Should you buy a new or second hand vehicle?

The author of ‘Practical Steps to Financial Freedom and Independence,’ Usiere Uko, writes about the basic things to consider when deciding whether to buy a brand new or second hand car.

I tend to get a bit upset when it is time to renew my car’s insurance. It is not because I feel I am throwing money away. I truly appreciate insurance and the peace of mind it brings, especially in these ‘ember’ months when reports of car snatching are on the rise. Also, my insurance company has been very nice to me. What I find upsetting is finding out the current market price of my car, knowing how much I bought the car brand new. I find the depreciation annoying because I know what I would have done with the money rather than lose it to depreciation just like that. Does it make sense to throw away so much money in the name of driving a brand new car?

Wealthy folks also buy second hand

According to a 20-year study of 500 millionaires and more than 1,000 high net worth individuals, Thomas J. Stanley, bestselling author of ‘The Millionaire Next Door,’ discovered that more than 75 per cent of self-made American millionaires do not drive the latest model and most bought second hand. They waited for someone else to pick up the steep depreciation before they bought the car. Among the minority that bought brand new cars, most held onto it for eight years and above before they traded them for a newer model.

Most cars depreciate the most in the first year. The moment you stick a number plate to a car, it loses about 25 per cent of its value before you drive it away from the dealer’s parking lot. That means if you bought a car for N6m, you would have lost about N1.5m as you drive off from the dealer’s parking lot. If you had used that N1.5m to buy a plot of land in the outskirts of town, it may be worth more than N10m in less than five years. Compare that to what the whole car will be worth in five years.

Spending is emotion-driven and we love the good feeling that comes with getting something we really want, even if it makes no financial sense in the long run. There is nothing wrong in buying a new car, but sometimes we need to take a step back and see what it is we are doing with our money and the impact years down the line.

Sneaky car dealers

Making the decision to buy a car is not an easy one. I remember my experience with my current car two years ago. None of the dealers I met told me the truth. I am not saying all car dealers are liars. I was not lucky enough to meet one of the truthful ones. Most of them then were not aware that you could check the history of a car online using the VIN or Chassis Number on some sites like carfax.com. It shows maintenance and repair records, mileage readings etc before shipment. Some of the searches are free while you have to pay to access records for some cars. All the cars I was interested in, upon my online search, were accidented cars.

I don’t have any issue with an accidented car (though it might feel a little creepy when one thinks about what may have happened to previous owners). Most of the cars were sold off by insurance companies as write-offs, to recover some of the money paid in claims settlement. These cars are fixed up and sprayed in a standard workshop making the car virtually as good as new. Also, because the car had been dumped in a yard for months and maybe years, the low mileage on the odometer is usually correct (you can see a three-year old car with a mileage of less than 20,000km). Due to low usage, the chassis, shock absorbers and shafts etc are in pretty good shape. My main issue is that the dealer should be upfront with the true history of the car, and give me the privilege of making the decision whether to buy an accidented car or not, rather than make the decision for me by telling lies.

Also, in some instances, the car was affected by flood water e.g. from Hurricane Katrina, Rita, Sandy and its cousins. That means the electronics may have been affected, which is the reason insurance firms sell them off to whoever cares to buy. It is a 50-50 scenario, everything may be fine or it may give you problems down the line due to water damage. Again, the dealer will not tell you the car was a victim of flooding. Everything would have been cleaned up to look as good as new. All you may notice is the low mileage on the odometer and the relatively cheap price for such a clean looking car.

After more than three months of fruitless search for a car without a disaster in its past, I gave up the struggle and went way above my budget to buy a new car. Although I enjoy driving a brand new car, I still feel pained whenever I think of what I would have achieved by investing the money I saved by buying a second hand car.

Buying a second hand car does not always mean buying an earlier model. You can still find the latest models as second hand in some showrooms. This means you can also buy the latest model second hand, if you wait for a while, that is if you must drive the latest model.

Cheap new and expensive second hand cars

The decision to buy brand new or second hand is yours. There are no right or wrong answers. Some brand new cars are much cheaper than some second hand cars. Some second hand Range Rover cars go for more than N7m, which is enough to buy two of some Kia/Hyundai models with enough money left for registration, insurance etc. The beauty of a brand new car is that you don’t need to know your mechanic’s house or have fellowship with him every weekend. With oil and filter change every 5,000km, you are free to do better things with your time. Also, there is a temptation to buy a car you cannot really afford second hand. When you need to change parts, it will then dawn on you that the car is out of your league. No part of the Range Rover for example comes cheap. Changing the side mirror of a new model Honda Accord can set you back almost N100,000. Buying the car is only half of the story. Being able to maintain it is another story entirely. That is why you see expensive cars on the road with missing parts. The owner is still gathering the money required to effect repairs.

One thing is clear – a car is a rapidly depreciating liability. It is unwise to use your capital to buy a car, unless you are using it to do business. The wise thing to do is to invest your capital and use the profit to buy your car. Even then, you still have to decide whether you want to buy a new one and take the steep depreciation or buy a second hand model of the same car and reinvest the savings.

culled from Punch