When you decide that buying a car is right for you, one of the biggest decisions you’ll need to make is whether to buy a new or used vehicle. It’s an important decision because, let’s face it, other than buying a home, a car is probably one of the bigger purchases you’ll make in your lifetime. And it’s something that, if you’re anything like me, you’ll be doing many times over the years. So making the right choice for your situation and your budget can be crucial to your financial health.
Many people assume that when they’re buying a car, they’re going to purchase a new vehicle with financing because they wrongly assume that everyone has a car payment (as Cat in Debt dispelled recently over at Frugal Rules). Now in the end, you may decide that is the right decision for your circumstances, but you should definitely consider the options because there are advantages and disadvantages to be weighed.
Buying a New Car
Why buy a new car? Well, because it’s new. Who doesn’t like something brand new with the latest design and technology? But there are other smart reasons to buy a new car. A major advantage is reliability because new vehicles are unlikely to need repairs for some time and come with warranties that protect you in many ways plus “lemon laws” which prevent you from losing your money if the car is truly defective. You also get to customize your purchase in dozens of ways that suit your particular wants and needs. You also know, with a little research (online, friends, the Better Business Bureau), that you can find a trustworthy seller. The dealer may offer attractive financing options (like 0.9% interest for a number of years) or promotional offers. They will handle your paperwork, plates, and registration, and you may be able to save time and drive home in your new car the day you decide to buy it. Plus, the dealer may offer perks such as lifetime oil changes and car washes which could save you a certain amount of money in the future.
However, there is a chief disadvantage buying new, and that is price. A new car is obviously more expensive than a used one and will depreciate considerably the minute it rolls off the lot. On average, new vehicles lose 20% of their value in the first year, and after five years, those vehicle are only worth 37% of what was paid. That’s thousands of your dollars down the drain. You’ll pay a higher sales tax because of the higher price, and possibly more interest if you are borrowing to finance it. It will also likely cost more to insure your new vehicle, especially if you’re financing and need to keep greater coverage on it.
Buying a Used Car
Buying a used car can save you from taking that big depreciation hit. It can allow you to spend less and still get the kind of vehicle you need, plus it will be less expensive to insure. Taxes will cost less and you are more likely to be able to buy without a loan and the associated interest. There will be more flexibility in negotiating since there isn’t a manufacturer’s suggested retail price and dealer fees involved. Research used car pricing information online at sites like Kelley Blue Book and Edmunds to save even more. You may also be able to use your purchasing power to obtain a vehicle that would be out of your financial reach if it were new.
But there can be serious disadvantages and questions when buying used. Used vehicles are sold “as is”, so nothing protects you from mechanical problems, unless you can obtain a written warranty or prove you’ve been defrauded by the seller with false information about the car. That is very difficult to prove, must go through the legal system, and may cost you money, time, and use of the vehicle. The way to avoid some of these problems is simple. If you can, buy from someone you know and trust. That will avoid scammers and dishonest people up front. But even friends and relatives may not fully know the car’s issues and history. So always take the car to a mechanic to check it out, from tires to under the hood. I can’t emphasize this enough! Always! An honest seller will allow it and may even share the cost of this service (about $150-200). You can also use a service like Carfax to get a history report to check things like accidents and floods.
Buying a Certified Pre-Owned Car
So is there a middle ground between price and reliability? Maybe. For a long time now, dealers have been offering Certified Pre-Owned (CPO) vehicles. These cars tend to be less than five years old with fewer than 80,000 miles and have been “certified” as in good condition. CPO vehicles usually come with a limited warranty. For this reason, buyers pay a premium over regular used cars, which may be only a few hundred dollars on an economy model but much greater on a luxury vehicle. Buyers should still beware that program standards vary and older cars are still more likely to need repairs. So you trade off some of the financial issues and some of the reliability issues for a compromise.
Buying a car is a whole process of decisions, but deciding on new or used (or CPO) is a good start. Check back in future posts when I’ll talk about some other ways to make a smart purchase.
Was your last car purchase new, or “new to you”?