Why some millionaires drive used cars?
Malong| Economics Writer|CPT Markets | Friday, 1st November 2019
When we think about buying a car, one of the most important decisions we make is whether we should purchase a new car or a used one. There are many several factors to consider on this decision, for example the differences in price, financing options, performance, insurance costs, reliability, and even the overall life-time buying experience that can have a huge impact on your purchasing decision.
Ok, let’s say you got the money to buy the car of your dreams. Then, you don’t need to even consider about the decision of buying a new car or used it one, right?

Well, according to the authors of a famous self-help book called: The Millionaire Next Door, reported that only 23.5% of millionaires drive the current year’s model. But this is not quite the same as saying the majority are driving around in used (as in pre-owned) vehicles. The book reports that nearly 37% of millionaires bought their cars used. Then, using simple math we can calculate that the majority, that means 63% bought new cars — they just didn’t keep buying new cars every year. The authors emphasize about the fact that 25.2% of millionaires have not purchased a car in four or more years.

A logical thinking is that some people hold onto their cars for at least 10 years to get the full value of them. For example, Leonardo DiCaprio drove a Toyota Prius which compared to how much money he earns, is a ridiculously cheap car. And a similar story with Mark Zuckerberg and a big list of wealthy people who follow this logic.
Depreciation Matters
Benjamin Franklin famously wrote: “In this world nothing can be said to be certain, except death and taxes.” I think he missed something in this quote: Depreciation.

Cars depreciate quickly, often as much as 20–30% their first year. The downward spiral continues at a more moderate rate from there, as vehicles age, add mileage and absorb wear and tear.
Depreciation is the biggest factor affecting the long-term value of a car and the total cost to own it. And if you borrowed money to buy the vehicle and decide to sell it after a few years, you might be upside down on the loan, or owe more money than the car is worth.
The market conditions are also very important in depreciation. For instance, SUVs and trucks are in higher demand now because gas prices are relatively low, so they’re holding their value better than sedans. The same with brands, some brands hold their value better than others, which pays dividends when it’s time to sell.

Now, let’s see another interesting fact when buying a new car. It’s presumed that the value of the car is equal to the amount of money that was traded for it. In reality, there is only one buying scenario where that presumption would be somewhat correct — a scenario where you purchase the car from an individual.
The most expensive car buying scenario is when you purchase a car from a car dealer. The value of the automobile will instantly drop in value the moment you drive the car off the lot. That’s because the auto dealer marked up the value of the new car (or used) to include a profit margin. In this case that “drop in value” impact will be much higher when buying a new car.
Paying With Cash
Unlike private sellers, most dealers would prefer you to get a loan for your purchase. Often dealers make a little bit of money of the loan that they give you. This is known as “dealer reserve” and it works basically like this: you get approved for a 60 months loan 2.5%, the dealer tells you that you were approved at 3.5%. If you accept the 3.5% loan the dealer gets the difference. This practice is perfectly legal and also very common.

If you pay using your own money or a check from an outside source like a credit union, the dealer loses that opportunity to make the reserve. In addition, cash buyers usually get to bypass all those finance and insurance spiels about how you need to “protect your investment” with an extended warranty, service plan or any other add-ons. These products bring a lot of profit to the dealers, so if they know right away they can’t make any money off you from F&I, they may be less likely to cut a good deal on the car itself.
The decision to purchase either a new or used vehicle should be based on a number of factors. You need to be comfortable with.
