An Economist’s Approach To Buying A Car

Good personal finance skills are not exclusive to economists, but this little piece by Theodore Cangero provides great instruction for thinking through the economics and executing the plan for buying a car.

One part he glosses over is the decision to buy new rather than used. Precisely because cars depreciate rapidly with high mileage (especially the first bunch of miles), the opportunity cost of buying a new car is pretty high relative to buying a (relatively) low-mileage used car. The question is in large part one of risk aversion due to uncertainty about the reliability of a used vs new car, and the availability of information about the car in question (e.g., CarFax reports, maintenance records, model reviews, etc.). If one is going to put lots of miles on a car anyhow (like the author), letting someone else take the depreciation hit for the first bunch of miles may be a better deal…depending on one’s risk attitude over repair costs.

Another factor that he doesn’t touch on is how long one plans to keep the car. If you are one that likes to trade in/up every so many years (as he seems to imply), then the value retention he talks about is more important. If you are one that drives a car until its useful life is nearly over (or if you plan on putting a couple hundred thousand miles on it before selling it, or even handing it down to your future teenage driver), value retention may be less important–though certainly a factor to consider at the margin. That said, value-retention and expected reliability tend to go hand-in-hand. So focusing on expected reliability for long-term use will likely result in choosing a vehicle that tends to hold its value better anyhow.

Despite the quibbles, the article lays out a pretty good approach that might help you make the best car-buying decision you can.