Old car or new car
Posted on by Etienne Noumen

Is it better economically to run a car into the ground before buying a new one? Data driven answer

Is it better economically to run a car into the ground before buying a new one? Data driven answer

Is it better to drive your car into the ground before buying a new one? You might think that’s an odd question, but there’s some logic to it. We all know cars are expensive, and many people feel they have to buy a new one as soon as theirs starts to show its age. But is that really the best way to go? Let’s take a closer look at the numbers.

It might be more economical to run your car into the ground before buying a new one. Sure, you’ll have to deal with a few mechanical problems along the way, but at least you won’t have to worry about depreciation costs. Plus, you’ll get the added bonus of being able to tell your friends and family that you’re driving a “classic.”

The advice I’ve always had (and followed) is that you should always EITHER:

  1. Buy a new car – keep it for 3 years – then trade it for a new one….OR…
  2. Buy a new car and keep it until it goes to the car crusher.

Let’s see how economics work out with an actual example…

WE’RE GOING TO NEED SOME DATA:

This graph must depend a bit on make and model – but it’s probably a good average:


Is it better economically to run a car into the ground before buying a new one? Data driven answer
Is it better economically to run a car into the ground before buying a new one? Data driven answer

Looking at that graph you’re going to pay about…

  • $2,100 on maintenance over the first 5 years
  • $5,150 in the next 5
  • $8,800 in the next 5
  • $10,300 in the last 5.

For depreciation:

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Is it better economically to run a car into the ground before buying a new one? Data driven answer
Is it better economically to run a car into the ground before buying a new one? Data driven answer

(15% seems kinda optimistic…but depending on the kind of car you buy – it might be OK)


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When you look at your car payments – if you finance over 5 years then for a cheap $25,000 new car (A Camry or an Acura or something similar)…you’ll have somewhere around a $500 monthly loan payment over 60 months – so you’re actually paying $30,000 for the car – the rest being interest on the loan.

  • So in the first 5 years you spend $30,000 on payments and $2,100 on maintenance for a total of $32,100.
    • If you sell after 5 years: with depreciation – you get $10,000 back from selling the car – so it cost you $22,100 to have a car for 5 years…or $4,420 per year.
  • After 10 years, you spent $32,100 so far plus another $5,150 in maintenance for a total of $38,250.
    • If you sell after 10 years: you’ll get about $4,500 back so $33,750 to have a car for 10 years…or $3,375 per year.
  • After 15 years, you spend $38,250 so far plus another $8,800 in maintenance for a total of $47,050.
    • If you sell after 15 years: you’ll maybe get $2,000 – so $45,050 to have a car for 15 years…or $3,000 per year.
  • After 20 years, you spent $47,050 so far – plus $10,300 in maintenance (eek!) for a total of $57,350.
    • Nobody will buy your PoS car now – but on the plus side, the breaker’s yard will probably tow it for free – so $57,350 to have a car for 20 years…for a total of $2,867 per year.

So the cost to own a car per year (on average) is the least if you keep it until it goes to the car crusher.

This is where that original claim comes from – and it’s true.

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WHAT IF YOU SELL AFTER JUST THREE YEARS?

  • Car payments are now $750/month over 36 months (MUCH higher than financing over 5 years!) – so you pay $27,000 in total (not much less than the $30,000 you’d have paid over 5 years!). But depreciation means that the car is now worth $15,000 and maintenance is zero. So you spent $12,000 over 3 years – which is $4,000 per year.

…which is LESS per year than keeping the car for 5 years.

PARTIAL CONCLUSION:

These numbers are VERY approximate – maybe you buy a more expensive car and it depreciates faster – maybe you find a crazy reliable car and nurse it along to 25 years. Maybe engine and transmission failure happen simultaneously at year 15 and it goes to the crusher early.

But if we look at my scenario…which is based on industry norms if you swap your car out every 5 years, it’s going to cost you $4420 per year and if you keep it for 20 years, it’s costing you $2,867 per year. So on strict economic terms you should always run your car into the ground.

However, the difference between $4000/year (swap your car every 3 years) and $2867/year is $1133/year or $94 per month.

You could not pay me $94/month to spend most of my life driving crapped out wrecks compared to driving an almost new car all the time.

Just the time I’d spend fritzing around trying to get my 20 year old car to start on a cold, damp morning isn’t worth $94/month.

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IMHO – THIS WHOLE EXERCISE IS KINDA SILLY:

People who can afford to buy a new car are not going to worry too much about $94/month to keep replacing it. It’s not that big of a deal.

People who live close to paycheck-to-paycheck probably can’t (and certainly SHOULDN’T) buy a new car to begin with – and in that case, buying a car that’s already done most of it’s depreciation is a much smarter tactic.

If you can’t afford a new car – buy a 5 year old car – for less than half price. Your maintenance costs will be twice what a new car costs – but that’s peanuts compared to a full car payment.

FINAL THOUGHT: THE STEVE JOBS APPROACH:

Steve Jobs famously replaced his car every six months – with an identical car each time. He actually had a standing order with the car dealership – so he didn’t even have to think about it – they’d just drive to his house or his office with a new car and drive away the “old” one.

For years he drove a long run of black Porsche 911’s but did switch to a long number of black Mercedes SL55s.

But this is madness! A car loses 10% of it’s value during the first 20 feet as you back it out of the parking space at the dealership!

But the Steve Jobs story is weirder:

In California, you don’t need a proper license plate for 180 days – you can drive on the temporary dealership plates, so by swapping out his cars every 6 months, he never had to go to the DMV to pick up his replacement plate. Looking at how much his time was worth – that wasn’t such a dumb idea. Jobs was earning upwards of $100 million per year – that’s $50,000 an hour. Going to the DMV for an hour cost him MUCH more than replacing the car!

This seems like a stupid story – but there is an underlying message here. While we look at those ever increasing maintenance costs over years of car ownership – each one comes with a penalty in time and stress.

In later years, the car probably breaks down – or won’t start – and you’d have to get it to a mechanic and sit around for an hour or two (or even be without a car for a few days) while you get it fixed.

How much do you value your time? $5/hour? $50/hour?

When you factor THAT in – then having a worry-free effortless new car can easily be worth the cost of swapping it out every 3 years.

Source: Steve Baker

Top 20 Comments:

1- Or buy a 3 year old Japanese (or nowadays a Korean would do) car, having let someone else take the bulk of the depreciation, and run it on a shoestring for the next 15 years, when it’s more likely the driver will clap out before the car does.

2- Everyone says this but when I tried to do it I couldn’t find one. It seemed like the only people selling 2–3 year old cars were rental agencies. Is it worth the risk of buying a former rental? I didn’t but it could be totally fine I guess.


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3- Rental companies sell their cars early so they don’t have to maintain them very well. The people who rent them also don’t drive them gently – because they don’t care. So buying a rental car seems like a bad idea.

4-

Seems to me there are some significant things you have ignored or just plain got wrong. You say it’s only $94/month difference between 3 year ownership and 20 year ownership but doesn’t your calculation require that you only pay $25,000 every 3 years when you replace your car? Does that mean you have to keep buying less expensive cars or did you just ignore increasing prices because it didn’t fit with your conclusion?

What about other costs which would be less with an older car, for example insurance and excise taxes, if applicable where you live. Also depending on where you live there may be significant sales tax due every time you buy a new car

I don’t expect your analysis to be perfect or all encompassing but I think you have substantially understated the cost differential of owning a car for 3 years vs 20 years

5- The model is simplified. In the real world, most of those variables are unknowns with a heap of “it depends”. Car prices and maintenance/parts are both impacted by inflation, but that effect can be completely dominated by supply/demand issues specific to the item in question, e.g. they stop making a specific part, your particular vehicle increases in popularity; or the old car has lower insurance, but new car has better gas mileage, etc.

6-Yeah – you can NEVER know for sure. My simplified model makes it easier to discuss and think about the consequences of depreciation versus maintenance. In reality, you need to check how the car you’re buying depreciates – and what it costs to maintain. Once you know that – you can run through the same thought processes that I did and deduce what is right in your situation.

A HUGE part of this is how many miles you drive – depreciation is a mix of mileage and age.



7- I don’t understand why all the maintenance is needed. I ran a Toyota Prius till it was 14 years old and I spent around £350 a year on maintenance including servicing. I’ve just bought a 3 year old Honda Jazz that I fully expect to run for another 10 years at similar yearly costs. Drive it gently and keep under the speed limit.

8- That graph comes from a statistical analysis of what an average car needs. There are always going to be a few people who do better than that – and a few that do a hell of a lot worse.

So your anecdotal one-off proves nothing.

9- Looks like the maintenance costs are too inflated for older cars. If one needs to put in 10000 dollars in maintenance a year, it is time to let this car go. But I’ve see enough examples when cars were running for 10 years or more with just basic maintenance, not needing a new transmission or any major repairs. Good strategy could be to buy a 2–5 year old car for a fraction of a new car cost, and then run it into ground.

10- I drive Toyota Corollas. Exclusively. The one I have now is a 2017 and it cost me $17,000. Had 11,000 miles on it when I got it. Paid off in 18 months. Almost nothing to maintain except oil changes, new brakes, and one set of tires so far. Goal is to get 300,000 miles out of her like I did the previous ones. I will drive it until the wheels fall off. Or the air conditioning breaks. I do live in the South.

11- Very well thought out. I came to the conclusion that I am in the switch out every 3 year category now. The peace of mind of always having a warranty is worth it if you can afford it in my humble opinion.

12- One major point to add. The hot-potato risk of a major service issue can greatly accelerate the crusher date, and those last 10 years can be a toss up, fix or crush.

13-

I think your maintenance figures are too high. But, using your own figures exactly:

Buy at 5 years, keep another 15: ((10000+(10300-2100))/15 = $1213/year

Buy at 10 years, keep another 10: (4500+(10300-5150))/10 = $965/year

Buy at 15 years, keep another 5: (2000+(10300-8800))/5 = $700/year

I bought my previous car here in NZ, a 1997 Subaru Outback, in 2012 for US$2.5k, and sold it in 2019 for $600 (22 yr old). There was very little maintenance. I replaced the head gaskets in the same year I got it (planned). $2k? At some point the AC started leaking and it took a couple of refills to find and fix the leaks (first refill with a dye included, so the leaks could be seen before the 2nd refill). No biggie. $500 total? In 2018 something seized in the brakes on one wheel and started dragging. Again, a couple hundred bucks to fix. Aside from that, just regular servicing.

My current car is a 2008 Outback, bought in May 2020 for US$6k with 54,000 miles. So far the only unscheduled thing is a $15 A/C control relay. Beautiful car. Limited 2000 unit production Subaru 50th anniversary model. 265 HP STI turbo engine (0–60 in 5 seconds), “Touring” cabin spec, modern safety features such as dynamic cruise control, pre-collision braking, lane departure warning (in 2008!). Going to keep this thing a long long time. 富士重工業株式会社　ニュースリリース | ニュースリリース | 株式会社SUBARU（スバル）

14-I enjoy your answers Steve:)

The only exception to that I’ve experienced is buying a used electric vehicle. I purchased a very low mile (13k) 3 year old EV lease return and have had zero maintenance on it except for tires. I spent 9k on it still have it. It was paid off early because of the savings and I could probably get around 5k for it at 10y/o. Of course whoever has to replace the battery would get that cost so it might break even using your calculations. I plan to run it into the ground including using it as a storage battery for my off grid solar.

15- My wife and I are leasing a vehicle at the moment. It’s probably the best decision we’ve made regarding transportation. We drive a new car for three years, the dealer pays for all major maintenance while we only pay for oil changes and when the time is up, we give it back and get a new one. We pay one fixed monthly price for a reliable, safe and more fuel efficient vehicle. This actually costs us less than when we drove a used vehicle that would break down randomly throughout the year and would require expensive repairs, not to mention days without a vehicle. Still, people try to tell me how I’m a sucker because I went to the dealership. But the dollars don’t lie: I save far more money doing it this way. Unless of course I am going to steal all of my new vehicles. That would be a lot cheaper, until I was caught at least!

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16- I like answers like this with real figures. They give sense of scale and change so nice one!

Side note is RVs or motorhomes, as called in UK, have weirder curve. As highly customized from new much steeper curve over first 3 years. Then long time flat up to 15 years. Then kind of afterlife up to 25 years.

Why excited about Tesla Truck, if ever happens. With RV conversion could last forever.

17- For me it is also stressful to spend time looking for a new car. Trying different models, find a good deal, compromising on this and that. Some people like this part, but I don’t.

So for me the optimum is to get rid of it before the stress occasionally bad news from the mechanics.

Ans: Find one brand/type that you like and stick to it. I owned 7 MINI Coopers in a row. The only decision each time was what color do I want this time?

I’ve now switched to Tesla as my go-to-brand – but I’ll do the same. However, the depreciation curve for Tesla’s is much more gentle – and they need almost no maintenance – and will likely last for 500,000 miles, not 200,000. So I won’t be replacing them every 3 or so years. Probably every 5? We’ll see. Right now, my 3 year old Tesla is worth $2,000 MORE than I paid for it…and is indistinguishable from a brand new Tesla. So there’s no way I’m replacing it right now.

18- In my experience, it’s only worthwhile for people to keep their cars until they have paid off the financing – assuming you haven’t done something stupid like financed over 72-84 months. If you need to do that to keep the payments down, you couldn’t afford the car in the first place.

Beyond that, it only makes sense to keep old vehicles if you are able to repair them yourself. In my case, since I do 90% of the post-warranty repair work on cars I own, I buy vehicles intending to keep them until they disintegrate into a pile of brown powder out there in the yard. My current vehicles are 7, 20, 22, and 23 years old. In the past 3 years I’ve sold off other cars I owned that were 21 and 18 years old.

19-

Interesting analysis, but I think that your data on depreciation is too dramatic.

None suffer 50% depreciation after only 5 years, and in fact some hardly suffer 20% after 5 years. Certainly, 15% per year is too much.

 
 
Cars with the Worst Resale Value
Rank and sort over 200 Vehicles with the worst resale values at the 3, 5 and 7 year marks.
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19- These monetary and time cost are virtually worthless. I have never purchased a new car for my own use for decades and have never incurred those types of maintenance expenses. I have always had nice cars. My last was an awesome Lincoln Mark VIII and my current is a very nice Silverado crew cab. My wife always insist on a new car. They have constantly been in the shop for scheduled maintenance and odd issues that pop up and the dealers can’t seem to resolve. German cars seem to really rack up annual maintenance cost, and dealing with their service departments is a lesson in extortion.

 

Her current vehicle is a Ram Big Horn with an A/C system that has a slow leak they cannot seem to fix and a bizarre wind noise that is also elusive. It’s under warranty, but constant trips to the dealership are a constant hassle. All while my 2007 Silverado Classic just rolls right along without any problems.

20- Beautiful analysis. Very insightful thank you. So one question? If the vehicle/truck is used to create dinero, then these stats obviously go out the window correct? Not trying to take away your analysis which is great. Just thought I would add this little wrench in the engine…no pun intended:-)

What car would be the optimal balance between affordability, speed, exoticness and parts availability?

A VW Golf would be cheap and parts would be readily available, but it would hardly be exotic or particularly fast.

Conversely, something like, say, a Lamborghini Diablo SV would undoubtedly be fast and exotic, but running the thing and replacing parts would be horribly costly and difficult.

What car ticks a balanced box between all these?

Consensus is:
– if in the US, a C4-C7 Corvette, preferably a Z06 or ZR1

Engines are cheap and easy to modify, can pull around 1 g on the skid pad depending on setup, dirt cheap on the used market.

– If in Europe, a 996 or 997 Porsche 911.

A mid 2000s Porsche. (996)

They’re reliable, relatively cheap meaning you could buy 3-4 entire fully running models for less than 10k each, and use them for parts, they’re exotic and have a more timeless appearance than most cars from that time. As for speed, they can go top to 177 mph!

At what miles does a car start to wear and break down?

  • Toyota, Lexus, Daihatsu, Honda, Subaru, Suzuki,  Volvo: 300,000
  • Audi, BMW, Mercedes, Lincoln, VW, Skoda, Seat, Mazda, Mini: 250,000
  • Ford, Buick, Chrysler, Dodge, Land Rover: 200,000
  • Opel, Chevrolet, Peugeot, Citroen, Dacia, Smart: 150,000
  • Renault, Fiat, Lada: 100,000 – on a good da, though I know of many examples of people throwing in the towel with one of these only a few weeks old.

Source: Here

While the mechanics of  fancy vehicles like Mercedes, BMW, Lincoln may be designed to last longer than most, the fatal flaw is that the electronics are buggers and will make the car useless long before the cylinders give up the ghost.

Caveat:

All those makes with proper maintenance will go much longer if you

  • Change coolant every 5 years or less
  • Change oil religiously with an excellent synthetic oil at proper intervals, and use OEM filters
  • Service  automatic transmissions at 50k miles
  • Change differential and transfer case oils at 100k
  • Check hoses belts and replace if necessary at 100k miles


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