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Should you buy a new car?

Tony Davis

It’s best to start with a specific example: let’s say you have a privately owned Mercedes E350 sedan.

It’s a fine car, which provides luxurious transport to work each and every week day, and swallows the whole family on weekends.

It was the absolute latest and greatest when you bought it in 2009. You were tempted by the whizz-bang technology, roomier interior and the sharp-edged new bodywork that adorned the “ninth generation” of Mercedes’ family-sized model.

You paid the $135,100 price (plus on-road costs), and drove away.

That was almost three years ago. The car is about to run out of its factory warranty, leaving you potentially exposed to expensive repairs.

What’s more, even in those three short years, Mercedes-Benz and others have introduced even more dazzling technology, some snazzy variants and engines that seem almost miraculous in their clean-burning and frugal nature.

Your six-cylinder-model car has power and torque figures of 200 kW and 350 Nm, and consumes fuel at the rate of 9.4 litres/100 kilometres. It emits 219 grams of CO2per kilometre travelled.

Benz will now sell you a 250 CDI version of the E Class with a turbo diesel “four” giving broadly similar performance. It has less power (150 kW) but markedly more torque (500 Nm). Remarkably, it sips just 5.1L/100km (that’s 46 per cent better) and emits only 135gm of CO2 per kilometre (39 per cent better). Competitors have introduced similarly frugal models.

Another compelling argument with the latest 250 CDI is that it’s fitted with most things on your current car and some equipment that wasn’t even available then, yet is about $35,000 cheaper.

This is thanks to the rising dollar, stiffer competition and Benz’s long-term policy of charging vastly less for four-cylinder models than sixes (which, admittedly, tend to be smoother and quieter).

Times have changed. Surely it’s time for you to change too, to downsize for the sake of the planet, and your peace of mind. Or is it?

The reality is that the cost of turning over a car is large – but highly variable. Aside from the ownership situation (the car may be privately or business-owned, or under various leasing arrangements), the financing and tax implications vary from person to person, and the car market itself is in the midst of a new model explosion, with a general trend towards lower prices.

The last point is a wonderful thing, except when you already own a car. Lower new car prices dramatically depress used car prices and can raise the cost of switching.

Although one model of car and one set of circumstances can’t answer everyone’s situation, the Mercedes-Benz E-Class example raises issues that need considering in most cases. There are three obvious options, so let’s pick up the Choose Your Own Adventure format. If you:

■ Stick with your current car and hope nothing goes wrong, go to option one;

■ Purchase an extended warranty and keep the car for two more years, go to option two; or

■ Sell the car and buy a cleaner burning, more frugal E250 diesel, go to option three.

1. Stick with your current car

There is a lot that appeals about the do-nothing option, the first and most obvious being you do nothing. That new-car smell is great but comes with a lot of mucking around: paperwork, phone calls and usually hours on the hoof investigating the options.

There’s also the nuisance of disposing of your present car.

Other advantages are obvious. There is no money to put down, and no need to reconcile yourself to the enormous depreciation that has taken place in those three years (see option three).

Until you sell it, your car is worth whatever you want to believe it’s worth.

The downside? Having no warranty leaves you very exposed (BMW and Audi also have a three-year warranty, while Lexus and the new-to-Australia Infiniti brand have four years).

Extensive work on the E350’s electronically controlled engine, transmission or suspension could cost thousands, and that’s dead money. Aside from that, you can expect the fuel cost difference between your car and the new model to grow, and you will miss out on the latest safety items.

The newest E, for example, can automatically apply the brakes if you’re going to hit the car in front.

Verdict: If you remain happy with your car, and nothing goes wrong, this is a canny financial move.

2. Purchase an extended warranty

Most luxury car makers – including BMW, Audi and Lexus – will sell you an extended warranty, even though it may be via an outside organisation. BMW’s new vehicle warranty extension, for example, is backed by Allianz. For a 535i sedan, it costs $5216 for a further two years with unlimited kilometres.

At the moment Mercedes doesn’t officially offer such a warranty (except when the car is bought from a dealer under its officially approved second-hand program), but the company tells us it’s working on one.

In the meantime, some Benz dealerships will sell you a warranty for your privately owned car.

No matter where such a warranty comes from, it can’t be overstated how important it is to check this warranty is comprehensive, properly backed and covers everything you would reasonably expect to go wrong (except fair wear and tear, which isn’t covered even in the original).

Make sure too the warranty doesn’t tie you to having the car serviced by a particular dealer, or you are really locked in.

On this point, it’s wise to follow the manufacturer’s scheduled service, irrespective of whether the servicing is carried out by an official dealer or not (legally, the choice is yours).

Having the official dealer service your car will almost certainly be dearer.

On the other hand, he or she should have the latest service equipment and software updates, which may not be available “aftermarket”.

Verdict: Option two gives you all the advantages of option one, while reducing (at a cost) your exposure to the unknown.

3. Buy a cleaner burning one

This is the choice that delivers the shiny new model, the latest gadgets and the virtuous feeling you are doing the right thing.

In your new E250 CDI you’ll reduce your fuel use and emissions dramatically and, by cleverly selecting the right options, make your family even safer.

What you’ll also do, if you’re honest with the figures, is reveal just how much your 2009 E-Class cost over those three years.

According to Glass’s Information Services, which researches trade-in values to dealers and auction houses, your car will be worth just $73,700 – 55 per cent of what you paid for it.

Though you are likely to get slightly more in a private sale, in broad terms you’ve dropped $20,000 each and every year. (Even if you are leasing the car, one way or the other you’ll be bearing that cost.)

The stunning drop in value isn’t because it’s a Mercedes. It’s just the way things now are. If it were the equivalent BMW, according to Glass’s, it would be worth 51 per cent of its original cost. The Audi and Lexus competitors stand at 49 per cent, less than half what you paid.

But the new car will use dramatically less fuel, won’t it?

Yes, but let’s say you drive 20,000km per year and achieve the E250’s official 5.1 lt/100km fuel figure (which is pretty hard in real-world conditions).

With premium unleaded and diesel both sitting on about $1.50 a litre as I type, the 2009 car will use $2820 worth of fuel each year, the new “green” model $1530.

The saving is $1290 per year. Even if there are other savings in running costs, it’s a relative pittance.

As Nick Adamidis from Glass’s says: “Depreciation is the highest cost factor of all the variables that make up the cost of owning a vehicle – over fuel, over insurance, over finance, maintenance, everything – especially on a luxury car, and regardless of whether it is privately owned or leased.

“As soon as you walk out the door, you lose 5 to 10 per cent; over the first three years you will lose 40 per cent if it’s a good car, up to 55-60 per cent if it has a poor resale value history.”

After three years the depreciation slows down. Your 2009 car will lose “only” another $27,800 over the next two years, says Glass’s, while any new car will be back at the top of that depreciation slope.

It’s not even clear the planet will be better off. Sure, you’ll be using less fuel and spitting out fewer harmful emissions, but your old car isn’t going to disappear.

It will slide further down the driver food-chain, probably receiving less love and maintenance with each year.

There are 900 million cars in the world, according to recent estimates by Mercedes-Benz. By buying a new car, you’ve just added another one.

Verdict: You’ll struggle to justify it on green or lean grounds alone.

Conclusion

Keeping your current car is the cheapest solution, and driving it gently and less often is probably the greenest.

That doesn’t mean you should never buy a new car. If we made decisions based solely on numbers, we’d live very grim lives indeed.

There are myriad reasons to change cars – greater safety is one justification, the variety that is the spice of life is another.

Whichever of the three options you take, there are risks, rewards and complexities. The simple truth is that the true cost of motoring is high and, in most cases, the bulk of it doesn’t lie in the day-to-day running costs. But we should all strive to use less fuel.

For more on specific values of used cars, the new Glass’s Guide app can be downloaded via the iTunes store or at glassguide.com.au

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