FOOL SCHOOL
Foolish Car Buying

February 14, 2005

After our home, a car is one of the most expensive items we will ever purchase. Unlike our home though, a car is rarely an investment. It is not an asset that appreciates in value or one that can earn you an income. But that does stop lot of us buying sparkly new cars each year. In fact, in each of the last four years, around 2.5m new cars have been sold in the UK, with Ford and Vauxhall being the two most popular marques. New number plates in March and September make these the two most popular months for new car buying, with around a third of new cars purchased in these two months.

However, many of us buy the car we want rather than the car that we need. The difference can cost you thousands of pounds each year, especially if you insist on getting a new car every two or three years. The most sensible way to buy a car is first of all to decide if you really do need one. Will your existing car do for a little while longer? Assuming you do need a different car then you can work out what you can afford before drawing up with a shortlist of potential candidates.

As well as the initial purchase price of the car you also need to bear in mind its annual running costs as well. Insurance, road tax, servicing, amusing bumper stickers and petrol are amongst the major costs. Insurance is probably the largest and most variable cost, especially if you're a young driver or if you have a less than sparkling no claims record. (See our Insurance Centre for more on how to get the best deal).

When choosing the sort of car you'll need it pays to think ahead. As cars depreciate rapidly you don't want to be chopping and changing every few years. For example, if you're planning a move into the big city, then a small car might make more sense than a whopping great, big 4x4. Similarly, if you think you may be starting a family in the near future then a two-seater sports car probably isn't the way to go.

New or used?

Having drawn up a budget you are now faced with the choice of either buying a new or used car. New cars are obviously more expensive and they lose a sizable chunk of their value as soon as you drive them off the forecourt. You'll usually get a better warranty deal with a new car. A used car means you can a better model for the same amount of money.

No two cars will depreciate at exactly the same rate, but the following table is a guide to how an average car's value falls with time.

Age          Value
New           100%
1 year         70%
2 years        55%
3 years        40%
4 years        30%
5 years        25%
6 years        20%
7 years        15%

Scary isn't it? From this table you can see that buying a used car, that's say two or three years old, can save you a great deal of money. Another thing you can do is look for cars which hold their value. Looking at one of the many price guides on the market can help you out here. They also have useful hints on what to look out for with each type of car.

German cars are renowned for depreciating more slowly. Desirable models that are in relatively short supply, like coupes, also tend to hold their value better. Also look at choosing a sensible colour (i.e. not lurid pink) and added extras like air conditioning.

New cars are mostly sold through dealers. Alternatively you can buy through specialist brokers or directly from the Internet. The opportunities widen with used cars. Dealers are safest but generally more expensive; independent dealers are usually cheaper but can offer less protection; private sellers can be good for bargains but the risks are all yours; auctions are cheap but potential minefields.

In the next two Fool School articles, we'll look in more detail at buying both new and used cars.

Need a car loan? Pick up a cheap deal in our loan centre.