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Re-Thinking Previously Owned [Used] Vehicles

By Rick Kahler CFP® MS ChFC CCIM

www.KahlerFinancial.com

Have you ever seen a Super Bowl ad touting how much money you could save if you bought something second-hand? Of course not! There’s not a lot of encouragement in our culture to buy used stuff. Even the one exception, a used home, is described as “existing.”

Badge of Honor

Buying used just isn’t cool—that is, unless you’re a wealth builder. Many of them look upon buying used as more of a badge of honor than an embarrassment. Certainly, there are many items that are best purchased new. Toothbrushes, toilet paper, and underwear come to mind. Yet there’s one thing that’s almost always better to buy used—a vehicle.

The Myths

Let’s look at a few common myths around buying a new [previously owned] car.

• “Buying a used car is just buying someone else’s problem.” That can certainly be true if you don’t do your homework. When shopping for a used car, be sure you research the model’s repair record. The best place for this is Consumer Reports. An inexpensive online subscription will give you loads of detailed information about every year, make, and model. Narrowing your search to the top used car values will significantly increase your odds of buying a great used car. Before writing a check for even a top-rated used car, take it to a trusted mechanic for an evaluation. The money you spend will be well worth the future headaches you save.

• “Never own a car that is out of warranty.” This is a good idea only if your heart is set on owning one of the many cars ranked as the least reliable. The warranty will come in handy because the car will spend a significant amount of time in the shop. Also, the value of a new car drops rapidly in the first few years. If instead you buy a used vehicle with a high reliability rating the warranty become less important, especially when you consider you’ll be getting a third to half off the sticker price. If you buy a low-mileage, late model car, your savings will be enough to more than pay for the few times you may need to take it into the shop.

• “When a car hits 80,000 miles it’s time to get a new one because it will start costing an arm and a leg to maintain.” Once again, a top-rated used car will often run reliably for well over 120,000 miles if it’s maintained. Yes, the maintenance will increase, but the rapid depreciation of a new car will cost much more than maintaining an older car. Wealth builders routinely buy late model cars with low mileage and own them for 10 years or more.

• “I can get a lower interest rate and longer term loan on a new car.” Here’s my rule of thumb: If you need a loan to buy a new car you are probably buying too much car. Those who manage money well create a savings account for replacing their vehicles. That way they can pay cash for a car and drive the best deal. If you must get a loan, borrow as little as possible and pay off the loan quickly. A higher interest rate on a shorter term loan on a used car is still a much better deal than what you would lose in depreciation on a new vehicle.

Assessment

Americans, especially doctors, have a love affair with their cars. Still, for most of us a new car is a luxury, a big splurge best purchased after we’ve attained financial independence. The best way to travel the road to that financial independence is in a used car.

Conclusion

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