New Car vs. Used: What Should I Buy?

Nov 21, 2020 11:23 AM EST | Ernest Hamilton

New Car vs. Used: What Should I Buy?

(Photo : New Car vs. Used: What Should I Buy?)

Maybe your old clunker has gasped its last smoky gasp, and while you're waiting on the side of the road for someone to come and tow it away, you're forced to face reality: you need a new car! But does it have to be new? A shiny new car does sound appealing, but every book or article you've read on saving money says that you should always buy used.

Cars aren't cheap, and you have to choose one that will stay with you for years, so this is an important decision. Of course, this "never buy new" financial advice isn't a fit-for-all. Your decision depends on your preferences, financial situation, and life requirements. You need to feel comfortable with the long-term implications of this decision. You also need to feel safe knowing that you picked a reliable vehicle with the features and amenities you want. It makes sense to consider all the factors involved carefully. A little introspection will be good for your wallet and give you peace of mind.

Buying New - Advantages and Disadvantages 

A brand new car has a lot more curb appeal. There's no denying that. The shiny new paint, the clean interior, and there's something about that new-car smell. Not to mention all the "oohs" and "aahs" you'll get when you show it to your friends. Let's face it. You don't get to brag as much when you buy a used car.

We live in a consumer culture where a new car is a status symbol. Depending on how fancy it is, it shows people around you how well you're doing in life. Setting aside the aesthetic appeal and prestige, there are some other advantages to buying a new car.

First of all, it's new, so you don't need to concern yourself with any wear and tear from how well the previous owner treated it. That makes shopping a lot easier. You just have to decide on what make and model you want. Let's say you want a 2020 Ford Escape. You go to a Ford dealership and discuss financing options. You don't need to take it to a mechanic and evaluate its condition. It's a new car. It's also easier to know how much you should pay for it even though the negotiation process can still be a bit of a pain.

New cars also come with more advanced technology, so you might get better gas mileage, lower emissions, safety features, comfort, and it's easier to connect your phone or other smart devices to it.

One of the biggest advantages is that a new car comes with a warranty, so if it breaks down (which isn't likely), you can have it fixed for free in the first three years or 36,000 miles. Road assistance is often included, so if you get stranded by the side of the road (which again isn't likely), you don't have to pay someone to tow it for you.

In regards to financing options, automakers usually offer a lot of incentives like cash rebates, better interest rates for loans, so if you're good at negotiating, you can significantly reduce that frightening sticker price.

And now for the disadvantages. The biggest disadvantage is, of course, depreciation. It's common knowledge that a car loses up to 20% of its value as soon as you cheerfully drive it off. This means that if you buy a $30,000 car, you drive it off and then turn around and try to sell it back to the dealer, they'll only be willing to give you $24,000 for it. By the end of the first year, the depreciation will reach about 30%, and in three years, you can only sell it for half of what you paid.

On the other hand, if you buy a three-year-old car for $15,000, you can sell it for $10,000 after three years. You only lose $5,000 in depreciation.

According to statistics, the average American owns 13 cars in their lifetime. If you always buy three-year-old cars instead of new, you can save $130,000 during your lifetime.

We have to mention that not all cars depreciate at the same rate, so the math isn't as straightforward as this. Luckily, there are many free tools online that you can use to find out how much the type of car you're interested in depreciates.

Buying Used - Advantages and Disadvantages

The biggest advantage of buying a used car is the most obvious one. They're cheaper. That's because you're essentially letting someone else take the depreciation hit from the first three years. When you resell it, as we've shown in the calculations above, you get a much better deal than them.

Since used cars are cheaper, you can also afford to try higher class cars. Also, because used cars are cheaper, they cost less to insure. If you're in your early twenties, you haven't reached that point in your career that you make enough money to buy an expensive new car and your insurance rates tend to be high because of your age, getting a used car would make the most financial sense.

The main disadvantage of buying a used car is that the purchasing process is much more difficult. Used cars come with a lot of unknowns, and price doesn't depend solely on mileage. You need to know a lot about cars and what to look out for to make sure you don't end up paying more than the car is worth.

You also need to be more flexible. You might not get the color or features you want because what matters most is that you get a quality vehicle in good condition for the right price. Even so, and even with the warranty, you'll still need to set aside some money for occasional repairs.

In terms of financing, the interest rates for used cars tend to be higher than for new cars. That's because, in case you default on your loan, the lender would have an easier time reselling a new car and would most likely get more money faster.

Lastly, if you had the misfortune of purchasing a lemon, you have less recourse. That depends on the specifics of the car. For lemon laws to apply, the vehicle needs to have less than a certain number of miles and be under a certain age.

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