5 Things to Consider Before Buying That New Car

Call me crazy, but I've become quite attached to my old car.

To be specific, it's actually my wife's first car, a 1998 Chevy Cavalier with just under 204,000 miles on the odometer:

The author's current car. Image source: author.

And it's not that I can't afford to buy something better.

Come to think of it, there's technically nothing that would prevent me from grabbing a decent-sized auto loan, bartering with a salesperson at the nearest dealership, and driving off the lot in something like, say, Ford's (NYSE: F  )  new 2014 Fusion, which, thanks to a whopping $555 million investment from the world's oldest automaker, I'm proud to know is now being produced in the United States:

The car the author would love to own (in a few years). Image source: Ford.

Of course, Ford had significant motivation to make that investment; the company recently told investors total U.S. sales increased 11% year over year for July, including retail sales which increased 19%. All told, that marked it Ford's best July performance since 2006 and best retail sales since 2005. 

In fact, strong auto sales are just one of many reasons I own shares of Ford stock in my own Roth IRA.

But each time I'm tempted to join the masses and buy a brand new vehicle, the investor in me brings the idea to a screeching halt.

Why, you ask?

Here are a few reasons I've decided to hang on to my 15-year-old vehicle.

1. Depreciation
First, I like buying assets that appreciate in value, which happens to be a class to which automobiles generally don't belong.

On average, new vehicles lose around 23% of their value in their very first year and are typically worth around 60% less after only five years.

Say, for instance, you pay $30,000 for a new vehicle. After one year, the value of your ride will likely fall by $6,900 -- or $575 per month -- to $23,100. After five years, that $30,000 car will be worth roughly $12,000.

To put that into perspective, what would you do if you were considering the purchase of a $250,000 home, only to be told after five years its value would depreciate by 60% to just $100,000? You'd run for the hills, right?

Sure, most cars cost much less than a typical home, but on a percentage basis those numbers are downright sobering.

2. Payments
That depreciation also doesn't account for the fact that, unless you've got a wad of cash to pay in full, you'll probably be making a monthly payment on your new vehicle as well.

So let's run some numbers, shall we?

Not including sales tax, if you took out a five-year loan on that $30,000 car at a very reasonable 4% annual percentage rate, that amounts to a monthly payment of roughly $552.

Even less comforting, note that's still about $23 less than the monthly amount your car will depreciate during the first year.

By contrast, having no payment on your used vehicle frees you up to do significantly more financially productive things with your money.

3. Cost of insurance
Then there's the cost of insuring your car, which is also bound to be significantly higher on your substantially more valuable new vehicle.

As it stands, I pay less than $300 per year to keep adequate liability insurance on my older car.

However, if I were to go upgrade even to the baseline model of Ford's latest Fusion, which is slightly larger and boasts similar fuel economy as my old Cavalier, my average annual premium would rise by nearly sixfold to a whopping $1,750 per year.

4. Cost of taxes and registration
Another benefit of keeping that older car? Taxes and registration costs typically go down with each passing year.

Specifically, in my home state of Montana, it costs $217 per year to register a vehicle between zero and four years old. For vehicles aged five to 10 years, it's $87. If your car is 11 years or older, you can either pay just $28 annually or, as I did, opt for a slightly higher one-time fee to secure a permanent tag.

5. Cost of parts, maintenance
Finally, remember new vehicles come with new technology, for which replacement parts can often be prove more expensive.

Then again, I'll admit the repairs should (in theory) be required on a less frequent basis for newer vehicles, but that doesn't mean they're exempt from breaking down every now and again.

Besides, if you make sure you keep up on routine maintenance and don't let larger repairs linger until they cause significant damage to other parts of the car, even older vehicles shouldn't require significant time in the shop more than once or twice per year.

Better yet, if you can find an honest mechanic who charges fair prices, you'll realize the costs for those inevitable repairs will be far less than the costs of owning a newer vehicle.

Here's how to invest
Of course, if you're dead-set on replacing your old car with something better, at the very least consider searching for a well-maintained used vehicle. Then, before you buy, be sure to have it inspected by a reputable mechanic and you'll be well on your way to saving more money.

But now that you've saved all that money by either keeping or buying a used car, how can you put it to work?

Perhaps you might pick up some shares of Copart (NASDAQ: CPRT  ) , a solidly profitable auto salvage specialist that has catered to dealers, dismantlers, rebuilders, exporters and, occasionally, everyday consumers since its founding in 1982.

Copart has also been on an acquisition spree over the past year in its efforts to corner the auto salvage auction market, with buys in Brazil and Germany last November, followed by the acquisition of U.S.-based Salvage Parent, in May, and most recently the purchase of Autoresiduos S.L. in Spain in June.

Or perhaps you could look at buying shares of used car-seller CarMax (NYSE: KMX  ) , which are up more than 60% so far in 2013 and at the end of last quarter stood tall as the second-largest position in Markel's impressive long-term-oriented portfolio. Incidentally, that portfolio is managed by Markel's CIO and noted value investor, Tom Gayner. In addition, the long-term quality of CarMax's business is more than evident considering Markel's single largest holding is none other than the veritable Berkshire Hathaway.

Still not convinced?
But don't get me wrong; I understand owning and maintaining an older vehicle certainly isn't for everyone.

After all, there's a certain satisfaction to be had with driving a new car caused by everything from the smell, look, and feel of the state-of-the-art machine.

And the technological advances also offer mouthwatering benefits, including smoother rides, better power and fuel economy, and more specific features such as automatic tailgates, voice control systems, blind-spot indicators, touch sensors, and a bevy of other goodies you won't find in last decade's models.

In the end, though, just be sure to use this as food for thought as you consider whether those benefits are worth the added financial outlay.

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Read/Post Comments (9) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2013, at 12:05 PM, bendssv wrote:

    Common sense reasons for not replacing your OLD car with a NEW car.

    Why don't you offer "fools" cost estimates for replacing it with a NEWER OLD car? Or cost estimates for why NOT to lease a NEW car?

  • Report this Comment On August 31, 2013, at 2:43 PM, shooter9mm wrote:

    Cars like wives are not an investment, one simply has to have one to be in the common group called an American male. Their is a tremendous similarity between the two. Both are great at first, eventually they get old & cost you more money, have their idiosyncrasies. Main difference is that cars are usually fairly quiet, they at least take you somewhere, you can shine them up & make them look much better. I was going to purchase a new Avalon Limited until I saw the 2013, which looks like a MUCH cheaper Ford Fusion. An 06 with only 37,000, much like my wife, a newer one might be nice but it will cost me a lot more. Have to navigate all the nuances until I'm familiar, as in breaking it in, so perhaps like Steve I'll hang onto both for a little longer.

  • Report this Comment On August 31, 2013, at 3:18 PM, johnybravobadass wrote:

    Sure, it might cost a lot to buy a new car, between the cost of the car, taxes, insurance, etc., but chances are the new car won't break down like an old car will. And try finding some parts for older cars any more, and there IS the cost of replacement parts and repairs. And when it comes to buying new vs. used, used cars often cost as much as new these days. I recently bought a new 2013 Cruze for $16,000 when the cheapest used Cruse I could find was a 2012 with 35,000 miles for $17,000.

  • Report this Comment On August 31, 2013, at 6:51 PM, 1appledude wrote:

    Keep in mind, that if you are in "the stupid state" called California - the registration on my 99 Mustang is a bit less than a hundred dollars per year - on a 14 year old car!

    What would it be for a new car here? I hear about $600 per year -

    Our state does not seem to understand that this makes keeping your old trusty car much more attractive - our infamous "Gray-out Davis" was kicked out because he was going to TRIPLE the car registration fee's - as if the average family could afford that!

  • Report this Comment On August 31, 2013, at 10:21 PM, ADrolson wrote:

    friend gave me a 1994 Suzuki Swift that was in an accident. cost me $600 dollars to fix it myself. had 75,000 miles on it now has 160,000. just done the usual maintenance and i am still driving it and it runs great and looks great. gets 43 miles per gallon. insurance is $30.00 a month. thats how i do it. i have done the same thing before. when i was younger i use to throw my money away on cars but i can't get excited about it any more.

  • Report this Comment On September 01, 2013, at 7:13 AM, jojopuppyfish wrote:

    I am in this position right now.

    Its tough to find an honest mechanic and its even tougher to find one that's good.

    My car has 120k and its been overheating for 3 months. 6 different mechanics haven't fixed it and I've spent over 1k in fixes that didn't work. Now I am about to spend 2k to fix the head gasket which will hopefully finally fix the problem.

    Its less of a headache to sell it and be mechanic free for 10 year

  • Report this Comment On September 01, 2013, at 8:50 PM, herky46q wrote:

    What is your source for the rate of depreciation? Way too many used car prices are similar to new ones.

    At what point would you decide to give up on your car?

  • Report this Comment On September 01, 2013, at 9:15 PM, SuntanIronMan wrote:

    Random bit of housing depreciation trivia:

    Houses in Japan depreciate very quickly. Nobody ever buys a house expecting it to appreciate in value. After about 15-20 years, the actual buildings are practically worth nothing. So little value that when someone buy an old home, often they will immediately demolish it and build a new one made to their liking. The land is always the most valuable part of any housing property.

  • Report this Comment On September 06, 2013, at 1:05 PM, TMFSymington wrote:

    @herky46q, I used an average from a number of sources including Edmunds and Autos.com. Of course, the actual percentage will vary based on the year, make, model, and condition of your vehicle, but the vast majority of new vehicles depreciate significantly over the first five years.

    At what point would I consider giving up on my car? Perhaps if it required a significant repair which would cost much more than the car is worth -- something which generally shouldn't happen until years down the road if it's properly maintained.

    Even then, I'd more than likely replace it with a several-years-old vehicle which is in great shape.

    To each his own, though! I definitely understand used cars aren't for everyone...

    Fool on!

    Steve (TMFSymington)

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