David Booth in The Fast Lane
If you're trying to save money, used actually might not be the way to go.
It has long been the centerpiece of any automotive scrooge's money savings schemes: Let somebody else pay for the depreciation. We all know a frugal shopper who never buys new, always insisting on buying a one-, two-, or even three-year-old car so the new - and the new car sticker tag - has worn off. You know, the annoying guy who always ruins a perfectly good after-dinner conversation about the futility of the Maple Loafs or the hubris of Greek civil servants in order to pontificate, always at length, about how smart he was to buy a used car.
But was he?
For much of the last two decades, his accounting would have born scrutiny. Though it hasn't always been so, the depreciation of a modern automobile - caused by the rapid face of advancements and the relatively short lifespan of any give model line - has resulted in the classic "you lose 20 per cent as soon as you drive it off the lot" syndrome.
In the last two years, however, a number of market upheavals - caused mainly by the economic crisis - have necessitated an investigation of that seemingly obvious formula. Used cars, for one, have significantly increased in value as homeowners, hit hard by the plunging value of their homes and stock portfolios, are suddenly discovering the wonders of frugality. In addition, "cheap money" has been thrown around by auto manufacturers, not to mention low- and sometimes even no-interest loans to leverage cost-conscious buyers into their slow sellers.
Crunch the numbers, and going to a place like this might actually end up costing you more than buying a new car.
The advent of cheap money has thrown a monkey wrench into the penny-pinching equation. Yes, a brand new $30,000 sedan may be worth only $24,000 after 12 months, but it will cost you only $500 a month for 60 months if you're lucky enough to qualify for zero per cent loan while the $24,000 used car will be $483 at the 7.75 per cent a few major Canadian banks are advertising for car loans.
True, getting an interest-free loan can be difficult, but look also at the opposite end of the coin. To make cars more affordable, some banks are offering long-term - up to eight years! - loans with interest rates at a whopping, at least for current times, 8.25 per cent. While your $24,000 used car payments will indeed be lower - $342 a month - you will pay $8,864 in interest charges, bringing the grand total to $32,864.
"But I pay cash," whines our four-wheeled money-grubber, "I'm not paying any interest."
True, but they are losing interest. Accountants like, nay love, to talk about the true cost of money and the first thing they will tell you about paying cash is the interest you are losing were you to invest that same money instead of dumping it on a depreciating asset. Even at today's deflated rates, paying $24,000 for our mythical used car with cash (compared with financing via an interest free loan) would see you lose more $2,000 if you parked it in a GIC for three years ($3,500 for five) and as much as $5,000 if you were the Oracle of Omaha.
Besides, say you were sincere about safe driving and buying - as I recommend - a second set of snow tires for your new motor car. If you were buying new, you could negotiate to roll that into your low interest loan, whereas you'll need to fork over hard-earned cash if you're buying used.
