made in this post so the calculations were meant to be relative. ;

I think the biggest issue with new cars is the massive depreciation after the first year. ; If you are a new car person, why not buy an "almost new" car that is one or two years old? ; At least that way you still get the new car feel, intact warranty, AND you don't need to pay for the initial 30% depreciation. ;

photo credit: Manik.

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