What If We All Bought Used Cars?
We are on the cusp of a nice, long three-day weekend. I am excited for it as I haven’t had a time to relax much. There is so much painting to be done at the house. Did I mention I hate painting? Anyway, instead of putting up a post about saving money or making more money, I wanted to run a hypothetical by you. This is just supposed to be fun and make you think a little about the topic. OK, onto the topic!
One of the longer running pieces of personal finance advice is to never buy a new car. Seriously, most experts use the word “NEVER!” I am cool with that, especially as someone who has purchased quite a few new cars, I have learned my lesson. The justification of this advice is you can save a lot of money by just buying a car one or two years old. The majority of depreciation happens within the first year. After that, most cars depreciate on a sliding scale. Some do it slower than others, but I am not getting into that. So, let’s talk about this “never buy a new car” advice.
If We All Never Bought a New Car
What if we woke up one day and everyone started listening to this advice? What would happen? Even if everyone didn’t buy a new car, what if a large portion of our population started on the used car kick? Lets think about it for a minute. Remember, this is entirely hypothetical, but I wanted to provide you with information about how using the word “never” could end up being a bad idea.
Supply Vs. Demand
Economics 101 talk about supply and demand. Most people understand how supply and demand work. But what happens when demand suddenly spikes and supply can’t match it? This is what would happen when a large majority of people starting buying used cars. The supply of used cars would be greatly reduced, maybe even leaving some used car lots barren wastelands. If this were to happen, you can assume by basic economics that prices would rise. They would rise considerably. The same thing happens when supply is low for homes, but demand is strong. It becomes a sellers market. Bidding wars happen and people end up over paying for an item. The same scenario would happen with used cars.
The funny thing is the exact opposite would happen to new cars. With extremely low demand and high supply, new cars would come down dramatically in price. Car lots would try to offload the new cars in to order to try and meet the demand of used cars. You can forget about depreciation in this instance as well. Your new car would be worth less than its used counterpart. When you leave the dealership lot, your car would appreciate. Interesting. People with new cars could easy turn around and sell their vehicles for much more. It’s basic economics people. Demand controls supply in a general way, but it also controls pricing.
You Can’t Have Used Without New
I don’t have much of an issue with buying new cars. I am a car guy through and through, so they are an investment for me. They are a hobby and I enjoy them. As technology and safety evolve, some older cars need to be taken off the road and be replaced by a newer car. It is a product’s life cycle.
There is a lot of articles about how people shouldn’t touch a new car because of the costs. I just described it above. The problem with this scenario is it is pushed as general advice. Everyone should follow it if they want to get control of their money. I understand it. Where the problem lies is you can’t have used cars without someone buying a new car. Right?
New products can’t become used until someone actually uses them. That is the meaning of used. So, if we advise most people to stop buying new cars, we run into two issues. We slowly stop the flow of used cars into the market because people switch to used cars. This in turn creates the scenario above where used cars become extremely expensive and new cars become cheap and easy to afford. It is a crazy place we live in, right.
The Advice Would Change, Right?
OK, this might just blow your mind, but put a towel down and continue on. If this hypothetical world actually happened, then wouldn’t we need to change our advice? Instead of telling people to never buy new cars, we would have to tell people to buy new cars as they would become appreciating assets. The whole equation would flip. Used cars would be overpriced and the supply would struggle, while new cars would be cheap because the demand is low.
So, after many years and decades of telling everyone to never buy a new car, we would have to change our tune and show people they would be creating an investment opportunity if they bought new cars. I just love hypothetical scenarios. They make you think, but you really don’t have to worry about them.
In the end, if you really want to do the best you can with your money, then think about buying a used car. There will always be the “oh, shiny” factor with new cars and I don’t see our materialistic consumer culture switching around. I just like to think about what would happen if it did indeed change. Remember, I have fallen for the new car trap three times. These were all before I had my financial mindset screwed on tight, so I forgive myself and move on. You can’t take back stupid decisions, you can only learn and move on from them.
Haha good point. Let the rich and financially irresponsible keep buying new cars so the price of used cars stay low 🙂
Well of course we will, but it is fun to think about.
I’ve leased a brand new car (a very bad move at a young age) and also bought used cars in very good condition. I will continue to buy used cars in cash as we did with our most recent car purchase. I don’t have a problem if people want to buy a brand new car and then basically keep it until it dies but the ones who finance cars that they really can’t afford, that’s the kicker for me.
I have done that as well Kassandra. We all learn our lessons in some way, right?
Loved the idea of this article, but it premises on a flawed assumption. You assert that used car lots would empty, but that misunderstands the durability of cars. If everyone started buying used cars, there wouldn’t be a ‘used car run’, as we see on banks. Rather, there would be a slow, general shift towards used cars that would gradually increase demand- especially as everyone already owns a car and those entering the market would do so at the same historic rate.. The used car supply would be recycled as newer used cars could pass through several owners. The prices would theoretically rise, but certainly not in the near term.
The premise was based on a hypothetical situation as the post presents. I didn’t want to dig deep into economic principles as this was more of a satire post, not what would actually happen. Last year there were 1.3 million new cars sold each month on average. If those new car buyers switched completely to used vehicles, that would put a massive strain on the used car supply. Remember, there are a ton of used cars for sale, but most of them won’t match what new car buyers are looking for. This means the supply of used cars which people actually want to buy would be thin throughout the year. I completely understand the durability of goods concept along with product life cycles. This didn’t need to go into those concepts in order to get the idea across. I don’t think prices would theoretically rise, they would rise, but it would be gradual and not immediate.
On another note, if we told people not to buy new cars and they followed that advice, how would the used car supply recycle? If everyone switched to buying used cars, as this post is suggesting and is the entire premise, there would be no more supply. Yes, newer used cars could be passed down, but where would you get the newer car to replace that one? This is why new car prices would have to fall dramatically in order to spur the change of idea and people would go back to buying new. This is the only way the supply cycle would restart. Again, the premise is all about “if we ALL bought used cars.”
I’ve thought about that before but not just with cars but also houses, clothes or anything you can buy second-hand. I’ve never owned a new vehicle but my wife has. She bought it at a discount and with 0% interest over 5 years in 203 and it just hit 100k and I’ve only changed the brakes, oil changes. Nothing major just the small stuff and it’s in mint condition. I’d say she did pretty good with it. If we all waited for used items there will come a point where there are none because you need someone to buy new. I do think though that there will always be that clientele that wants everything “new”. Interesting though.
There will always be the clientele for new cars. They aren’t going away, but it is interesting to think if people really decided to never buy a new car again. It would really throw some stuff into a loop. Prices are really effected when supply diminishes.
To see this hypothetical in real life, you can visit Cuba. It wasn’t until recently that citizens of Cubans could “buy” new cars, but at sky high prices.
Interesting. I didn’t know that. Thanks for the information Z!
I actually just looked into the costs of getting a new car. Not that I was planning on actually getting one, but just one of the “run the numbers” scenarios.
I wonder if your scenario would be true, if new car sales plummet manufacturer’s could be closing their doors and others need to scale down and make a larger profit on the fewer cars they sell to make up for their overhead costs. It would be interesting to see what would actually happen!
Who knows if that would happen. I think they would just produce less and try to pull some used cars onto their lots.
Fun post, Grayson! Always interesting to read and think about this kind of stuff. Thanks for a fun Labor Day weekend post, and have a good one! And if it makes you feel any better, Rick’s been painting this week too, and he hates it just as much as you do. 🙂
I always enjoy thinking about stuff like this.
Since I didn’t really know too much about cars and took the advice of my dad to buy new (actually both my parents for the longest time, felt secondhand was below them and preferred brand new), I purchased my car brand new.
My fiance on the other hand, know his stuff on cars. He can fix them, take them apart and put them back together again. He purchased his first car off of Kijiji. While he’s done a lot of work to it, it’s still running quite well. His second car he purchased used from his friend who’s also mechanically inclined.
I can work on cars as well. I have bought used and new before. It depends on what I want to do with the car.
Very interesting. We’ve been new car buyers our whole life. Sure we knew about the depreciating as soon as it left the lot etc. but we wanted the new car so it would last longer and not be breaking down all the time. Now since starting our debt repayment journey and reading a lot more about it, I’ve changed my thinking. Our vehicles are 5 and 3 years so not something I need to think about right away, anyways.
I hear you there Deb. I understand what you are talking about for sure.
That’s good advice if you are wealthy enough to pay cash for a car and absorb the risk of major repairs and expensive maintenance work if it’s a luxury brand. If you arent, though, you will get better financing terms on a new vehicle, and have the comfort of knowing that the only thing you will be paying for in most cases is tires. Most new cars come with scheduled maintenance covered for the first two or more years.
An even better option is leasing. Buy a middle of the market car, and in 6 years, you’ll have a paid off car with no warranty, worth maybe 5-7 thousand dollars, that you’ve been paying for repairs and maintenance on for the last 2-3. Lease three cars over six years and you’ll have paid that same seven thousand less in monthly payments, plus you’ll never have spent a dime in maintenance or repairs.
This is very interesting advice. While I know many people can’t pay cash for vehicles, I have leased before and it is not a real smart thing to do. Math contradicts your advice. Also, you do realize you still have to pay for repairs and maintenance on a leased vehicle, right? You don’t get free repairs and maintenance on a leased vehicle. The only repairs would be ones which follow the warranty. You also have to bring your car in every x miles to keep the warranty good. Those can cost upwards of $400.
You are also not buying anything with a lease. You are renting for the term. When you are done, you can buy it out, but then you have to start paying again until the car is paid off. This means you just paid money in the beginning just to rent the vehicle. You didn’t pay it down.
Haha I like seeing how your brain works. This is such an interesting question – of course, there will always be those people who buy their fancy brand new luxury cars without a care in the world!
Thanks Cat! Since this was entirely hypothetical, I know we won’t ever see this scenario in play. It is fun to think about basic supply and demand and how it would affect prices.
I am on my 5th car. The first was a new Mazda GLC, which I had for 11 years. The second, a Honda Civic, I bought used from a friend, which was totaled when it was rear-ended, after less than a year. The third had been my Dad’s Chrysler station wagon (the first and only car he ever bought new — he always paid cash), which had over 200,000 miles on it when it became too unreliable to keep. The fourth was a new Ford Escort, that I had for 20 years. Now I have what used to be my Mom’s Chevy Malibu.
I don’t know what — or when — my next car will be, but I am told by an auto dealer that good used cars command premium prices right now, because of current economic instability.
Thanks for the information about the used car premium. It wouldn’t surprise me.
This happened to a certain extent during the financial crisis of 2008-2009. No one bought new cars, and reliable, fuel efficient used cars held their value more than usual. Manufacturers produced less cars to meet lower demand so the price of new cars didn’t need to change that much.
You can still see the effects of this on the used market. There aren’t many 2009 model years for sale, compared to 2008 and 2010.
You are most certainly correct there Mr. Frugalwoods. I didn’t think of that much, but now that I look back, it makes sense. Of course, my scenario was all the way to the extreme, but it shows that is can happen.
Very interesting read! Especially for an economics nerd like myself. You bring a great point, but the thing that offsets this, in my opinion, is the general lack of financial education. We aren’t teaching it in schools and most people are terrible with their money, thus new cars come into the picture. I wonder if this could happen if more people started to become educated. Of course, education is a small part. Emotions are the biggest part of an average consumer’s buying habits.
That’s why this is entirely hypothetical. We know people lack general financial education, but also there are too many emotions behind our buying decisions. This is especially true with cars. It was more of a fun thing to think about, though I know people aren’t going to suddenly shift to purchasing used cars.
This is a brilliant post and I think what you have said quite easily applies to drivers here in the UK. There seems to be almost a taboo with used cars because as you say they aren’t shiny and new but drivers should be wiser- if financially a new car makes sense then great but otherwise there is no reason why a used car can’t tick the right boxes! -Thomas