New Car vs Used Car: Should I Buy a New or Used Car?

13 January, 2012

There are few things in life that bring as much angst as it does excitement than buying a car. And, in this day and age of tighter budgets the debate rages on in our heads over whether it’s better to buy a new car vs used car. We’ve all heard the argument of driving a brand new car off the lot and immediately losing thousands of dollars of value through depreciation, which is an awful lot of money for that new car smell.

On the other hand, we’ve heard plenty of nightmare stories of used cars turning into money pits. We buy our cars for their safety as well as the pleasure they give us, but we also want to make sure we are getting the best value for our money. So, what’s the best way to go?

Unfortunately there’s no real clear cut answer for that as it depends on many factors – the type of car, the number of years you intend to drive it, how much financing is involved, your budget, and even your driving habits are all variables that could influence the answer when deciding on a new car vs used car.

Each one should be considered in your decision along with your overall purpose for buying the car. For instance, if your need is just to be able to get from point A to point B, you might apply a different weighting to these variables than if your purchase objective is to satisfy a desire to own a certain type of car. Regardless, you need to consider all of the pros and cons of buying a new car vs used car.

New Car vs Used Car: Things to Consider

Purchase Price: You can just as easily buy a new car for, say, $20,000 as you could a used car. The question is which will provide you with greater value over the years. These days, with the demand for used cars increasing, and new car dealers becoming increasingly competitive, the margin between new car vs used car prices is narrowing.

It does depend on the age of the used car. A three or four year old used car is likely to have the same level of safety features and other bells and whistles as a new car of the same make. The advantage of buying used is that you have more flexibility and choice in finding a car that brings greater value.

Depreciation of a New Car vs Used Car: Yes, it is true that new cars can instantly lose 10 to 20 percent of their value the minute you drive it off the lot. Over a three year period a car could lose as much as 40% of its value to depreciation. Generally, a three or four year old car has already been depreciated so it sells closer to its true market value.

The issue here comes down how many years you expect to drive the car. If you expect to drive it more than five years, then depreciation is less of a factor in the new car vs used car debate. With some cars, when you factor in financing costs, it could take as many as ten years to make up for the cost of depreciation. The advantage here goes to high quality used cars regardless of the length of ownership.

Residual value of a New Car vs Used Car: The flip side of depreciation is the car’s residual value. Certain cars hold their value much better and longer than others. If you make the wrong choice on a new car you could lose out on both ends. The ideal would be to find a high quality, pre-owned car that has a high residual value.

Financing a New Car vs Used Car: If you need to finance your car purchase you might find that new car loans are less expensive in terms of interest costs. Many car dealers will offer 0 to 5 percent financing on new purchases, while used car loans are issued at a range of 5 to 9 percent. It you have less than good credit, the costs in either case will be higher. Assuming the same purchase price, a new car has the financing advantage. But, if you were to buy a used car of the same model for a few thousand dollars less, your total interest cost could be less.

Insurance costs of a New Car vs Used Car: There are several variables here. When financing a new car, your lender typically requires minimum coverage that is likely to be more than what you would get for a car you owned outright. For instance, you might not get comprehensive coverage on a fully paid-for car.

On the other hand, insurance premiums on new cars may be lower if the car has added safety features. You will find, however, that the safety features haven’t changed much over the last several years, so a used car of the same make may be considered just as safe by the insurance companies.

Repair and maintenance of a New Car vs Used Car: Unquestionably new cars have an advantage here as you don’t expect to have any repair needs and your maintenance costs are generally limited to oil changes. Plus, many dealers now offer maintenance programs (built into the car’s price) on new cars which will cover those costs and such things as roadside service.

A well-maintained used car in a reliable make and model should limit your costs as well. These days, cars are so well built that you may not experience any major repairs for several years. If you limit your used car search to those that are maintenance certified and have impeccable service records, you should be able to keep your costs down.

Warranties on a New Car vs Used Car: Of course, most manufacturers offer multi-year warranties with some extending out to 10 years and up to 100,000 miles. Most warranties are limited to 50,000 to 60,000 miles. The good news is that warranties are transferrable, so if you buy a used car with 30,000 miles your car could still be under warranty.

Your car buying decision may come down to other factors not listed here. It’s a personal decision, and for some an emotional one, that sometimes defies rational thinking. But the more input you have for your decision, the easier it may be to rationalize it. To some people the new car smell is worth the thousands of dollars of depreciation, or it simply comes down to a “pride of ownership.”

At the very least, you should consider the total cost of ownership of both options. For most people, just knowing they are getting the most value for their dollar is the most important consideration. And, if a used car is their choice, they know where they can buy a $3 bottle of “new car” fragrance.

Suggested Reading

Reach Your Fitness Goals Without Paying for a Gym
How to Get the Most from Your Savings Account
How to Make Thrift Shopping Cool
How To Control Your Auto Insurance Costs
Not All Banking Products are Created Equal

Credit Cards Plus