Buying a vehicle can be a very important financial decision. You want to buy one that is reliable and practical (a “soccer mom” probably won’t be driving her children around in a two-seater sports car). Once you find your “dream car” the next question to answer is, “how much will it cost?” If you have ever shopped for a car before, you know that the prices can range anywhere from several thousand dollars for a car with 100,000+ miles to $50,000 for a brand new family SUV with that “new car smell.”
Choosing whether to buy a new or used vehicle is a polarizing decision for most car owners, largely depending on their personal experiences. Those who favor purchasing new vehicles say the extra cost means fewer repair expenses. Plus, you can drive the vehicle for an entire decade before having to purchase a replacement vehicle.
Proponents of “buying used” say the lower initial cost of buying a used vehicle and the occasional repair is normally cheaper than the monthly payment for a new car. They also point out that the new vehicle can depreciate up to 50% within the first three years.
So, should your next vehicle be new or used? That decision depends on your circumstances. This guide will hopefully help you make your purchase decision a bit easier.
Advantages of New Vehicles
Buying a brand-new vehicle has several advantages. They are equipped with the latest safety technology, possess more horsepower than previous model years, and have a cutting-edge design that makes you different than everybody else.
With a new vehicle, you have more selection to choose from among dealer inventories. You can select from the various exterior paint colors. You can also choose whatever interior trim package or upgrades are available. These choices can cost as much or little as you allow them. But, the number of choices for used vehicles can be limited by what people are selling.
For example, you might want a dark red 4-wheel drive Toyota pickup truck with a leather interior. You know you can buy the truck with the exact specification brand new. How long will you have to wait for that same truck to be for sale? Will you have to compromise on a model with cloth seats or a different color? These are things to consider.
One reason to purchase new is the peace of mind regarding maintenance and repairs. The worst feeling for any car owner is for the “Check Engine” light to illuminate shortly after buying a vehicle. It is highly unlikely that a brand-new vehicle will need any repairs the first couple years beyond the routine oil change and tire rotation.
Certain parts come with warranties that are valid for the first couple years. If you plan on taking a coast-to-coast trip, you will feel more confident driving a new vehicle than a used car that is approaching 100,000 miles. Keep in mind there are some new car “lemons” as well. The first year of new vehicles or models with major redesigns is more prone to requiring repairs than other new vehicles.
Cost of Buying New is Almost the Same as Buying Used
Certain types of vehicles are difficult to buy used, in good condition, with low mileage, and minimal maintenance needs. Why? The owners who purchased the vehicles in new condition like them a lot and plan to keep them until the maintenance costs no longer justify hanging on to them.
Currently, it can be difficult to find used trucks and large SUVs with low miles or minimal needed repairs. Not many people want to buy a vehicle with high mileage or a faulty transmission when they can spend an extra couple thousand dollars for a trouble-free new vehicle with near-zero miles.
Cheaper Loan Rates
If you need to get a car loan for your next purchase, interest rates are usually lower by at least 1% (depending on your bank) for new cars. Even “like new” vehicles may qualify for the special interest rate. A new vehicle can be defined as any automobile less than two years old, although some lenders will extend new vehicle rates to any automobile 5 years old or newer.
The monthly payment for a used car still might be cheaper than a new car because of the lower principal amount. However, it doesn’t hurt to use an auto loan calculator to see the monthly price difference between a new and used vehicle loan payment. Buying new might not be as expensive as you think once you factor loan interest into the equation.
Disadvantages of New Vehicles
This is most likely the #1 reason used car advocates will tell you to buy used.
You have probably heard the saying, “a new car loses $2,000 in value as soon as you drive it off the lot.” This is very true. If you were to buy a vehicle, drive away, and return 15 minutes later wanting a refund, most dealers will not give you a full refund. A new car depreciates approximately 10% the second you leave the dealer lot and 20% overall for the first year of ownership. After the first three years, most cars will depreciate up to 50% from their original sticker price.
If you are one to trade vehicles every few years, you are affected the most by depreciation. This is realized each time you trade-in your current vehicle. Three years ago it could have been worth $30,000. Today, the dealer might only pay you $15,000 for it. That is $15,000 already put towards your new vehicle, but you still have pay or finance the difference to drive the new one. If you decide not to trade-in but keep the vehicle for another 7 years, will you spend less money overall by waiting?
Vehicles are not a wise financial investment because of the depreciation factor. Unlike stocks that will do up and down, most vehicles will only keep losing value each year. A very select few will actually appreciate in value.
Hidden Costs & Fees
Beyond the sticker price, new vehicles have higher taxes and fees. The dealer is primarily concerned about the sales price. After you have agreed on that, the “real fun” begins with the paperwork. You will soon realize any vehicle (new or used) will cost more than the sales price.
The largest “hidden cost” will be sales tax. Your state might charge an 8% sales tax on all vehicle purchases. For instance, the sales tax on a $7500 used vehicle is only $600 compared to a $2200 tax on a new vehicle that costs $27,500. Certain states also assess an annual personal property tax on vehicles as well. An older vehicle will have a lower tax burden than new vehicles.
Another fee to consider is the “doc fee” charged by dealers. Normally this fee is non-negotiable and is a couple hundred dollars. The easiest way to avoid this fee to purchase private-party using Craigslist or your local newspaper classifieds. Obviously, it’s easier to buy a “used vehicle” without a dealer. Not many people are going to buy a new car and immediately sell it themselves.
Higher Insurance Rates
A new vehicle will have higher insurance rates because they are more valuable. New vehicle owners are more likely to also carry comprehensive and collision insurance (required for any vehicle that is financed) that adds to the monthly cost. Depending on the value of the used car you might buy, it might not be financially wise to purchase additional insurance to cover damages to your vehicle if the deductible or premiums are comparable to the current vehicle value.
Before making a purchase, car insurance providers will provide free quotes for your new monthly premiums if you purchase a vehicle. Depending on the vehicle and provider, the premium price difference between a new and used vehicle might be narrow or wide. To get the full cost picture, it only takes a few minutes of your time to receive an estimate.
Nor for the other side of the discussion. When is it best to buy a used vehicle?
Advantages of Used Vehicles
No Car Loan
One advantage of buying used is the increased ability to buy a car without borrowing money. It is easier to save and buy a car that only costs $10,000 instead of $20,000 or $30,000. For those with low credit scores or simply do not want another monthly payment, buying used vehicles are the best way to stay out of debt.
Buying a reliable, good quality pre-owned vehicle for $10,000 and the cost of an occasional repair is still cheaper than paying an extra $10,000 or $15,000 for a new vehicle that can only be purchased by borrowing money.
It’s a fact that new cars depreciate at a rate of 15-25% per year and will only be worth 50 to 70% of its original value after five years. Cars will continue to depreciate each year, but the rate slows after the five-year mark. Waiting to buy a car after it is five years old, means you can buy two used ones for the price of one new car.
Buying used might be a way for you to be a two-car family instead of a one-car family or a three-car family. Even if you decide to buy a 1-year old used car, you will still have saved several thousand dollars compared to buying new.
Not All Used Cars Are “Lemons”
A “used car” doesn’t mean every single one is like your very first car in high school with a funny smell or needed a quart of oil added every week. Used is a very broad term. It can be a one-year-old car with 20,000 miles on it or 12-year old sedan with 173,000 miles that needs new tires.
The beauty of buying a used car is that experts at places like Consumer Reports and Edmunds have long-term maintenance histories of vehicles you are considering. From these reports, you can learn what certain model years are more prone to having electrical or transmission troubles. These are model years you can avoid due to the experiences of previous owners.
Disadvantages of Used Vehicles
Depending on the age of the vehicle, it might not have certain features that new vehicles have. Such desirable features could be LED headlights, a backup camera, or a 6-speed transmission. If certain features are important to you, increasing your spending limit or waiting for another year or two to purchase a “new-to-you” vehicle will be the only way to the new technology.
Uncertain Vehicle History
Used cars get a bad rap for a particular reason. There are enough bad experiences that have convinced people to only buy new. Although buying used and having to pay for the occasional repair is still cheaper than the additional cost for a new vehicle, in most instances, some vehicles come with little or new maintenance history.
Not every owner keeps meticulous records of every oil change, preventative maintenance milestone, or unexpected repairs made. Tracing a vehicle history is even more difficult if it has had multiple previous owners. Vehicle longevity can differ greatly depending on the driving habits of prior owners as heavy towing or constant stop-and-go traffic will wear out a vehicle quicker than normal highway driving.
That Said, Should I Buy A New Or Used Vehicle?
Buying a new or used is ultimately an individual decision. These are not strict rules that determine whether to buy a new or used vehicle, but just some closing thoughts to help you make a decision.
When To Buy New
Buying new is best for those that want peace of mind for maintenance and might drive a lot of miles each year. You don’t want to have a vehicle malfunction when you have an important meeting to attend or plan to drive across the country to see family.
New vehicles may have mechanical issues too. However, they are more likely to be under warranty if they do occur. Purchasing a new vehicle is also a good option for buyers who want the latest technology, can afford a more expensive loan or plan to keep the same car for the next decade.
When To Buy Used
For those with low disposable incomes, bad credit scores, or families that want a reliable vehicle without going into debt, buying used is the best option. The money saved by not writing a check to the bank every month means more money that can be saved for other events like a vacation, a new house, or retirement. Buying used is also a good option for those that only need a vehicle to get from A to B and do not need the latest technology or body design to get there.