I think there is a lot of confusion among car buyers of the full advantages of buying a used car. It is one of those things that I think most people realize buying a used car is a better idea for their finances, but don’t understand the scope of it. Dave Ramsey’s critics often belittle his math on his “drive for free” method, but even if the numbers are a little generous, the same principle still applies – owning a depreciating asset is a bad move, but paying interest on a depreciating asset is a really bad move!
Since I started this site I have written a bit about how you can save money by buying used cars and how they affect your financial freedom. But this video (I think from Dave Ramsey’s course) argues the case for buying used cars so much better than I could in under 4 minutes! Thanks RCVogler!
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Thanks for posting that video, Bob! It’s nice to see the concept broken down into simple terms like that.
PS: The site looks better than ever! The new design is fantastic!
Interesting concept, but how come depreciation was not factored into the cars? Car was purchased for $6,ooo, and after 10 months it is still worth $6,ooo? maybe I am nitpicking on this point, but not the next one…
How long ago did the “stock market average” earn 12%? How old is this video that they use 12% “stock market average”? If you are making 12% on your stocks, you are way ahead of the game.
I buy new cars because I keep them a long time. I currently own a 1999 car that was paid for in 36 months. After I apid the car off, I did continue to “pay myself” $450/month. I used this money for my next purchase. Unfortunately the interest did not come anywhere close to the “Stock market average” of 12%.
Wolfe,
I agree, some of the numbers are a bit generous, but it is true that the depreciation on an older car is whole lot smaller… And as far as the 12%, right now that is difficult to get, but on average over the last 100 years the stock market has returned 11% (or so they say)
I do like your strategy of buying cars…and I hope I can convince my kids to buy used. But the 12% is more than “difficult to get”… I’d say “impossible”. ..I’d like to see the stock market average for the past three years…. I’d be willing to bet it is pretty close to zero growth, or worse.
This is a great video!
I enjoy buying solid used cars too, but the hardest part is paying yourself first and not spending it on something else. Even if the stock market returned only 5% a year, it still would outpace the value of the vehicle. They need to start making cars out of precious metal so they increase in value.
Aside from some minor points, I think it’s an excellent video. Nice find!
What about the higher maintenance costs with a used car?
What if you have the $$$ for cash purchase for a new car vs used car?
BTW your “FREE CAR” is costing you north of $600 a month
Depreciation should always be factored into the equation. Consumers planning to keep a car for fewer than five years will likely get a better value buying a used car from a recent model year, which already has that initial depreciation built into the price. But if you plan on hanging onto the car for at least five years, it’s alright to go for that temptingly priced new car. The price of a car that’s more than five model years old is largely determined by its condition, rather than the initial selling price.
Exactly one year ago I had a $375 truck payment on a $13,500 loan and the truck was only worth about $11k. I put the truck up for sale and luckly sold it for $11,500, with the difference coming out of my pocket. I bought a 95 4runner for 2k, drove it for a couple of months and sold it for $3200. I used that money to buy another 4runner for $1,500. Again drove it a couple of months, sold it for 3,000. I did this a couple more times with various vehicles. Yesterday I paid cash for a 2004 GMC Envoy fully loaded. It books for about 13k and I have about $3k of my money that wasnt made off of buying and selling vehicles. It can and will work. It takes many hours of searching on craigslist and such and a little bargaining with people but I know have almost $400 a month going to pay off student loans.
Although Cameron’s idea is really cool and I appreciate the spirit of this post, there is a moot point made by DelCid above. You need to have a trusted engineer who will scan the used car on sale inside out before you give your heart to it! It shouldn’t turn out to be a penny-wise-pound-foolish decision!!