Is buying a used car a good decision?
Last week, I decided to go for a used car to replace my existing small hatchback car. Though I usually recommend a small car to save money on gasoline, this time I went for a sedan that runs on diesel. The primary reason for going for a sedan from a small hatchback is to save on gas costs. Gasoline has become almost double the price of diesel. I had fewer choices for a small diesel car in the market. Furthermore, I preferred a used car instead of a new one. Yes, buying a used car is a good decision if you do it right. These are the reasons that prompted me to buy a used car instead of a new car:
Value for Money
Buying a car itself is a bad idea for a value investor. It is a depreciating asset (or rather a utility). Buying a new car should be the worst decision for an investor looking for value for money. However, a car is a necessary evil. So the wisdom would be to invest the least possible amount in a car. Therefore, a used car would be the right choice. The only hiccup would be to spot the right car.
In the used car market, cash is the king. Altogether it is a different experience buying a used car with cash. It is a buyer’s market. If you are going to make a 100% down payment, you have the power to bargain and get good deals. If you are able to spot a potential individual seller in dire need of cash, you are going to get a good deal.
Maximum Depreciation in the First Few Years
A new car starts depreciating at the fastest rate at the moment you roll it off the lot. The maximum depreciation for such a new car occurs in the first few years. Usually, with the standard permissible depreciation rates stipulated by the tax authorities, a car loses 50% of its value in the first three years. So the value of a car bought for Rs 10 lakhs becomes Rs 5 lakhs in mere three years. Assume a lifespan of 15 years. So, there are still 12 more years of useful life left in a good car to take full advantage of. Let the first owner bear the major brunt of depreciation, and let us reap the fruits of benefit.
Affordability and Ample Selection
When going for a used car, you have the liberty to choose all the specifications according to your budget. Depending on your budget, you can look out for the brand, make, model, color, accessories, features, etc. Furthermore, even low-income-group people have a chance to own a luxury segment used car. You have the freedom of owning your dream car just by compromising to own a used car. By grabbing a splendid used car, you kill two birds in one shot; you are frugal as well as luxurious!
Ability to Avoid Debt
With a tough economy and job losses everywhere, if you buy any car by borrowing, used or new, it is going to be a fearful life until you fully repay the borrowed amount. If you buy a car with the aid of an auto loan, your investment keeps adding up day by day with interest and borrowing costs, while the value of the car keeps decreasing day by day. Leave aside the running and maintenance costs. Buying a used car gives you a chance to avoid debt, as the value of a used car is far less compared to a new car. You can pay it off 100% with your savings. Thereby you are avoiding debt, interest and borrowing costs, and no impact on your credit score.
Minimum Investment in a Depreciable Asset
As I said earlier, a car is a depreciating asset. By going for a cheap used car, you are making a minimal investment in a depreciable asset. The less you invest in a depreciating asset, the less your money evaporates into the air.
Pay Less on Car Insurance Premium
Since the value of a used car is far less than its original price, obviously the amount that you have to spend on auto insurance premium also becomes correspondingly less.
Buyers are Less for Used Cars
People are reluctant to buy used cars because of the fear of landing in trouble. Wherever there is fear, a value investor tries to find opportunities.
Get Free Accessories, Like it or Not
Whatever accessories, features, or extras that the previous owner has added to his car do not get added to the resale value of a car. You get all of them for free which otherwise would have emptied your wallet if you were to buy a new car. Whether you need them or not, whether you like them or not, you get all those extras, additional features, and accessories for free.
The Skills Needed to Identify a Potential Used Car
Finding the right used car is an uphill task. However, you don’t need any extraordinary skill to buy a used car. You have to just adopt a precautionary stance to not land into trouble. Keep yourself a checklist to buy a used car. Verify if the car you are going to buy meets all the criteria in that checklist.
Guidelines to Buy a Used Car
These are a few quick guidelines on what to look for while buying a used car:
Offline Research
- Before you go looking out for a car, research for the asking price on the Internet, ads in the local newspapers, local used and new car dealers, car rental and leasing companies, and friends and neighbors.
- Choose a brand or model that has high resale value, with a large number of cars on the road and in the market.
- Look out for a car that has run low kilometers and is with the first owner.
- Verify whether all the relevant statutory records (registration, tax, insurance, title, smog certification, etc.) are up to date and to your satisfaction. Look for the service history of the vehicle at the garage where it is usually taken care of. By doing so, you can avoid stolen, junked, salvaged, flooded, or a totaled car by an insurance company or a car involved in a crime.
Direct Inspection
- An auto mechanic can easily identify the repair and maintenance issues of a car. Taking a mechanic with you for inspection is a good idea.
- Check for major dents, ripples, waves, welding spots, poorly fitted panels, and mismatched colors. All of these indicate a serious accident or major repairs for which bodywork may have been done.
- Look for minor dents, cracks, rust, and scratches. Estimate expenses like tinkering and painting that you may have to bear.
- If possible, take the car for a test drive. Identify the noises and their causes. You’ll get an idea about the expenditure the noises may incur you.
- Identify the wear and tear and the possible longevity of the parts (Eg., tires, battery, etc.)
- Ensure that the engine room is clean and dry. It should be free of leaks, with a well-maintained engine that can easily be started. Ideally, the engine room should be with fewer emissions and leakages. Even if the engine room has been cleaned to show a buyer, any leak can be traced by looking at the ground where the car is parked.
Risks Involved in Buying a Used Car
The manufacturer’s warranty may have expired for a used car of more than 3 years of age. However, if the car was well maintained until then, you might not be needing a warranty cover thereafter. Furthermore, you have those risks that I have outlined above if you fail to identify them. Nevertheless, you can lower your risks by significantly lowering the acquisition price.
Negotiate With The Owner
It is better to buy the car from an individual rather than a dealer as the benefits are many. Dealers refurbish crap to look good to dump it on you. On the other hand, if you buy from an individual, you know about the seller. You can talk face to face with the owner and inquire about the mechanical problems if any. You can know who the principal driver was, the reason for selling the vehicle, and other pertinent histories in detail, and also request maintenance records.
Once you have spotted the right car and satisfied, sit down with the owner of the car for negotiation. Bring to the owner’s notice all the defects and the negative factors in the car to lower the price in your favor. Offer the owner full down payment, a rate that is very much in your favor or pretend to walk away. Mostly you should win the deal. However, I didn’t have a chance to sit on the negotiation table this time! Why? Read below.
My Experience This Time
Usually, manufacturers sell cars used in their factories, by their staff and managers, through bidding or auction. You may try to find some good deals there. The cars will be factory maintained. I got an opportunity to participate in one such closed bidding. The cars were used by the factory managers and were factory maintained. I was successful in three bids.
Let me detail that incident a bit. In that factory on that occasion, a person was allowed to bid for three cars only. The bidders have to be referred by an employee. There were a totally about thirty cars available for bidding. I bid for three, in a hope to win at least one. When the results were announced initially, I was the successful bidder for one car. I bought that car for myself. I was the fifth or sixth bidder for the other two. However, the fear factor rolled in. The bidders above me for the other two cars gave way. The bids rolled down to me. I became the successful bidder for the other two cars too. Chance favors the prepared mind!
Agreeing to my views that I stated above in support of going for a used car and being satisfied with the prices and the vehicle conditions, my dad and my brother in law bought one car each out of the other two successful bids.
Bottom line
So the key takeaway message here is that going for a sparingly used, 3-year-old used car for far less than 50% of the original price tag without being fearful by carefully evaluating the condition of the car could be the best deal for a guy who looks for value for his money. Are you intelligent, emotional, or fearful?
Hi Raj,
I just want to comment on this article you’ve made. I know we are in different countries, but the fear most car buyers face in my country is buying a car submerged in a flood. As we all know, sellers of those types of cars would do whatever it takes to beautify and present this to the buyer so they can be rid of it. Owning such a car is a headache to begin with. You would have to invest a lot of money and resources to fully appreciate this kind of car, but would it be really worth it?
But it’s good that you have a way to skirt this headache by buying direct from company cars which may or may not have hidden maintenance risks to it.
Anyway, thank you for sharing your thoughts on this. I really appreciate it.
Joseph
Even brand new cars parked in the factory yards got submerged in Philippines due to cyclonic rains and tsunami. That’s why I advised to proceed with “due diligence.”
A well treated car can be sold less 40% so on a 20k car you lose 8k. if you are in business you can claim capital allowances of a third of this, so for only 1800 a year (5400 / 3 years) you can be driving a $20k new car without ever having to pay for repairsas everything under guarentee. I know on older cars how the bills can add up as well as fuel if they are not as efficient as new cars.these numbers are not precise but something to think about
Ps. If you buy a2nd hand car for 12k and drive it to death for a further 10 years that amounts to 1200 a year then you also have to factor in those repair costs ( mind you you will get full capital allowances when you dispose the car so it is only roughly 800 plus repairs etc) to drive an old banger. My point is new cars do not have to be as expensive as they seem (especially if you are in business).
Haha, not to mention the lost opportunity cost on the $12k because now it is easy to get 0% interest 3 year loans on cars.
Not trying to prove your post is wrong, I’m just saying there are many ways to look at the same thing.
P.s
I am also an intelligent investor and a big fan of ben graham.
It should be noted here that the smartest investor ever, Warren Buffett, buys used cars. He is in business; doesn’t he know about all those claims? What I can say is that if you do it right with cash without availing any form of credit, you save at least half the cost of the new for a 1 or 2 year old car. Do your due diligence as you do with stocks and sleep peacefully. Naysayers have always their say. If you think you can substantiate your thoughts, go ahead.