Is A New Car Purchase Really That Bad?

When purchasing an automobile to transport yourself from Point A to Point B, one of the most controversial things to think about is whether you should buy a new or used car.

Typically, people would recommend you to go with the used car so you won’t get hit with the depreciation once you drive off the lot, a loan (if you pay with all cash), and the possibility of increasing your lifestyle to suit that brand new car.

On the opposite spectrum, people would recommend a new car so you can have a peace of mind on the possible maintenance costs that come with an used car, a sweet and lean factory warranty for the new car, and being the sole owner of the car, and in general, having something new.

To give you some preface, I’ve been on the market for an automobile for the last few months, given that my car was stolen a few months ago.

So for today’s article, I’ll be looking into and analyzing whether or not a new car purchase would be bad for a “financially literate” person with “trustworthy credit”.

Related: The Simple What to Do with Your Money Guide and The 5 Factors That Affect Your Credit Score

The New Car: The 2017 Toyota Camry LE

For our research subject, we’re going to use the base model of the 2017 Toyota Camry LE.

By using TrueCar, the average cost of the 2017 Toyota Camry LE Base Model comes to an average of $19,025. If we add in Tax, Title, and Licensing Fees (TTL), which is an extra 10% in my state, it will come out to a total of $20,927.50.

Now since we have great credit (because you went through my money and credit guide, right?), we’re going to qualify for Toyota’s 0% APR Loan for 60 months, which means it’ll be an interest-free loan for us and we won’t have to be charged extra for the loan!

The Used Car: The 2012 Toyota Camry LE

For our used vehicle, we’re going with a 2012 Toyota Camry LE with less than 100,000 miles.

I chose a car that is less than 5 years old because it will still be quite recent and it is less than 100,000 miles so it’s not “driven” that much in the past few years.

Using TrueCar’s Used Car search criteria, the lowest car I found was $10,988 for a 2012 Toyota Camry with 92,268 miles.

The Assumptions and Analysis

Alright, let’s organize the math and then break it down.

For the new 2017 Toyota Camry Base LE, it’s going to cost $20,927.50 total.

For the used 2012 Toyota Camry Base LE, it’s going to cost $10,988.00 total (I may have not calculated taxes and fees for this, but let’s just pretend it’s in there).

Now, assuming we already have money to purchase the used car out right since we are great with our money and credit, we’re going to start to take a look at the math.

We’re going to take a few assumptions to make things easy.

  • The Down Payment will be $0 and the cash ($10,988.00) will be used towards the cash balance as we can place it in the stock market.
  • During the car loan, once the cash is depleted, no more compound interest will be collected.
  • Inflation will not be calculated.
  • For the used car, once the downpayment is paid, the monthly payment of the new car loan will be placed into the stock market and earn increase 10% annually.

To put it up quickly, I whipped up a few math formulas in Excel, which you can find below.

MonthsLoan BalanceCash BalanceNew w/ CIUsed w/ CIDifference
0 $20,927.50 $10,988.00 $10,988.00 $- $10,988.00
1 $20,578.71 $10,639.21 $10,727.87 $348.79 $10,379.08
2 $20,229.92 $10,290.42 $10,465.57 $703.40 $9,762.17
3 $19,881.13 $9,941.63 $10,201.08 $1,060.96 $9,140.13
4 $19,532.33 $9,592.83 $9,934.39 $1,421.50 $8,512.90
5 $19,183.54 $9,244.04 $9,665.48 $1,785.04 $7,880.44
6 $18,834.75 $8,895.25 $9,394.33 $2,151.61 $7,242.72
7 $18,485.96 $8,546.46 $9,120.92 $2,521.24 $6,599.68
8 $18,137.17 $8,197.67 $8,845.23 $2,893.95 $5,951.28
9 $17,788.38 $7,848.88 $8,567.24 $3,269.77 $5,297.47
10 $17,439.58 $7,500.08 $8,286.93 $3,648.71 $4,638.22
11 $17,090.79 $7,151.29 $8,004.29 $4,030.82 $3,973.48
12 $16,742.00 $6,802.50 $7,719.30 $4,416.10 $3,303.19
13 $16,393.21 $6,453.71 $7,431.93 $4,804.60 $2,627.32
14 $16,044.42 $6,104.92 $7,142.16 $5,196.34 $1,945.82
15 $15,695.63 $5,756.13 $6,849.98 $5,591.34 $1,258.64
16 $15,346.83 $5,407.33 $6,555.37 $5,989.63 $565.73
17 $14,998.04 $5,058.54 $6,258.30 $6,391.25 $(132.95)
18 $14,649.25 $4,709.75 $5,958.75 $6,796.20 $(837.45)
19 $14,300.46 $4,360.96 $5,656.71 $7,204.54 $(1,547.83)
20 $13,951.67 $4,012.17 $5,352.15 $7,616.27 $(2,264.12)
21 $13,602.88 $3,663.38 $5,045.05 $8,031.44 $(2,986.39)
22 $13,254.08 $3,314.58 $4,735.40 $8,450.07 $(3,714.67)
23 $12,905.29 $2,965.79 $4,423.16 $8,872.18 $(4,449.02)
24 $12,556.50 $2,617.00 $4,108.32 $9,297.82 $(5,189.49)
25 $12,207.71 $2,268.21 $3,790.86 $9,727.00 $(5,936.14)
26 $11,858.92 $1,919.42 $3,470.75 $10,159.75 $(6,689.00)
27 $11,510.13 $1,570.63 $3,147.98 $10,596.12 $(7,448.14)
28 $11,161.33 $1,221.83 $2,822.51 $11,036.12 $(8,213.60)
29 $10,812.54 $873.04 $2,494.33 $11,479.78 $(8,985.45)
30 $10,463.75 $524.25 $2,163.42 $11,927.14 $(9,763.72)
31 $10,114.96 $175.46 $1,829.75 $12,378.24 $(10,548.48)
32 $9,766.17 $- $1,493.30 $12,833.09 $(11,339.78)
33 $9,417.38 $- $1,154.05 $13,291.73 $(12,137.68)
34 $9,068.58 $-$811.97 $13,754.19 $(12,942.22)
35 $8,719.79 $-$467.03 $14,220.51 $(13,753.47)
36 $8,371.00 $-$119.23 $14,690.71 $(14,571.48)
37 $8,022.21 $-$- $15,164.83 $(15,164.83)
38 $7,673.42 $-$- $15,642.90 $(15,642.90)
39 $7,324.63 $-$- $16,124.96 $(16,124.96)
40 $6,975.83 $-$- $16,611.03 $(16,611.03)
41 $6,627.04 $-$- $17,101.15 $(17,101.15)
42 $6,278.25 $-$- $17,595.36 $(17,595.36)
43 $5,929.46 $-$- $18,093.69 $(18,093.69)
44 $5,580.67 $-$- $18,596.17 $(18,596.17)
45 $5,231.88 $-$- $19,102.83 $(19,102.83)
46 $4,883.08 $-$- $19,613.72 $(19,613.72)
47 $4,534.29 $-$- $20,128.87 $(20,128.87)
48 $4,185.50 $-$- $20,648.31 $(20,648.31)
49 $3,836.71 $-$- $21,172.07 $(21,172.07)
50 $3,487.92 $-$- $21,700.20 $(21,700.20)
51 $3,139.12 $-$- $22,232.74 $(22,232.74)
52 $2,790.33 $-$- $22,769.71 $(22,769.71)
53 $2,441.54 $-$- $23,311.16 $(23,311.16)
54 $2,092.75 $-$- $23,857.11 $(23,857.11)
55 $1,743.96 $-$- $24,407.62 $(24,407.62)
56 $1,395.17 $-$- $24,962.72 $(24,962.72)
57 $1,046.38 $-$- $25,522.44 $(25,522.44)
58$697.58$-$- $26,086.82 $(26,086.82)
59$348.79$-$- $26,655.91 $(26,655.91)
60$(0.00)$-$- $27,229.74 $(27,229.74)

To explain the table a bit, I broke it down to 60 months, as the car loan at $20,927.50 is a 0% APR loan for 60 months because of our good credit.

There are five columns:

  1. Months: The months from 0 to 60 on the loan.
  2. Loan Balance: The balance remaining on the loan after after paying each month towards the car loan.
  3. Cash Balance: The cash balance remaining
  4. New w/ CI: The adjusted cash balance with compound interest involved when buying a new car and putting the money towards the car loan.
  5. Used w/ CI: The adjusted cash balance with compound interest involved when buying a used car and putting the money towards the stock market.
  6. Difference: The difference between the “New w/ CI” and “Used w/ CI” column.

If we look at table at Month 0, we can see that the difference is $10,988.00 as the used car is bought with cash and we haven’t paid our first loan payment yet.

Now, if we fast forward a bit more to Month 32, we would have already paid more than $10,988.00 to our loan and if that money was in the stock market collecting compound interest at an annual rate of 10% with no extra additions, it would have only earned $1,493.30 (shown in Column 4 – “New w/ CI”).

Compare that to Column 5 – “Used w/ CI”, you would see that the extra $348.69 a month would have already accumulated and snowballed in a total of $12,833.09, giving a difference of $11,339.78!

Fast forward to the end of the loan, we could have finally paid off the car loan and the stock market accumulation would have been a total of $27,229.74, giving us a difference of $27,229.74!

Recap

By the end of the loan, with our assumptions, the money that was placed towards the monthly car payment of the new car could have been an extra $27,229.74! I guess with our analysis, we’ve found that a used car is much better with our assumptions.

However, this could be different if we didn’t have a down payment and have to put the used car on a loan. Additionally, things would also be different if there was interest on the new car loan as well.

Ultimately, depending on your personal preferences, a new or used car can go for you. I’m not trying to advocate for used or new cars in anyway, but am trying to understand the difference and analyze the cost between both. I hope this will help in some way, because it has sure given me a deeper insight on the cost. Additionally, there are a lot more factors that need to be taken into account (peace of mind, reliability, etc) and sometimes… everything can’t just be based on numbers.

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10 thoughts on “Is A New Car Purchase Really That Bad?

  • May 8, 2017 at 10:21 am
    Permalink

    Thanks for doing this comparison! Generally it’s a good idea to buy a 1-2 year used car if you still want the reliability of a newish car with a significantly slashed price.

    Reply
    • May 9, 2017 at 3:16 am
      Permalink

      Agreed.

      Although it’s quite unfortunate as those 1-2 year used cars are only now 10-20% off MSRP, which isn’t that much in depreciation anymore.

      Reply
  • May 9, 2017 at 8:09 am
    Permalink

    The key is that if you buy new, you need to hold it for 10-15+ years. If you buy new and then trade it in every 3-5 years, that’s a recipe for financial disaster. The sweet spot is probably buying a lightly used car (2-3 years out) and then driving it for 10-15 years.

    Reply
    • May 15, 2017 at 1:29 am
      Permalink

      I agree, WSP.

      It’s much more ideal to hold the car for as long as you can if you decide to purchase a new car. Trading it in just to get the latest and greatest features won’t help anyone on their financial situation.

      Additionally, an odd thing I found is that a new car can actually be cheaper than a lightly used car (1-5 years out) if you can get the new car at invoice. You also won’t have to worry about the used car being owned by someone else as you’ll be the sole owner.

      Reply
  • May 9, 2017 at 12:23 pm
    Permalink

    I used to be for buying new cars. Buy it new and forget about it. But when I learned about the huge depreciation costs, now I believe lightly used or certified used is my preferable option. Many cars nowadays go for 200,000 + miles. If you can save thousands by buying a used car with only 10-20,000 miles it’s probably a win! Also, always check the Car Fax report 🙂

    Reply
    • May 15, 2017 at 1:30 am
      Permalink

      Checking the Car Fax report is a must, I agree!

      Depreciation differs from brand to brand, so some brands like Toyota and Honda depreciate less and sometimes purchasing new may be better than purchasing used, provided that you can get the new car below invoice and a loan with good APR. I don’t think I’ve seen a used car loan with 0% APR.

      Reply
  • May 10, 2017 at 4:00 am
    Permalink

    Interesting analysis as I’ve been considering car choices as well. Apologies for raising this, but in this case I think your assumptions made the choice a foregone conclusion. If you assume an annual 10% return from stocks, almost any financial decision where the alternative isn’t compounding at 10% will lose over time. If this were the case, every choice would be to put as much money in stocks as possible, and the choice would only become more clear as time passes.

    Consider if you invested in stocks when the S&P 500 was at 102 in 1980. This was the very beginning of what can only be described as multiple wildly successful bull runs. Compounding at 10%, the index would be at 3,468 today. As it stands, the index is at 2,400. Still an outstanding result, but that’s the difference between 9% compounding and 10% compounding over time.

    Anyway, all this to say that I’m not sure a decision tree should be made on the basis of assuming 10% compound returns over any stretch of time, especially 5 years. By the 10% assumption, the S&P would be at 3,865 in 5 years, another 60% higher from here, all time highs. It’s possible but is it likely?

    Hope I didn’t rain on your parade. For the record I’m in the camp of buying a lightly used car for the reasons others have pointed out.

    Reply
    • May 15, 2017 at 1:36 am
      Permalink

      Nah, you didn’t rain on my parade, Rich. 🙂

      I mainly chose 10% because it’s the best representation of today’s dollars without counting for inflation (3%). Additionally, if the numbers were actually extrapolated further into years, you can see that the new car would only be behind by a few years, which isn’t all that bad. However, the downside ot this, just like you said, is the volatility of the market. Just because it is assumed to be a 10% average per year, does not mean that each year would reap 10% in gains.

      Furthermore, I was only comparing between a new car with a loan and a used car being paid off in one go. If I were to compare a new car with a loan and a used car with a loan, the numbers wouldn’t be that far off.

      As for me, I’ve decided to hold off on the car for now and take some good old public transportation. While it’s not ideal, I don’t think I would want to be locked down with a loan if something occurs with my work (lots of things are going on and the future is currently uncertain).

      Reply
      • May 15, 2017 at 7:07 am
        Permalink

        Good point. I think a large part of the calculation with taking on debt concerns a factor not often considered, which is income stability. If you have rock solid employment, debt can be simply a matter of the time needed to pay it off, and you can invest comfortably in the meantime.

        Reply
        • May 22, 2017 at 3:33 am
          Permalink

          Agreed.

          I probably should have added more scenarios in before I published the post, which I will do in the future.

          In the end, I’m probably going to go with a used car because of the depreciation and the lost in investment opportunity cost.

          How about you?

          Reply

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