The Millionaire Next Door

Buying a Car: First Cost vs. Life Cycle Cost

In a recent advertisement for Honda Accord, it was described as having the highest resale value within its class.  I’m not surprised.  How well a motor vehicle holds its value depends on several factors.  Of course reliability is important no doubt, but there is something else.  It has to do with retail versus fleet sales.  What if the car that you are contemplating buying is sold in the hundreds of thousands under the heading of Fleet Sales?  Most of these fleet purchases are made by rental car companies who demand  very deep discounts from manufacturers.   Later these one, two or three year old cars are “dumped” on the used car market. 

I learned this first hand when Leigh asked me to help her sell her grandfather’s car, a 3 year old sedan purchased new for $25,400.  The car sold for $7,000 [she was lucky] even though it only had 14,000 miles on the odometer and was in excellent condition.  Why so little?   It was the number one make and model of car purchased by rental car companies during the year it was originally purchased.

Leigh’s grandfather thought at the time that he was getting a good deal, a deep discount on his purchase.  So much for “first cost” when buying a car.  He paid dearly in terms of lifecycle cost, losing more than 70% of the purchase price.  Maybe he should have purchased a Honda!  If he had he would have netted at least $5,000 more.

According to a recent article in Automotive News [Retail joins fleet in driving growth, January 10, 2011, p. 4], Honda America accounted for only 1.6% or 33,000 of all the fleet sales (2.1M) in 2010.  In contrast, Honda sold 1,197,500 of its vehicles to retail custsomers.   In sharp contrast in terms of fleet sales,  General Motors accounted for 29.2% or 609,000 motor vehicles; Ford-29% or 604,900.  

Ironically, I recently bumped into the owner of a large Honda dealership.  I hadn’t seen him since we were in graduate school together.  I praised his reputation as a quality dealer.  He responded, “They are great cars and Honda, wonderful people to work with.  But once you sell a Honda to a customer, they’ll hold onto it or at least keep it in the family.  I never have enough Honda trade-ins to keep my lot filled.”


6 thoughts on “Buying a Car: First Cost vs. Life Cycle Cost”

  1. (Bruce)

    We’ve had 2 Honda Preludes, 1 CR-V and 1 Odyssey. When we bought the Odyssey, the dealer tried to sell me an extended warranty. I told him I didn’t need an extended warranty, because I was buying a Honda! He laughed and didn’t mention it again. I only gave up my Prelude (for the CR-V) when the baby seat (w/baby #2) wouldn’t fit behind the driver’s seat when I drove. I either paid cash for these cars (I did buy new) or I paid off any loan (from Credit Union) in under a year.

  2. My 1991 Honda Accord will have its 20th birthday at the end of this month. I bought it new, and would like to buy another when that time comes. So I’m glad to read that Hondas still have a good reputation in the marketplace.

  3. We bought our first Honda (a Civic) in Dec 1988. Three extended family members followed our lead that next year.

    Since then, we’ve only bought Hondas: an Accord, a CR-V, an Odyssey, another Civic, and in Dec 2010–another CR-V. (Incidentally, my husband’s current car is an Acura MDX, so it counts as a Honda, also!) I love Honda, and I love their honest service department.

  4. We are proud owners of 2 Hondas, Accord 2001 and Odyssey 2001. Accord just crossed 200k this month. Except regular maintenance, Accord is maintenance free. Odyssey being a first generation 2001, we had transmission and catalytic converter recall which was covered under extended warranty. I am amazed by Honda quality. (I owned 2 Toyotas before. I felt Toyota were cutting corners in 2000 models). My kid will be driving age in 2 years and most likely he will drive this car considering he will be driving locally while he will be learning. Accord simply has good engine. When driving on highway at around 75 miles/hours, you do not hear any sound from engine. My sister has 1998 Accord which she is planning to keep it forever. She just purchased another new Accord this year for her college age son.

  5. This post will definitely affect my next car purchase. What are your thoughts applying the life cycle cost principle to uber drivers?

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