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Buying a car: brand-new or second-hand?

By: Aida Sevilla Mendoza, January 22nd, 2013 11:18 PM

What would you advise someone who is buying a car—get a brand-new one or a second-hand? If you were to ask Gus Lagman, the president of the Automobile Association Philippines (AAP), this question, he would probably answer: “Second-hand.”

This is because Lagman observed a tradition set by the late lawyer Conrado “Dodo” R. Ayuyao, who was president of the national auto club, then known as the Philippine Motor Association, for 17 years. Ayuyao never bought a brand-new car for himself although he could very well afford to. He believed that you shouldn’t have to pay for the drop in value of a new car, which depreciates the moment you drive it out of the dealership. According to this theory, you should let the first owner of the car shoulder the cost of its rapid depreciation during the first five years after purchase.

This is not to say that all the succeeding presidents of AAP after Ayuyao’s term only bought second-hand cars. But even Johnny Angeles, the current veep, doesn’t believe in buying brand-new cars, either.

Look at Lagman’s experience with buying second-hand—he read the classified ads and bought his 2005 Toyota Camry in either 2008 or early 2009, when it was about three years old or so. The Camry was owned by a pharmaceutical company and was assigned to one of the executives. Lagman is happy with his second-hand Camry because it never gave him any problem. He still uses the Camry almost daily (although he has several other cars) and doesn’t want to sell it yet.

RISKS. Despite Lagman’s satisfaction with his second-hand purchase, there are many risks involved in buying a used car. You may end up with a flooded car, one that has been submerged underwater during a typhoon or a car whose odometer has been tampered to make it appear to have been slightly used by its first owner when in reality it has been heavily used by more than two previous owners. Or you may unwittingly acquire a “hot car,” a stolen vehicle being hunted by the police.

On the other hand, the price difference between a brand-new car and a second-hand one of the same make and model could tempt you to choose the latter. These days, premium car distributors are advertising “pre-owned” cars with good quality warranties that would allow middle-income consumers to tool around town in a BMW, Mercedes-Benz or Audi. A nearly new car that is one or two years old may offer better value than a brand-new one—unless it has been damaged in an accident and secretly repaired and repainted before it was placed on sale.

If you’re shopping for a used car and get the chance to buy one that, like Lagman’s Camry, was owned by a company and used by an executive for only two or three years, chances are that the car is in good condition. The company owning the car should have seen to it that it properly underwent the manufacturer’s preventive maintenance service schedule.

Car depreciation, by the way, is not a long-term process. Depreciation slows down as a car gets older. AAA (Automobile Association America) defines depreciation as the difference between a new vehicle’s purchase price and its estimated trade-in or resale value at the end of five years. Depreciation or the loss of a car’s value is the most expensive part of owning a car, especially in the first five years. It comes up to much more than the sum total of monthly loan payments, cost of fuel, insurance premiums and maintenance and/or repair expenses.

DEPRECIATED. As soon as you drive a new car off the dealer’s lot, the car will have depreciated 11 percent, according to Edmunds. Others place it at 20 to 30 percent. For the next five years, you lose between 15 percent and 25 percent a year, assuming you drive the car 10,000-15,000 kilometers annually. If you keep the car after Year 5 of original ownership, it will be worth 35 percent of what you paid for it at the dealership. Aside from mileage, various factors affect the rate of depreciation, such as the condition of the car and the demand for that particular model in cases when demand exceeds supply.

By the time a car is eight years old, it’s done all the depreciation it’s going to do, but the risk of costly repair is higher and more unpredictable. After 20 years or 200,000 km, scrap metal value is the only value a car would have—unless it’s rehabilitated as a classic car or collector’s item. In this context, hats off to those car owners in Cuba who manage to keep their 1950s vintage Chevrolets looking good and in running condition.

To reduce the depreciation cost of owning a car, either buy a new one and use it for a long period of time (eight to 10 years) or buy a slightly used car often enough to avoid the costly repair that comes with heavily used vehicles. The depreciation or resale value of a new car should concern only those buyers who intend to keep the car for a few years, not those who plan to drive it until its wheels fall off.

IF YOU own a car that you plan to sell one day, here’s what you can do to minimize depreciation, according to AA (Automobile Association Ltd. UK): 1.) Keep the car in good, clean condition; 2.) Keep mileage down; 3.) Make sure that servicing is done according to the manufacturer’s schedule; and 4) Keep a comprehensive service record and attend promptly to any repairs required.

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