Resolved: Cars are a big, honking waste of money.
But most of us need one or two of them in the driveway for our daily comings and goings. How can we minimize the financial drain? By making smart, contrarian decisions such as buying new instead of used. A more radical thought: Reduce your need to use, or even own, a car by buying your groceries online.
If you’re set on buying a vehicle, be skeptical about the widely held idea that a one- or two-year-old car is a better buy than a new vehicle. The value of a new car depreciates by an average 27 per cent as soon as it leaves the dealer’s lot, and that certainly suggests buying used is smarter. And yet, a new car could be cheaper over the long term.
“Certainly, the new vehicles are more expensive from a purchase price standpoint as they have not depreciated in the same way that the used cars have,” Brian Murphy, senior manager of the Canadian automotive division at J.D. Power, wrote in an analysis he sent by e-mail. “However, when you buy a new car, you could be eligible for some very attractive benefits you might not see with the used car purchase. …”
At the top of the list is low-cost financing. Mr. Murphy said the average interest rate for all loans on new compact cars this year is around 2 per cent, compared to between 6 and 7 per cent for used vehicles. Net result: The average payment on a used 2012 compact car bought this year was just $26 cheaper on a monthly basis this year than for a comparable new vehicle. A 2011 car cost $47 less per month and a 2010 model cost $71 less. Note: Used car loans tend to be one year shorter in length than new car loans. This gives them an edge in terms of overall borrowing costs over the life of a loan.
A cost comparison between new and used must also include maintenance. The new vehicle has a full bumper-to-bumper warranty, while the used vehicle has used up much of this coverage. The new vehicle also has fresh tires and brakes, both of which are expensive basic maintenance costs.
Mr. Murphy said there may also be a fuel efficiency trade-off in buying a used car. “If you’re comparing Model X this year and two or three years ago, transmission technology may have evolved, and the engine technology may have evolved.” Same goes for safety equipment.
Right now is an especially good time to consider buying new because dealers and manufacturers are keen to clear out current year cars and trucks to make space for 2014 models. “If you can find a 2013 that has been sitting on a dealer’s lot for a little while and the 2014s are coming in, the dealer is going to be highly motivated to sell that car to you,” Mr. Murphy said.
If you prefer to buy used, be aware of the pricing trends for nearly new and older vehicles. Josh Bailey, vice-president of research at Canadian Black Book, said lightly used vehicles have to be priced competitively in a market where hot financing rates make new vehicles affordable. Dealers have more latitude on pricing older cars because buyers aren’t as likely to be looking at new cars as a possible alternative.
As for depreciation on new cars, Mr. Bailey said it hits hard in the year you buy and then tapers off. A one-year-old vehicle is worth 73 per cent of its buying price, while two- and three-year-old ones are worth about 64 per cent and 55 per cent, respectively. “The [depreciation] curve does lessen as a vehicle ages,” he said.
Looking for ideas on how to go down to one vehicle from two or not own a car at all? Online grocery shopping might point the way.
One of the key reasons to own a car is to be able to lug home a week’s worth of groceries, especially if you have kids. An alternative: Order your groceries online and have them delivered to you. Amazon.ca has just started selling groceries online in Canada, joining Wal-Mart and local outfits such as OnlineGrocer.ca in Ottawa and Grocery Gateway in the Toronto area.
Delivery charges are an issue, and you won’t have access to the week’s best sales in your area. On the other hand, you may not need a car if your groceries are coming to you every week or two. Not paying car insurance alone would more than cover your grocery delivery charges.Report Typo/Error