Here come the recession bargains: Used cars coming off lease

[EJ]

Here come the recession bargains: Used cars coming off lease

Buy used and use cash

by Eric Janszen

Back in November 2006 we wrote How much of your car should you finance? Zero percent. Back then, a month after we released our forecast of a recession due to start at the end of Q4 2007, the housing bubble fueled economy was only just starting to wind down, and the mainstream press was still in denial about the coming post housing bubble bust. Now that the recession has arrived our advice to buy a car with cash instead of financing is getting a whole lot easier to follow – if you also took our advice and saved cash, too.

Our zero finance article explains that cars depreciate in value, just like flat panel TVs and other consumer goods. The interest that you pay on a loan if you borrow to buy a car is rent on your labor – what economists call economic rent. The banks earn this rent for doing absolutely nothing but loan you money. In the case of a car, by the time to loan is paid off, the value of the car has depreciated significantly. The difference between to total cost of the loan and the remaining value of the car minus the value you have extracted from use of the car is the amount of rent the lender has earned off your labor as you paid off the loan. If, on the other hand, you borrowed money to purchase an asset such as land that appreciates over the term of the loan, the value of the land once the loan is paid off and you own it is more than the total cost of the principle and interest on the loan. That's a good use of credit.

Taking out loans to buy goods that depreciate is selling your future labor at a discount to lenders who are doing nothing for you but taking advantage of your willingness to rent your labor on the cheap.

Now that doesn’t sound very smart, does it? So don’t do it – or at least do it as little as possible. But, you say, you don't have enough money to buy a safe car and you need a car to get to work.

Good news! The US economy is in a recession. Auto makers are getting hammered. Leasing and finance companies are on the ropes. It's your lucky day.

Toyota predicts earnings slide for first time in nine years

With economic problems, a weakening dollar, and surging costs for raw materials, automakers around the world are facing hard times. And now even mighty Toyota -- once seemingly bulletproof -- is predicting financial struggles in the months to come. For the first time in nearly a decade the company has said that its North American volume, operating income, and net income will all decline over the next fiscal year. – May 8, 2008 (Motor Trend)

Recessions mean great deals on new cars and this one is no exception. With dealers offering big discounts, should you buy a new car? We recommend you buy the safest car you can afford to purchase with cash but the median US household has only $5,000 in net liquid savings. Assuming a household is willing to spend its entire liquid net savings on a car, there hasn’t been a new $5,000 car on the market since the 1970s. Buying a car with cash means buying a used car and letting some other dope take the depreciation hit.

New Cars: Always a bad idea, but even worse now

I was one of those dopes the last time I bought a car. I like to make this mistake at least once every ten years: A new car loses on average 20% of its value as you cheerfully drive it off the dealer’s lot, sniffing the sexy scent of new upholstery. In the first year that follows, value fades with the aroma as the car depreciates by another 10%. In total, your shiny new car loses about 30% of its resale value in the first year. What's that in dollars?

The average new car in the US costs $28,400. Losing 30% the first year translates into $8,530 in the first year depreciation as the resale value falls to $19,880. Ugly, but it gets worse. Let’s look at the other side of the transaction, what you still owe on that $19,880 in new car smell value that’s left.

The average new car buyer puts down just 5% or $1,420 for the average car and finances the remaining $26,980 at an average interest rate of 9% for a monthly payment of $560 on a typical five year (60 month) loan. For the average car that means that at the end of the first year you still owe $20,260 on a car now worth only $19,880. You have spent an amount that is not recoverable at resale – ever – over $7,000 on depreciation.

You’re too smart for that. Go used and use cash. Good advice anytime but in a recession if you have cash it goes a long way. The best in terms of value for your cash? Buy a car off lease.

Best used car deals: Cars coming off lease agreements

Want to buy a car that’s nearly as good as new, usually with a full warranty, but with that ugly depreciation already paid by off by someone else? A recession is a bull market in cheap, high quality used cars coming off lease agreements.

Debt collection is big business

And when the economy is down, it's really big.

The industry is growing so fast, Northstar has installed several more rows of calling cubicles to handle the business. They're empty now, but by summer's end, Northstar executives expect them to be filled with new agents. Northstar's chairman, Joel Castle, says business is going to get even better for him, (worse for consumers) this summer when the bottom falls out of the auto leasing market. – April 30, 2008 (CBS News)

Off lease cars are costing dealers and manufacturers money. What happened last time the leasing market crashed during the 2001 recession? Desperate automakers throw the leasing companies under the bus with big discounts, and this time around free gas gimmicks, that wreck havoc on leasing company calculations of residual value. Residual value is an estimate of what the car was going to be worth at the end of a lease. If residual value was calculated during flush economic times when the cars were leased, during economic busts these estimates turn out to be grossly optimistic. According to a safecarguide.com from a report in 2001, here's what happened during the previous bust:

Millions of car leases financed by banks are expiring just as domestic new car prices are falling. In 1998 only 38% of lease customers turned in their vehicles at the end of the lease. Due to aggressive pricing and rebates offered by domestic automakers that percentage has risen to over 56% this year and banks and finance companies are panicking. The result is a gap between what banks expected the vehicles to be worth and what they're actually fetching at wholesale dealer to dealer auctions. In 2000 that gap cost banks about $2,000 per vehicle. This year (2001) losses are expected to rise to between $2,500 & $3,000 per vehicle.

How about this time around?

Used-car prices coming down quickly

Used-car prices are hitting the skids in Canada and the U.S., falling in some cases at the fastest pace on record as the North American economy continues to falter, Scotiabank says in its Global Auto Report.

In the first quarter alone, Scotiabank's used-car price index fell seven per cent below a year ago, led by an 11-per-cent plunge in one-year-old models, the weakest performance on record for data going back to 1978.

This is hurting automakers and finance companies, as many of the expired-lease vehicles are being returned to the manufacturer, creating losses of more than $8,000 for each vehicle repossessed, according to one analysis the report quotes.

That's good news for consumers but a blown gasket for manufacturers, as the decline is expected to extend through 2008 and into 2009, and as a flood of vehicles coming off lease pressures auto makers. May 01, 2008 (Canwest News Service)

The sweet spot for leased cars are those with 30,000 to 50,000 miles on them. If taken care of, the average modern car will go for 150,000 miles before it starts to develop serious and expensive maintenance problems; if you drive 12,000 miles a year as the average driver does, that used car off lease will last you more than ten years. So what if it doesn’t smell like new?

Another advantage over the 2001 bust: Internet based car shopping was still in its infancy. Not anymore. Hit the Internet and you’ll find many well constructed competing sites with bargains galore.

Buy a bargain: Buy American

American cars earned a reputation for poor quality during the terrible 1970s and 1980s and have never been able to shake it off, even though statistically many are as good or better than Japanese or German makes with a better quality reputation. The most recent J.D. Power & assoc. study from 2003, of vehicles that had been on the road for 3 years, lists 37 manufacturers in order of the least problems to the most. Here’s the top ten listed best make first.

1. Lexus
2. Mercury
3. Buick
4. Cadillac
5. Toyota
6. Acura
7. Honda
8. Jaguar
9. BMW
10. Infinity

Let’s assume you’re better off than the median household. After all, you are smart enough to be reading iTulip.com. You can afford to buy a car with $10,000 cash. We visited cars.com and searched for used cars for sale under $10,000 with less than 50,000 miles within 30 miles of downtown Boston. The search returned 211 results with some cars under $10,000 with as few as 29,000 miles such as $9,888 for a 2001 Mercury Sable LS Premium with 28,738 miles on it. That’s only a few grand more than the entire loss you’d take buying the average new car and, as an added bonus, you own it free and clear: no payments, no huge excise tax bill, title in the file drawer.

Still, if you haven't been saving and are in the $5,000 category, there are plenty of used cars for you among the list we found, like a 1986 Mercury Grand Marquis for $4,995 with 22,000 miles driven by an geezer back and forth to the local pub. Actually, we have no idea about the geezer but we do know that if you drive 12,000 miles a year and the Grand Marquis gets 15 MPG while the Mercury Sable gets 22 MPG, at $4 per gallon it’ll take you five years to spend the extra $5,000 that the Sable costs to make up the difference in higher gasoline costs for driving the geezermobile. If you’re not environmentally minded, there are serious bargains among the gas hogs.

Four dollar gas and the biggest bargain of them all: SUVs

As cheap as used cars are getting, especially big cars like the Marquis, car dealers are practically giving away gas guzzling trucks and SUVs as commuters pretending to be construction workers on the weekends rush to trade them in for smaller vehicles.

Used SUV sales in March were down 14 percent nationally compared to last year according to data compiled by CNW Marketing Research. That follows drops in used SUV sales of more than 8 percent for the first two months of the year, compared to the same months in 2007.

That trend has sent used SUV prices plummeting, giving owners a shock when they try to trade theirs in and find out how little they can get.

“Owners find out they don’t have the trade equity they thought they had and are forced to keep their vehicles or come up with a large sum of cash to make up the difference,” said Chris Denove, a vice president of the auto information firm J.D. Power and Associates. – May 12, 2008 (New Press)

How cheap are used SUVs? You can buy a 1997 Mercury Mountaineer for $6,585 with 61,426 miles on it or a 2003 Mercury Mountaineer with 61,402 miles for $9,988. How’s that for cheap?

No hurry – auto sales plummet during recessions and this one has just begun

If you don't have to buy a car yet, it will pay to wait. Auto sales are historically correlated to unemployment for the obvious reason that the unemployed don't buy cars.

We are early in this recession and the good deals are only beginning. October 2007 our analysis told us this recession was going to be worse than the last major recession. Sir Warren Buffett says so now, too.

Buffett says recession may be worse than feared
April 28, 2008 (Reuters)

NEW YORK (Reuters) - Warren Buffett, the world's richest person, said on Monday the U.S. economy is in a recession that will be more severe than most people expect. "This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow.

Summary

For low price and value used is better than new, used cars coming off lease are better than other used cars, American makes are a better deal than foreign makes, and SUVs are, if you don’t care about global warming, the best cash deal of all.

You can take that to the bank. But don’t – pay cash instead.

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[don]

Re: Here come the recession bargains: Used cars coming off lease

My granddaughter is buying her first car. Thanks, Guys!

[Nicolasd]

Re: Here come the recession bargains: Used cars coming off lease

Used cars purchased in the US by canadian residents (american, european or japanese make) are gaining popularity here after 5 years of currency appreciation and no price adjustments (until very recently) on new car prices by the manufacturers.

Typically , a one year old luxury car , less than 10Kmiles , can be purchased in the US at 2/3 of the full canadian retail price ! .The plan is to run the car for a 18-24 month period and resell it locally at roughly the same purchased price and do it again.:p Saving all this ugly depreciation.

Unfortunately , canadian manufacturers are raising non tarrif barriers to limit the exodus of their consumers by making it difficult to obtain certificate letters of compliance to the local regulations or threatening of not honoring the warranties.Another limitation is that foreign purchases can not benefit from favorable financing terms so you gotta have the dough (which is not a bad habit either)

[ChessMan]

Re: Here come the recession bargains: Used cars coming off lease

What about leasing? I like changing cars every three years. I think leasing might be the only sensible option for those like me because you pay tax only on the lease payments, not the whole value of the car.

[hoodoo]

Re: Here come the recession bargains: Used cars coming off lease

Hi all,

I've been shopping for a new car to pay for my last all cash car purchase (94 Nissan Sentra) and the advice here is great.

However, in the land of the monthly payment consumer, finding a private party car sale at a decent price in nearly impossible here in Southern California. Here's what I think is happening - J6P drives his new car off the lot and loves it for the first couple of lovely HELOC leveraged years. Then things get bumpy and the car is the first thing to sell off for a decent spot of cash. Unfortunately, the amount of cash paid off toward the note the car is just a few thousand off the price paid when it was new. J6P says - you can have it for what I owe the bank. To which I say no thanks, why wouldn't I just go and buy a new one?

The used car market is not as robust as it has been in the past - at least for private party sales. Carmax is looking like a decent alternative.

Hoo

[Guest]

Re: Here come the recession bargains: Used cars coming off lease

First of all, I agree a used CAR is a relative bargain.

But when EJ makes his financial decisions and forecasts, I bet he adjusts his return expectations for RISK. He should do the same with his suggestions on vehicles.

Simply put, a used car in this day and age has more risk than a new one. You can mitigate that with inspections, carfax reports, and buying a used vehicle still under warranty, but there are tons of horror stories about buying used vehicles. Sometimes an older out of warranty "reliable" brand used vehicle bought from a reputable seller still becomes a problem. Sometimes the previous owner did something to void the warranty on the item that breaks. Sometimes you cannot get the clear title you expected, which can be a nightmare. Some sellers will sell a vehicle, accept payment, not pay the bank, and you are stuck with a title-less vehicle. Sometimes your seller doesn't even really own the vehicle! You can forge a lot of documents in the age of cheap PC desktop publishing. Your vehicle may also have been garaged in New Orleans in 2004 and they've done a good job of masking that mildew smell! Sometimes you suffer a massive catastrophic failure of a major component that these cash-strapped buyers simply cannot afford.

Which is better for a person of very modest means, a manageable $150-$250/mo payment on a new or nearly new modest car or an engine/tranny meltdown on a $5000 older car that costs $8,000 to repair? I actually owned one that I got rid of it in time, but other owners of the same model were reporting failures where coolant entered the engine/transmission causing them to junk the $7,000+ used cars when just 4 model years old. Not many broke guys can recover from this sort of thing.

The very people who whose lives will be absolutely destroyed by such a repair bill (you can finance a car at a reasonable fixed rate...try that with an auto repair) are the ones who can only afford to pay $5,000 cash for one.

My advice would be if money is tight, buy a nearly new (the sweet spot in depreciation vs risk is said to be 2 to 2.5 years old) vehicle that meets your minimum needs and finance a part of it if needed.

Example: Take that $5,000 cash and borrow $5,000 on a 2 year old Hyundai Sonata GL with a 10 yr/100K powertrain warranty and 5/60 bumper to bumper and you'll have a safer, more reliable, spacious, efficient, and possibly even CHEAPER ride than paying $5000 cash on a gas hog out of favor or a tiny weak domestic brand econobox you paid cash for. (It should cost about $10,000 from a dealer if you bargain well ) Your modest $110/mo payment for 4 years will allow you to drive mostly worry free for the next 8 years, 4 of which will be sans payment or major repair costs.

Deliver pizzas one weekend a month if you can't swing that. Or simply drive less. The way to save on car costs isn't only buying $5,000 beaters. It's driving less and choosing a vehicle that depreciates slowly and lasts longer.

Sometimes we forget how broke many people are. They are very unlikely to be able to amass $5,000, but even if they could, they are then unable to afford the cost of a significant repair bill.

Maybe if one has a second family vehicle, lives close to work, is self-employed and works from home, this is a good plan. But for those who rely on vehicles to make a living, it's assuming a level of risk which should be compensated by a higher degree of savings than knocking out a meager car payment provides.

For the record, I haven't had a car payment in years and own two recent model vehicles.

[zoog]

Re: Here come the recession bargains: Used cars coming off lease

First of all, I agree a used CAR is a relative bargain.

But when EJ makes his financial decisions and forecasts, I bet he adjusts his return expectations for RISK. He should do the same with his suggestions on vehicles.

Simply put, a used car in this day and age has more risk than a new one. You can mitigate that with inspections, carfax reports, and buying a used vehicle still under warranty, but there are tons of horror stories about buying used vehicles. Sometimes an older out of warranty "reliable" brand used vehicle bought from a reputable seller still becomes a problem. Sometimes the previous owner did something to void the warranty on the item that breaks. Sometimes you cannot get the clear title you expected, which can be a nightmare. Some sellers will sell a vehicle, accept payment, not pay the bank, and you are stuck with a title-less vehicle. Sometimes your seller doesn't even really own the vehicle! You can forge a lot of documents in the age of cheap PC desktop publishing. Your vehicle may also have been garaged in New Orleans in 2004 and they've done a good job of masking that mildew smell! Sometimes you suffer a massive catastrophic failure of a major component that these cash-strapped buyers simply cannot afford.

Which is better for a person of very modest means, a manageable $150-$250/mo payment on a new or nearly new modest car or an engine/tranny meltdown on a $5000 older car that costs $8,000 to repair? I actually owned one that I got rid of it in time, but other owners of the same model were reporting failures where coolant entered the engine/transmission causing them to junk the $7,000+ used cars when just 4 model years old. Not many broke guys can recover from this sort of thing.

The very people who whose lives will be absolutely destroyed by such a repair bill (you can finance a car at a reasonable fixed rate...try that with an auto repair) are the ones who can only afford to pay $5,000 cash for one.

My advice would be if money is tight, buy a nearly new (the sweet spot in depreciation vs risk is said to be 2 to 2.5 years old) vehicle that meets your minimum needs and finance a part of it if needed.

Example: Take that $5,000 cash and borrow $5,000 on a 2 year old Hyundai Sonata GL with a 10 yr/100K powertrain warranty and 5/60 bumper to bumper and you'll have a safer, more reliable, spacious, efficient, and possibly even CHEAPER ride than paying $5000 cash on a gas hog out of favor or a tiny weak domestic brand econobox you paid cash for. (It should cost about $10,000 from a dealer if you bargain well ) Your modest $110/mo payment for 4 years will allow you to drive mostly worry free for the next 8 years, 4 of which will be sans payment or major repair costs.

Deliver pizzas one weekend a month if you can't swing that. Or simply drive less. The way to save on car costs isn't only buying $5,000 beaters. It's driving less and choosing a vehicle that depreciates slowly and lasts longer.

Sometimes we forget how broke many people are. They are very unlikely to be able to amass $5,000, but even if they could, they are then unable to afford the cost of a significant repair bill.

Maybe if one has a second family vehicle, lives close to work, is self-employed and works from home, this is a good plan. But for those who rely on vehicles to make a living, it's assuming a level of risk which should be compensated by a higher degree of savings than knocking out a meager car payment provides.

For the record, I haven't had a car payment in years and own two recent model vehicles.

I have two friends with a history of buying cars that cost less than $5000, sometimes considerably less. One of them swears that his repair costs are still less than payments on a newer car. I'll have to take his word for it. The other friend has spent far more on major repairs, tune-ups, and every little thing the mechanic has recommended than he did buying the cars. He also has a history of relatively short-term turnover with these vehicles, which just makes the financial picture even worse. There is definitely a breakpoint between car payments and likely repair payments; the exact point varies from vehicle to vehicle.

A few years ago I needed to replace my ailing '89 Accord. It happens that I did in fact have $5000 saved up. My choice was to buy a then four-year-old '99 Civic, "Certified Used" from the dealer. The certification gave me a limited warranty, clear title, the implied assurance of a thorough mechanical inspection, and financing directly through Honda at a fixed rate of 4%. My $5000 covered a little under half the agreed-upon price, leaving me with a very manageable monthly payment in the $150 range and a low fixed rate.

I feel like this was a reasonable compromise for someone who does not have enough cash to entirely pay for a car that meets their safety and reliability standards. There are many ways to play this game. Just like everyone has a different risk / return tolerance with investments, everyone has a different risk / cost tolerance in choosing a vehicle. If I knew how to work on cars myself, I'd be more inclined to buy an older car. If I had not had years of prior experience driving Hondas, with generally minimal repairs and maintenance, I might have chosen a newer, more expensive car. This is not a plug for Honda in particular, I am just saying I chose a car I was comfortable with due to past experience, at a price I was comfortable with. Sure I would have liked to have bought a newer car, but I couldn't responsibly afford it. Sure I could have bought an older, cheaper car, but I'd be afraid to drive it.

As an aside, personally I do not care for the "new car smell". Toxic, that's what it smells like. Happy to let someone else drive it while all that outgassing is going on.:eek:

Wikipedia

A 1995 analysis of the air from a new Lincoln Continental found over 50 volatile organic compounds, which were identified as coming from sources such as cleaning and lubricating compounds, paint, carpeting, leather and vinyl treatments, latex glue, and gasoline and exhaust fumes. An analysis two months after the initial one found a significant reduction in the chemicals. The researchers observed that the potential toxicity of many of these compounds could pose a danger to human health.

[Verrocchio]

Re: Here come the recession bargains: Used cars coming off lease

Good on you, Zoog! You bought a reliable automobile at a price that you could afford. My game is to enjoy what I have until I can pay cash for a three- to five-year old beauty. BTW, bruce42, the sweet spot in used car purchasing has moved to slightly older cars now, due to higher quality, longer expected reliability, etc.

Not many people can slice through the fog of MSM easytalk about the economy and also give eminently practical advice on buying a used car. Our EJ can do both!

[ddk]

Re: Here come the recession bargains: Used cars coming off lease

There is also a scandalous option many Americans forget is available: just don't buy another car.

My wife and I are down to one car. I drive my sneakers to work, and only go shopping on weekends (when I can borrow her car). When we move farther from town, I am going to buy a nice bicycle and a nice raincoat. If we move much farther from town, for an extra $1200 I can get an electric motor for the bike with a 30-40 mile range that costs 3 cents to fill up.

On those rare occasions a second car is needed, friends are always happy to lend us a car in exchange for a favor (nice dinner, fresh loaf of bread, tray of brownies). And if that fails, there is a car rental place nearby, a bus route, a taxi stand, a train station, and the Zipcar program.

The $5000 I did not spend on an "inexpensive" second car will easily pay for a very nice bike with safety lights, and luggage racks (and raingear for me), 10 years of bike maintenance, AND 10 years of car rentals AND 10 years of the occasional public transportation. Over the same period, how much more would the buyer of a $5000 car pay for gas and maintenance? Easily $10,000, for just a local commute...

More than that -- I can't stick to an exercise program if you glue me to it. But I have to get to work every day -- and boy howdy is it nice to walk in the door whistling after exercise while everybody else is spitting nails about crazy drivers and endless traffic.

[akrowne]

Re: Here come the recession bargains: Used cars coming off lease

Remember: buy a car that is cheap enough that you don't need to finance it. The hidden advantage of doing this is that there's no bank lien on your car, which means you don't need to buy collision insurance (or much of it). In other words, you can leave out the portion of insurance taken out against yourself, as opposed to against other people, or acts nature.

[Ann]

Re: Here come the recession bargains: Used cars coming off lease

First of all, I agree a used CAR is a relative bargain.

But when EJ makes his financial decisions and forecasts, I bet he adjusts his return expectations for RISK. He should do the same with his suggestions on vehicles.

Simply put, a used car in this day and age has more risk than a new one. You can mitigate that with inspections, carfax reports, and buying a used vehicle still under warranty, but there are tons of horror stories about buying used vehicles. Sometimes an older out of warranty "reliable" brand used vehicle bought from a reputable seller still becomes a problem. Sometimes the previous owner did something to void the warranty on the item that breaks. Sometimes you cannot get the clear title you expected, which can be a nightmare. Some sellers will sell a vehicle, accept payment, not pay the bank, and you are stuck with a title-less vehicle. Sometimes your seller doesn't even really own the vehicle! You can forge a lot of documents in the age of cheap PC desktop publishing. Your vehicle may also have been garaged in New Orleans in 2004 and they've done a good job of masking that mildew smell! Sometimes you suffer a massive catastrophic failure of a major component that these cash-strapped buyers simply cannot afford.

Which is better for a person of very modest means, a manageable $150-$250/mo payment on a new or nearly new modest car or an engine/tranny meltdown on a $5000 older car that costs $8,000 to repair? I actually owned one that I got rid of it in time, but other owners of the same model were reporting failures where coolant entered the engine/transmission causing them to junk the $7,000+ used cars when just 4 model years old. Not many broke guys can recover from this sort of thing.

The very people who whose lives will be absolutely destroyed by such a repair bill (you can finance a car at a reasonable fixed rate...try that with an auto repair) are the ones who can only afford to pay $5,000 cash for one.

My advice would be if money is tight, buy a nearly new (the sweet spot in depreciation vs risk is said to be 2 to 2.5 years old) vehicle that meets your minimum needs and finance a part of it if needed.

Example: Take that $5,000 cash and borrow $5,000 on a 2 year old Hyundai Sonata GL with a 10 yr/100K powertrain warranty and 5/60 bumper to bumper and you'll have a safer, more reliable, spacious, efficient, and possibly even CHEAPER ride than paying $5000 cash on a gas hog out of favor or a tiny weak domestic brand econobox you paid cash for. (It should cost about $10,000 from a dealer if you bargain well ) Your modest $110/mo payment for 4 years will allow you to drive mostly worry free for the next 8 years, 4 of which will be sans payment or major repair costs.

Deliver pizzas one weekend a month if you can't swing that. Or simply drive less. The way to save on car costs isn't only buying $5,000 beaters. It's driving less and choosing a vehicle that depreciates slowly and lasts longer.

Sometimes we forget how broke many people are. They are very unlikely to be able to amass $5,000, but even if they could, they are then unable to afford the cost of a significant repair bill.

Maybe if one has a second family vehicle, lives close to work, is self-employed and works from home, this is a good plan. But for those who rely on vehicles to make a living, it's assuming a level of risk which should be compensated by a higher degree of savings than knocking out a meager car payment provides.

For the record, I haven't had a car payment in years and own two recent model vehicles.

You make excellent point, but I don't see how your opinion disagrees with the article. His recommendation of car off lease at 30K is in line with your statement: "the sweet spot in depreciation vs risk is said to be 2 to 2.5 years old" except you go into the risks of buying a used vs used car and EJ probably didn't want to go that far afield into the details. But we can!

Buying a used car is more of an art than buying a new car, for all those reasons you mention and more. I've been successful over the years buying from private sellers, not dealers. Here's my trick!

Buy used cars from people who live in high end neighborhoods and who display persnickety personality tendencies. From the dictionary: Requiring strict attention to detail; demanding: a persnickety job. You can tell because when you go to drive and look at the car you look at them, at their house, and their yard and everything is well taken care of. Guess what? So was the car. That's their nature. Best used car I ever bought was from a surgeon. He was immaculate and so was his car. You can get the same result from buying from dealers that warranty used cars but you pay a premium. I'm too cheap!

Two big thumbs up for the Hyundai Sonata. I've rented them and am a fan. GREAT car! Surprisingly fast and solid yet affordable. Love it.

[Ann]

Re: Here come the recession bargains: Used cars coming off lease

There is also a scandalous option many Americans forget is available: just don't buy another car.

My wife and I are down to one car. I drive my sneakers to work, and only go shopping on weekends (when I can borrow her car). When we move farther from town, I am going to buy a nice bicycle and a nice raincoat. If we move much farther from town, for an extra $1200 I can get an electric motor for the bike with a 30-40 mile range that costs 3 cents to fill up.

On those rare occasions a second car is needed, friends are always happy to lend us a car in exchange for a favor (nice dinner, fresh loaf of bread, tray of brownies). And if that fails, there is a car rental place nearby, a bus route, a taxi stand, a train station, and the Zipcar program.

The $5000 I did not spend on an "inexpensive" second car will easily pay for a very nice bike with safety lights, and luggage racks (and raingear for me), 10 years of bike maintenance, AND 10 years of car rentals AND 10 years of the occasional public transportation. Over the same period, how much more would the buyer of a $5000 car pay for gas and maintenance? Easily $10,000, for just a local commute...

More than that -- I can't stick to an exercise program if you glue me to it. But I have to get to work every day -- and boy howdy is it nice to walk in the door whistling after exercise while everybody else is spitting nails about crazy drivers and endless traffic.

You are my hero. Wish I could get a job close enough to home to do that.

[jimmygu3]

Re: Here come the recession bargains: Used cars coming off lease

There is also a scandalous option many Americans forget is available: just don't buy another car.

My wife and I are down to one car. I drive my sneakers to work, and only go shopping on weekends (when I can borrow her car). When we move farther from town, I am going to buy a nice bicycle and a nice raincoat. If we move much farther from town, for an extra $1200 I can get an electric motor for the bike with a 30-40 mile range that costs 3 cents to fill up.

On those rare occasions a second car is needed, friends are always happy to lend us a car in exchange for a favor (nice dinner, fresh loaf of bread, tray of brownies). And if that fails, there is a car rental place nearby, a bus route, a taxi stand, a train station, and the Zipcar program.

The $5000 I did not spend on an "inexpensive" second car will easily pay for a very nice bike with safety lights, and luggage racks (and raingear for me), 10 years of bike maintenance, AND 10 years of car rentals AND 10 years of the occasional public transportation. Over the same period, how much more would the buyer of a $5000 car pay for gas and maintenance? Easily $10,000, for just a local commute...

More than that -- I can't stick to an exercise program if you glue me to it. But I have to get to work every day -- and boy howdy is it nice to walk in the door whistling after exercise while everybody else is spitting nails about crazy drivers and endless traffic.

I ride a bicycle to work myself, but I have my '95 Toyota Avalon for rainy/cold days and special errands. The thing about paying "cash" for me is that anytime I have excess cash in my checking account, I pay down my HELOC. When I bought my wife's car recently at Carmax (better price than private sellers, surprisingly), I wrote a check from the HELOC for $18k, sold the old car for $5000, which went right back to the HELOC, so I financed about $13k. However, I had been hammering away at the balance to the tune of $500/month and I have upped that to $850/mo since the car purchase. The interest rate is currently at 4.5%, and that is tax deductible, so the effective rate is about 3%.

If I look at the entire $850 payment as going toward the car, it will be paid off in 16 months from the time of purchase. If I only count the marginal $350 voluntary increase in my payment, it will be more like 39 months. My total after-tax interest paid will be about $800. The car is under full factory warranty for another 3 years, so maintenance will not be an issue until the car is paid off.

Meanwhile, I could have been paying $250/mo on my HELOC, putting the additional amount into a savings account at 1% until I had enough to pay "cash" for the car, while the HELOC balance stayed high due to the decreased payment, but I would be worse off in the end. I know, 3 lashes with a wet iTulip noodle, but to me, this was the smarter financial move.

Also, edmunds.com has a free service called "True Cost To Own" (TCO), that incorporates financing, taxes, depreciation, fuel, maintenance and repairs. It can be very enlightening, especially for some of the American cars that look like bargains. TCO is much lower for a 1 or 2 year old car due to the first year depreciation. This car is costing us about $100/mo more than keeping our old clunker that we put 2 trannies in.

[JayS]

Re: Here come the recession bargains: Used cars coming off lease

There is also a scandalous option many Americans forget is available: just don't buy another car...

Yes. Absolutely. I drive my paid-in-cash 1994 Nissan Sentra to work an average of 3 days per week per year. My estimated "monthly payment" (initial purchase + insurance + gas + maint / mnths ownership) is about $97/month at this point. And the beauty of beater cars is that you don't fix problems - you find ways to work around them.

Otherwise I bike the 6.1 miles (one-way). Here's a very thorough article comparing the costs of car & bike ownership:

"Auto Costs Versus Bike Costs" - Ken Kifer

There are a few external links to additional cost-per-mile studies that are also very interesting.

When I can't keep the Sentra rolling anymore, we're going to try transitioning to a single car household.

Jay

[jimmygu3]

Re: Here come the recession bargains: Used cars coming off lease

Yes. Absolutely. I drive my paid-in-cash 1994 Nissan Sentra to work an average of 3 days per week per year. My estimated "monthly payment" (initial purchase + insurance + gas + maint / mnths ownership) is about $97/month at this point. And the beauty of beater cars is that you don't fix problems - you find ways to work around them.

Otherwise I bike the 6.1 miles (one-way). Here's a very thorough article comparing the costs of car & bike ownership:

"Auto Costs Versus Bike Costs" - Ken Kifer

There are a few external links to additional cost-per-mile studies that are also very interesting.

When I can't keep the Sentra rolling anymore, we're going to try transitioning to a single car household.

Jay

That's a good article. Gas prices have apparently tripled since he created the cost comparison chart at 6.8¢/mile. Probably closer to 20¢/mile these days.