Comment by brianwawok | Hacker News Reader

Comment by brianwawok | Hacker News Reader

I did this math when I was buying my last car. The things I did different

I kept the end point constant at 10 years. So it was:

* Option 1: Buy a new car, keep 10, and sell

* Option 2: Buy a 3 year old car, keep 7, and sell

* Option 3: Buy a 5 year old car, keep 5, and sell

* Option 4: Buy a 7 year old car, keep 3, and sell

At the time I was shopping, the car I wanted had really high resale. So option 1 was coming out CHEAPER per year than option 2. (new price / 10 compared to used_price / 7). Options 3 and 4 were cheaper, but not by a ton. But then the thing I thought about was:

* With option 1, the car I am driving is an average of 5 years old

* with option 3, the car I am driving is an average of 7.5 years old

* With option 4, the car I am driving is an average of 8.5 years old

So that pushed me to go for option 1. No regrets so far, my car just passed his 7th birthday. Not 100% sure I will sell at 10, but a strong possibility.

I think the simple math of "new car = always bad unless you are rich" is wrong. "new car every 3 years trading in = always bad", sure. But throw in dealer incentives and financing, and the new vs used debate can be less black and white.

I bet it's a different story if you calculated opportunity cost and risk. Are you paying cash for the car in all cases? Or are you getting a loan? Increased positive cash flow has a real economic value. A loan has real economic risk. Are you investing the cost difference between option 3 and option 1 to get a return on that money?

The funny thing is, options 1 I got 0 APR loan. Option 2 was 5% APR loan. Options 3 and 4 were cash.

So cash in my pocket, option 1 was the "best". I had no initial outlay, the car dealer loaned me the money for free.

So yes that is even 1 more reason why option 1 worked out best for MY case. But who knows when I next get a car what will be true.

Car dealers do not loan you money for free. Interest rates are low, but it costs them money to service that loan. What they did, since the dealership owns the bank, is they shoved their profit into the principle instead of getting it back in interest. In other words, they simply charged you more for the car. And even a 0% loan is a risk from a personal finance standpoint. Options 3 and 4 carried no risk, lower cash in hand, but higher positive monthly cash flow (because no monthly bill). This freed up your additional monthly cash flow which would have been spent on a car payment to be invested and earn a return.,

From the point of view of these calculations it doesn't matter that the principle included loan servicing or sales commissions or what have you.

The cash flow calculations vs the cash on hand - risk costs are where the math happens but it is perfectly possible to walk away with the decision to buy new to work out better on certain models of car.

What model of car?

I saw this with inexpensive manual Japanese imports the last time I shopped ~4 years ago. In particular lowend civics & Subaru imprezas were holding their value such & the dealer incentives & financing made the calculation essentially even.

I have friends that said the same thing about certain diesel sedans (pre mpg scandal) but never calculated it myself.

In my case above it was for the wife, so it was a Honda CRV.

Small Japanese SUVs had a very very high value retention for the first 4-5 years.

Something like maybe the sticker price new is 25k, but what you really pay is closer to 21k new. A 3 year old would be going for 17-18k. After the maths above, it ended up costing more per year to buy used.

Loans = higher principle price is false. It could be true in some cases, but it was not in mine.

I negotiated a cash rate. I had the cash in my hand, and I got the lowest possible cash price, after talking to 6 dealers. Once I had the price printed on paper including all fees, I then said sure I will do the 0% APR loan. My price did not go up a single dollar.

Options 3 and 4 I could take that cash I would have spent on the car, and put into the stock market. It would have generated me 5-6% return, on average, over the life of my car.

As written, Option 4 you only have a car for 3 years. I'm pretty sure that's not what you meant, but fixing it makes the math below also wrong: if you keep a car that is 7 years old for 10 years, it's an average of 12 years old in that time period.

edit: my mistake, I guess you want to have 3.333 cars in 10 years for Option 4. Carry on...

My math could be wrong-ish, I don't think 8.5 is exact...

not sure what 3.333 cars means

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