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Bought New vs Bought Used — The Real Math — Transcript

by The Gen X Way · 2,065 words · 333 segments · language en · Watch on YouTube

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0:00Meet David and Jake. They're best
0:02friends. Same age, same income, and they
0:05even wanted the same car. Jake bought it
0:08brand new. David bought the exact same
0:11model, 3 years old. We followed both of
0:14them for 20 years and kept score of
0:16every dollar. The value their cars lost,
0:19the interest they paid, and the repair
0:21bills.
0:23We'll check the scoreboard four times.
0:25At year three, year six, year 10, and
0:28year 20. Every decision gets judged with
0:31real data. And only at year 20 do we
0:33find out who the real winner is.
0:36It starts on a Saturday morning when
0:38both men are 30 years old. Jake walks
0:41into the dealership and walks out with a
0:43brand new SUV. The price is about
0:46$50,000.
0:48That isn't an expensive choice by
0:50today's standards.
0:51According to Kelley Blue Book, the
0:53average new vehicle now sells for just
0:56over $50,000.
0:58Jake bought an ordinary new car at an
1:01ordinary price. He gets the full
1:03warranty. He gets the newest safety
1:05features. He gets that new car smell. He
1:09puts a little money down and takes a
1:10loan for the rest. His monthly payment
1:13is $745.
1:16David wants the same SUV, but he makes a
1:19different choice. He finds the exact
1:21same model, 3 years old with normal
1:24miles in good condition. He pays about
1:27$30,500
1:29for it. He also puts a little down and
1:31takes a loan. His monthly payment is
1:34$529.
1:36Those payments are not made up.
1:39Experian, one of the biggest credit
1:41bureaus, reports that the average buyer
1:43pays about $765
1:46a month for a new car and about $542
1:50for a used one.
1:51Jake and David are as average as it
1:53gets.
1:54When Jake asks David why he bought a
1:56used car, David gives him one sentence.
2:00"I let someone else pay for the first 3
2:02years." Jake laughs.
2:04At the next family dinner, everyone
2:06wants to see Jake's new car. Nobody asks
2:09about David's.
2:11On day one, Jake looks like the winner.
2:14But something is already happening to
2:16his car that nobody can see.
2:18The first year goes perfectly for Jake.
2:21No problems, no repairs, no surprises.
2:24He loves that car. But every month,
2:27something is quietly disappearing. It's
2:30called depreciation.
2:32It's the value your car loses just by
2:35getting older.
2:36Nobody sends you a bill for it. It never
2:38shows up in your bank account. You only
2:41find out how much you lost on the day
2:43you sell. According to Kelley Blue Book,
2:46a new car typically loses around 20% of
2:49its value in the first year alone, and
2:51close to a third within 2 years. So, in
2:54year one, Jake's car loses about $10,000
2:58in value. David's car, which was already
3:003 years old, loses about 4,000. Here's
3:04why. A car loses value fastest when it's
3:07new.
3:08The steepest part of that drop happens
3:10in the first few years. Jake bought his
3:12car right at the top of the hill. David
3:15bought his after the steepest part was
3:17already over. The first owner paid for
3:20that drop, and David simply skipped it.
3:23But David isn't winning everything.
3:25There's a cost to buying used that most
3:28people forget. Lenders charge more
3:30interest on used cars. According to
3:33Experian, the average new car loan
3:35charges about 6 and 1/3% The average
3:38used car loan charges about 11%. So,
3:42even though David borrowed less, he's
3:44paying a much higher rate. So, who's
3:47ahead after 3 years? It's time for the
3:50first scoreboard.
3:52Year three scoreboard. Value lost.
3:55Jake has lost $19,500.
3:59David has lost 10,500.
4:02David wins this one.
4:04Interest paid. Jake has paid about
4:07$6,500.
4:09David has paid about 7,100
4:12because of that higher rate. Jake wins
4:14this one.
4:16Repairs.
4:17Jake's new car has needed about $1,800
4:21in maintenance.
4:22David's older car has needed about
4:243,300.
4:26Jake wins this one, too.
4:28So, Jake wins two out of three
4:31categories. But when you add everything
4:33up, Jake has spent about $27,700
4:37on his car. David has spent about
4:4020,900.
4:42David is ahead by about $6,800.
4:45That's the strange thing about
4:47depreciation. You can win most of the
4:49battles and still be losing the war.
4:52But Jake isn't finished. In year four,
4:56he gets his best moment of the entire
4:58race. In year four, David's car is 7
5:01years old. That's the age when cars
5:04start to ask for more. That year,
5:06David's car needs about $1,500 in
5:09repairs and maintenance. Jake's needs
5:12about 900 and some of his work is
5:14covered by warranty.
5:16These numbers come from CarEdge, which
5:18tracks what it costs to maintain cars at
5:21every age. Their data shows a clear
5:23pattern. A car costs a few hundred
5:26dollars a year to maintain when it's new
5:29and well over a thousand dollars a year
5:31by the time it's eight or ten years old.
5:33Jake hears about David's repair bill and
5:36says what you'd expect him to say.
5:38That's why I buy new. And honestly,
5:41that's a fair point. Older cars do cost
5:44more to keep running. Anyone who tells
5:46you otherwise isn't being straight with
5:48you. If the story ended in year four,
5:51plenty of people would say Jake made the
5:53smarter choice.
5:55But the story doesn't end in year four.
5:58Two years later, Jake does something
6:00almost everyone does, and it changes the
6:03race completely. Year six.
6:06Both loans are now finished. For the
6:08first time in 6 years, both men have no
6:11car payment. David keeps driving. His
6:14car runs fine, and he's in no hurry. His
6:17payment goes to zero, and it stays at
6:20zero. Jake does something different. His
6:23warranty is running out. His car has a
6:25few scratches, and it doesn't feel new
6:28anymore. And the dealer has been calling
6:30with an offer.
6:31So, Jake trades it in and buys another
6:34brand new SUV. New warranty, new smell,
6:38and a new payment of $745
6:41a month. This is the most normal
6:44decision in the world. According to a
6:46study by the insurance company The
6:48Zebra, nearly 2/3 of drivers keep a car
6:52for 5 years or less.
6:54Jake kept his for six, which means he
6:56was actually more patient than most.
6:59But think about what just happened. Jake
7:02has now sold a car at the exact moment
7:04it was about to become cheap to own.
7:07The payment was gone. The biggest drop
7:09in value was behind it. And he handed it
7:12to someone else and started over at the
7:14top of the hill.
7:16Year six scoreboard. Value lost. Jake
7:20lost $30,000 on his first car.
7:23David has lost $17,000.
7:26David wins.
7:28Interest paid. Jake has paid about
7:31$8,700.
7:33David has paid about $9,400.
7:37Jake still wins.
7:39Repairs. Jake has spent about $5,100.
7:44David has spent about $8,200.
7:47Jake wins again.
7:49Once again, Jake wins two out of three.
7:52But in total, Jake has spent about
7:55$43,800.
7:57David has spent about $34,600.
8:01David's lead has grown to about $9,200.
8:05Right now, the race still looks close.
8:08Jake is winning most of the categories,
8:11and David's lead feels small. But over
8:13the next 4 years, Jake is about to lose
8:16one of the categories he's been winning,
8:18and he won't win it back. Between year
8:21six and year 10, something important
8:24happens.
8:25David pays nothing. No car payment, no
8:29interest for four straight years.
8:32The only money going into his car is
8:34maintenance and gas. Jake is making his
8:37second round of payments, $745
8:41a month, and every one of those payments
8:43includes interest. His new car is also
8:46losing value fast again, because it's
8:49back at the top of the hill. In year 10,
8:52David's car is 13 years old, and he
8:55decides it's time for a change. He
8:57doesn't buy new. He does exactly what he
9:00did the first time. He finds another
9:033-year-old model in good condition and
9:05buys it. Same strategy, same patience.
9:09Year 10 scoreboard. Value lost. Jake has
9:13now lost $53,500
9:17across two cars.
9:18David has lost $22,500.
9:22David wins, and the gap is getting huge.
9:25Interest paid.
9:27Jake has now paid about $16,400.
9:31David has paid about $9,400.
9:35For the first time, David wins this
9:37category. Jake just lost one of his two
9:40wins, and he'll never get it back
9:43because he's always paying on a new
9:45loan.
9:46Repairs. Jake has spent about $7,800.
9:51David has spent about $15,500.
9:54Jake still wins this one, and he'll keep
9:57winning it all the way to the end. In
9:59total, Jake has spent about $77,600.
10:04David has spent about $47,400.
10:08David is now ahead by about $30,000.
10:1110 years ago, the gap was zero. Now,
10:15it's $30,000.
10:17And there are still 10 years left in the
10:19race. The next 10 years follow the same
10:22pattern. In year 12, Jake trades in his
10:25second new car and buys a third. In year
10:2818, he buys a fourth. Every 6 years, he
10:32goes back to the top of the hill, takes
10:35the biggest drop in value, and signs a
10:37new loan. David drives his second used
10:40car for 10 years, just like the first
10:42one. He pays more for repairs as the car
10:45gets older, but most years, he pays
10:47nothing to a bank.
10:49Now, both men are 50 years old. 20 years
10:53have passed since that Saturday morning.
10:56It's time for the final scoreboard.
10:59Year 20. The final scoreboard.
11:02Value lost. Over 20 years and four new
11:06cars, Jake lost $105,000
11:10in value. David, with two used cars,
11:13lost 45,000.
11:15David wins by $60,000.
11:19Interest paid. Jake paid about $30,700
11:23in interest. David paid about $18,800.
11:27David wins by nearly 12,000.
11:30Repairs. Jake spent about $16,400.
11:35David spent about $30,900.
11:38Jake wins this one by about $14,500.
11:42Now, add it all up. Jake spent about
11:45$152,000
11:48on his cars over 20 years. David spent
11:51about $95,000.
11:53David is the winner by about $57,000.
11:58Look closely at what that means. David
12:00really did pay more for repairs, about
12:03$14,500
12:05more. Jake was right about that the
12:07whole time. But David saved $60,000
12:11on depreciation. He paid $14,500
12:15to save $60,000. Anyone would take that
12:18trade.
12:19Now, you might be wondering if we chose
12:21numbers that make used cars look good.
12:24So, we tested that. There are different
12:26ways to measure how fast cars lose
12:28value. Kelley Blue Book's estimate is on
12:31the harsher side. A company called
12:33iSeeCars studied about 950,000
12:37real sales of 5-year-old cars and found
12:40that cars lost an average of about 42%
12:43of their value in 5 years. That's a
12:45gentler number, and it's friendlier to
12:48people who buy new. So, we ran the whole
12:50race again with the gentler numbers.
12:53David still won by about $35,000.
12:57And there's one more thing. We left
12:59insurance out of this race completely
13:02because it depends so much on where you
13:04live and your driving record. But new
13:06cars generally cost more to insure than
13:09older ones.
13:10If we'd included insurance, David's lead
13:12would have been even bigger.
13:15So, does that mean Jake made a terrible
13:17decision?
13:18No, and it's important to be fair to
13:21him.
13:21Jake got real things for his money. He
13:24always had a warranty. He always had the
13:27newest safety features. He almost never
13:30had a surprise repair bill. He never had
13:33to wonder whether his car would start on
13:35a cold morning.
13:36Those things have value. But now, we
13:39know the price.
13:40Jake paid about $57,000
13:43over 20 years for that peace of mind.
13:47David made a different trade. He
13:49accepted a few more repair bills, a
13:51slightly older car, and a higher
13:54interest rate.
13:55In return, he kept $57,000.
13:59That's more than the price of the new
14:01SUV Jake drove out of the dealership on
14:04that Saturday morning 20 years earlier.
14:07And remember what David said on the
14:08first day? I let someone else pay for
14:11the first 3 years.
14:13It sounded like a joke at the time. It
14:15turned out to be the most valuable
14:17sentence in the whole story.
14:20Prices and loan rates are different
14:22everywhere. So, I'd love to know how it
14:24works where you live. Does the first
14:26owner take the biggest hit there, too?
14:29So, which one are you? Do you buy new,
14:31like Jake, or used, like David? Tell me
14:35in the comments, and tell me how long
14:37you've had the car you're driving right
14:39now. We read every single one.

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