According to U.S Department of Transportation statistics for the year 2000, 94% of American households own at least one vehicle. In fact, 42% of households own at least two vehicles and 21% own three or more. Considering the fact that the average car owner drives 15,000 miles per year and the average new car price was $22,000 in 1999, it becomes obvious that the automobile is not only an important factor in the everyday life, but also a significant financial commitment for the average American. As such, it is important to determine if there is a financially optimal time to purchase and sell an automobile. Several factors must be considered, including purchase price, probable rate of depreciation, warranties, history of repair costs, and maintenance costs.

The goal of the study was to use the metric of cost per mile to identify optimal purchase and sale timing for a variety of automobiles in the U.S. market. For each vehicle in the sample, the National Automotive Dealers Association (NADA) car valuation guides were consulted to determine the monthly market value from December 1995 through June 2001. All valuations were based on the assumption that the vehicles were driven under normal conditions for an average of 15,000 miles per year. In addition, car purchases were assumed to be cash transactions. The results of surveys conducted by Consumer Reports magazine, Consumer’s Research magazine, and the Complete Car Cost Guide were used to determine estimated maintenance and repair histories for each vehicle. To estimate the cost of each repair or maintenance task, the Mitchell Estimating Guide was used and a common labor rate of $60 per hour was applied. The April 2000 survey by Consumer Reports was based on information collected from owners of more than 500,000 vehicles. If the survey results showed that over 9.3% of the owners reported a "serious" problem, it was assumed that the vehicle in this study would have a similar problem. Standard scheduled maintenance costs were applied to each vehicle as listed in the 1995 Complete Car Cost Guide. The following costs were excluded: taxes, licenses, fees, and fuel. Because of the brief time periods, costs were not discounted to present (1995) values. However, it is anticipated that this adjustment would not have a material impact on the results of the study because of the significant savings that result from applying these strategies and relatively short time period of the study.

To test the hypothesis, four scenarios were created and applied to the data for each vehicle. The first scenario, labeled Category I, demonstrates the financial implications of purchasing a new car and selling it after 6.5 years. Category II, III & IV reflect the estimated outcomes if a buyer purchases each of the vehicles in February 1996. However, the selling points in categories II, III, and IV were varied to show the different outcomes if the cars were sold at three different times: (1) in June 2001, (2) at the time of warranty expiration, and (3) in December of 2000. (Please see Exhibit 3). For each car and category, the NADA retail market values were used to determine the purchase and sale values. Repair and maintenance costs, estimated based on the previously mentioned survey and costing data, were included to arrive at the total cost to drive each vehicle during the given ownership periods. The net expense includes the sale value of each vehicle at the designated selling points. Costs per mile calculations are based on the net expense divided by the estimated mileage driven, using the 15,000 mile per year national average.

Eight 1995 model year cars were selected with the following criteria: four luxury cars (two domestic and two foreign) in a new retail price range from $30,000 to $40,000 and four economy cars (two domestic and two foreign) in a new retail price range from $9,000 to $15,000. The following cars were chosen: Cadillac De Ville, Lincoln Towncar, Lexus ES300, Mercedes C220, Ford Escort, Saturn SL, Honda Civic, and Toyota Corolla.

Many Americans still consider the process of buying and maintaining an automobile to be an "investment". However, nothing could be further from the truth. Those who are convinced that buying a new car is more prudent than purchasing a used vehicle often argue that when a used car is purchased, the buyer is simply purchasing someone else’s problems. However, according to J.D. Power and Associates, "1997 model year cars and trucks were the most worry-free vehicles ever sold in terms of the number of defects, mechanical failures, and other complaints reported by owners." (Consumer Research, p.11) In fact, J.D. Power surveyed 43,000 motorists and found that over 50% responded that their vehicles had no problems three months after purchase. Further evidence of a dramatic improvement in the quality of today’s automobiles lies in the trend toward improved coverage in manufacturer warranties. Since the 1970s, manufacturers have lengthened standard warranty coverage for major components from 12 months/12,000 miles to up to 10 years/100,000 miles. In 1996, the results of a Consumer Reports survey confirmed that Japanese manufacturers continued to lead the way to improved quality by reducing the number of complaints to 17 per 100 vehicles surveyed. Many of the recent improvements in manufacturing quality are attributed to increased use of technology such as Computer Aided Design (CAD) systems, robotic welders, hydroforming, and automated paint shops. In 1999, the American Automobile Association predicted that by 2005, 40% of vehicles in the United States would be at least 10 years old.

A buyer who absolutely has to have the latest new automobile should be prepared to pay the highest price and to incur the highest depreciation loss in the life cycle of the automobile. New car prices are inflated to allow for negotiation and dealer margin. If a buyer chooses not to negotiate, he or she will pay more than necessary in most situations. According to Consumers’ Research in 1999, the average car depreciates 20% to 40% during the first year of ownership. This drop in value doesn’t reflect a design flaw in the automobile, but rather the profit margin of the dealer. On a $22,000 vehicle, the loss in value is between $4,400 and $8,800 in the first year alone. Luxury cars are the worst offenders with the highest sticker prices and depreciation rates.

The analysis performed on the 8 vehicles in this study revealed that depreciation rates are highest during the first 13 months after purchase (Please See Exhibit 1). For the luxury and economy cars, the depreciation rates for the 1st 13 months of ownership ranged from 6% (Mercedes) to 26% (Lincoln) and from 10% (Toyota) to 28% (Ford Escort), respectively. In dollar terms, this indicates that by simply purchasing a car that had aged by 13 months, the average car buyer could have saved up to $9500 on the luxury cars and up to $3800 on the economy cars.

During the 6.5 years reviewed, the percentage of total depreciation for each of the eight vehicles was significantly different and ranged from 52% to 77%. This observation could lead to a conclusion that it would be advisable to simply purchase a car with the history of the lowest total depreciation after it has aged approximately 13 months. However, this conclusion would be incorrect since it ignores the fact that each car has a different rate of depreciation from year to year and different repair and maintenance costs.

The repair history for each model should be closely considered during the vehicle selection process and in the decision regarding when to re-sell. In many situations, expensive repairs can offset low rates of depreciation (Please See Exhibit 2). For example, the1995 Mercedes Benz had a history of engine problems that tended to occur during years 4 and 5 with an average repair cost of over $7000. Despite the fact that it had the lowest overall total depreciation (52% as of June 2001), and a relatively low monthly depreciation rate from year 2 through 4 (1% to 2%), the depreciation advantage can be easily offset by high repair costs. If the engine trouble occurred before the car aged by 48 months and before the owner drove 50,000 miles, the warranty covered the costs. However, if the driver’s habits were roughly equal to the average American, the Mercedes would have traveled over 50,000 miles by the 40th month and the engine repair costs would not be covered under the warranty.

Based on the analysis of the 2001 rate of depreciation, an increased depreciation rate should also be expected to coincide with the 100,000 mile marker. In fact, for the first six months of 2001, the 8 vehicles studied depreciated over 13% compared to 8% during the first six months of the previous year.

The best selling point for all eight vehicles was determined to fall between 28th and 72nd month of ownership. This range was primarily the result of the expiration of the basic warranties from the manufacturers and an increase in depreciation that was observed during the 6th year as vehicle mileage approached 100,000. The cars demonstrated monthly rates of depreciation ranging from 1 to 2% per month during years 2 through 4. After the fourth year of ownership, the rate of depreciation accelerated to a range of 3 to 4% per month.

All eight basic warranties expired as a result of high mileage rather than the length of ownership. 3 year / 36,000 mile warranties expired after 28 months and 4 year / 50,000 mile warranties expired after 40 months. After the expiration of the warranties, the risk of costly out-of-pocket repairs increases dramatically. However, for vehicles with histories with low frequency of expensive repairs like the Honda Civic and Toyota Corolla, the impending expiration of the warranty does not necessarily reflect that it is time to sell the vehicle. As cars with low repair costs age, scheduled maintenance costs increase (e.g., brakes, tires, and major engine tune-ups). However, these costs do not offset the fact that, as a result of low repair costs and depreciation rates, the cost per mile to operate the vehicle remains very low. In these situations, the optimal selling point was determined primarily based on the advantage of avoiding the increased depreciation rate that can be anticipated as mileage approaches 100,000. For the first six months of 2001, the 8 vehicles depreciated over 13% compared to only 8% during the first six months of the previous year. (See Exhibit 3 for analysis of each vehicle).

While this study advocates the practice of buying and selling vehicles more frequently, it is also important to consider the time, energy, and patience that these transactions can require. On the other hand, as confirmed in this study, the frequency of repairs and scheduled maintenance also increases as a car ages. Each trip to the mechanic also requires time, energy, and patience. The wise buyer should consider the expenses and hassles of each alternative and choose the option that fits his or her budget and lifestyle.

Category III (purchasing at in February 1996 and selling at the time that the basic warranty expires) was the lowest cost course of action for all eight vehicles. The Ford Escort revealed the most dramatic cost savings: The cost was a full 10 cents higher per mile if the buyer purchased a new Escort and drove it for 6.5 years. (The buyer enjoyed a 5-cent per mile cost if the latter scenario was chosen.) However, the Escort was not an exception. The data for all eight vehicles confirmed the initial hypothesis and provided good confirmation of the advantages of buying after 13 months and selling at the time of warranty expiration.

The analysis results demonstrate that owning a vehicle is not an investment. The costs of depreciation, repairs, and maintenance are relentless. With the exception of the Ford Escort, buyers could have justified delaying the sale of the car until December of 2000 because the increase in cost per mile ranged from 13% to 50%. These increases in cost per mile might be considered acceptable for some individuals who consider the process of selling and buying a car to be more of a hassle than the occasional trip to the mechanic shop. After December of 2000, the depreciation rate spiked in direct correlation to mileage passing over the 100,000 mile mark. However, the cost per mile for all eight of the vehicles studied was always the lowest when the buyer took advantage of all three of the following potential benefits:

1. Purchasing after 13 months to avoid the highest depreciation rates.
2. Selling at approximately the time that the manufacturer‘s warranty expires to avoid out-of-pocket repair costs.
3. Selling before the increase in depreciation rates that is typical as an automobile approaches 100,000 miles.

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"Used Car Reliability." Consumer Reports. April 2000: 76-89.

"Are Cars Getting More Reliable?" Consumer Reports. April 1996: 12-13.

"1995 Car Ratings." Consumer Reports. April 1995: 255-257.

"New Car Warranties." Consumer Reports. April 1995: 226.

"Profiles of 1995 Cars" Consumer Reports. April 1995: 230-253.

"The Complete Car Cost Guide." Intellichoice, Inc. 1995: 41-211.