Drive Virtually Free: Smart Used Car Buying Advice

Recently, a friend came to me for some advice on whether he should keep his current car or move to something new.  He has major car fever just like me, so his dilemma is a nice one to have: whether to stay with a Porsche Cayman S or move to a 2008 BMW M3.

Now, it is of course almost always less expensive to keep the car you have rather than move to another car if they are similar in class, age and price.  There are significant transaction costs associated with changing cars every few years – taxes, fees, transportation and time spent searching for the car.  Luckily, he is in a state where he doesn’t have to pay sales tax on car purchases, so the cost associated with frequently changing cars isn’t as high for him.

He wanted to know how much more it would cost him to switch to the M3, so that he could make an informed decision about whether it would be worth the extra cost or not.

If you can’t tell, I love spreadsheets.  So I decided to make a spreadsheet that breaks down all of the costs of keeping one’s current car versus moving to a different car.

I separated the variable costs from the fixed costs, so that I could see how the cost of ownership would change with the number of miles driven.  Some of the fixed costs aren’t purely fixed – your insurance and depreciation will depend on how many miles you drive per year, but since they won’t change that much within 5,000 miles higher or lower than average driving, I consider them to be fixed costs.  I included an opportunity cost in there because even if you are able to buy your car in cash, you are still losing the ability to invest the money that is tied up in the car.  If you finance your car, this takes the form of interest.

The variable costs are things that I have discussed before – maintenance, repairs and fuel.  I used actual costs for the Porsche in this example and estimated the costs on the BMW based on published numbers for fuel economy, my personal experience with the tire wear, and I was able to set many of the costs to $0 since they would be covered under the free maintenance program.

If I didn’t have this data, I could have used Edmunds’ True Cost to Own tool to make similar assumptions.  I had to use this for the depreciation figure as well.  Consumer Reports also offers this data with a paid subscription to their site, but sometimes data specific to high performance cars is not available.

After I had all of the assumptions plugged in, I summed up the costs in each section and was able to compare them.  The operating cost on the M3 is lower for the first few years because of their included maintenance program.  However, the depreciation, opportunity cost and tax and registration make the car more expensive to own over the next 1 year period.  In my friend’s case, he lives in a state that doesn’t have sales tax, so that item would be $0 as well and the two cars become similar in annual costs.

So, what did he decide?  He’s a car freak like me, and thought it was time to change despite the higher cost, so he’ll be shopping for a new car soon!

Photo: Library of Congress

I’ve always been confused by people who have perfectly practical luxury vehicles but choose to drive an older commuter car during the week. If you ask them about it, they say that they’re “keeping the miles off of it.” Exotic cars that have ridiculously expensive maintenance costs or are utterly impractical for regular use may be exceptions.  Then again, that’s not the point of buying a car like that.

Cars that are made in quantities of more than a few hundred are unlikely to become collector’s items, and therefore probably will continue to depreciate over time.  Mileage will make a difference in the resale value, but even still, that is more a function of time than mileage.

Keeping a second car around so that you can keep the miles off your car will also cost you some money, even if it is a total beater.  You still have to pay for the insurance, gas, tires, brakes, etc.  While these will be cheaper than the “weekend car,” these costs add up and would probably cost just as much as if you racked up a normal amount of mileage on a single car.  The bonus there is that you would be able to actually enjoy the car you bought more, and there would only be one car to maintain instead of two.

After all, presumably you bought the car to drive it, so what’s the point of keeping it in the garage all the time?  To me, it’s kind of like when people cover their nice couches and their remote controls in plastic so that they don’t get messed up.  At the end of the day, you’re sitting on some hard, slippery plastic instead of the nice plush sofa that you paid for.  In 10 years, it will be perfectly preserved, but that’s not really the point of a sofa – you bought it so that you could sit and relax on it.

The same thing goes for your Mercedes/Audi/BMW/Porsche/Corvette – get some use out of it, otherwise you will have paid for something very expensive without getting full use of it.

The flip side of this is that if owners like this didn’t exist, we wouldn’t be able to score great deals on barely used cars.  I used to drive over 25,000 miles per year, and my strategy has always been to buy a car with low miles (about half of what the average is for that make and model) and just pile on the miles for a few years.  By the time I’m done with the car, the mileage will still be considered low.  In some cases, it is roughly average, but I’ve thoroughly enjoyed it without worrying about mileage.

When the time comes to buy the next car, I’ll be looking for the one that’s been garaged and driven only on the sunniest, clearest days on the weekends.  I’ll pay a little bit of a premium on the front end of the purchase, but that’s  a small price to pay for enjoying the great cars I’ve been fortunate enough to own.  It’s also probably a smaller price than keeping a second car around for the sake of practicality.  To each his/her own, but for me, I’ll keep racking up the miles.

Photo: chuckbiscuito

A car’s ability to withstand a crash can mean the difference between life and death for its occupants.  Consumers do weigh safety into their decision to purchase a car – some more than others – but on the whole, I think it deserves more attention than it gets.  More to the point, I think there is an illusion of safety that has to do more with marketing than actual crash test safety data that needs to be debunked.

If you ask your average person which manufacturer they think makes the safest cars, more often than not they will say, “Volvo.”  Now, don’t get me wrong – Volvo makes very safe cars.  But if you look at the NHTSA (National Highway Traffic Safety Administration) ratings, so do most car companies these days.  Most cars built in 2009 have either 4 or 5 star crash test ratings across the board.

To give you an idea of what these ratings mean, here are the definitions of frontal crash test ratings from the NHTSA:

5 stars: 10% or less chance of serious injury

4 stars: 11-20% chance of serious injury

3 stars: 21-35% chance of serious injury

2 stars: 36-45% chance of serious injury

1 star: 46% or greater chance of serious injury

When you’re talking about serious injury, a 10-20% increase in risk is a big deal.  So, when you buy your next car, it’s worth the time to take a look at the safety ratings before making a decision.  Advances in airbag technology and stability control systems alone have helped make today’s cars safer than ever before, narrowing the gap between the safest cars and all the rest.  This is one reason I prefer to drive newer cars and purchase them used every few years, though it’s definitely not the main factor in that decision.

Tire pressure monitoring systems also help – keeping your tires inflated to the correct pressure will improve your car’s handling so that you will be better able to avoid accidents in emergency situations.  This also reduces the chance of  tire failure and can improve your gas mileage.  Most tire failures do not result in crashes, so this is less significant (the NHTSA attributes 400 fatalities (about 1%) annually to tire failures – not all of which result from underinflated tires).

You can find the NHTSA crash test ratings for different cars at www.safercar.gov.  Not all cars have been tested, but usually at least one car from a family of cars has been tested (e.g. they may have data for an Audi A4, but not the Audi S4).  The NHTSA also puts out an annual report on safety ratings for the current model year vehicles to enable buyers to make an informed decision as to how their short-list of cars stack up in terms of safety.

When you make your next purchase, take a look at the data rather than relying on the reputations of different car companies which have developed through anecdotal information and marketing.