Your old car is starting to cost you more in repair costs than it’s worth. If it's time to replace it, but you want to be financially responsible, you have a decision to make. Should you buy a new vs. a used car?
Both decisions have pros and cons, and we’re here to help you decide which is the right money move for you.
New vs. used car: Which one is a better option?
Deciding whether to buy a new vs. used car can be challenging for car buyers. Like most things related to personal finance, the right choice for you will likely be based on the vehicles you're considering, your money situation, and your other goals. However, one important factor to consider is depreciation.
How depreciation affects your car’s value
One of the most significant expenses of buying a car is depreciation. Although this isn't an expense where you receive a bill or write a check, the cost is just as real. Depreciation is the reduction of the value of an asset over time. For cars, depreciation is based on the combination of the vehicle's age and mileage.
With a new car, depreciation has a strong, negative impact on its value of the asset immediately after you buy. In an extreme example, if you bought a new car from a dealership, drove it home, then tried to sell it to someone else the next day, the drop in value could be significant.
Car depreciation tends to affect luxury vehicles more than moderately priced ones because luxury car drivers are often more willing to pay a premium for new cars. According to the Edmunds.com True Cost to Own tool, a 2021 BMW 740i xDrive with a $92,394 sticker price will depreciate by $55,803 in its first five years. Of that amount, almost half of the depreciation ($24,205) happens in just the first year.
Of course, purchasing a used vehicle will not protect you from depreciation completely either. All cars depreciate over time based on their age and total mileage. However, a used car will generally depreciate slower than a new car. The amount of depreciation will vary by model and how many years old the used car is. And in line with the example above, a 1-year-old luxury used car will typically depreciate far more than a 5-year-old economy sedan.
3 advantages of buying a used car
If you’re thinking about buying a used car, here are a few advantages to buying used vs. new:
- It could save you money. New cars can lose up to 40% of their value shortly after their purchase. When you buy a used car, that discount is already factored into the price.
- The loan won't be underwater. When you buy a new car, its value can drop quickly, which could mean your loan balance ends up being more than the car is worth, unless you make a large down payment. Used car values typically don't drop as quickly; therefore, the value of your car might be higher than the loan balance.
- It might be less expensive to insure. Depending on the type of used car you purchase, your insurance rates could be cheaper than if you chose to buy a new car.
- It comes with reduced registration costs. Many states base registration fees on a vehicle's value. With a lower-cost used car, it could save money on annual registration fees.
4 advantages of buying a new car
If you’re thinking about buying a new car, here are a few advantages to buying new vs. used:
- Lower interest rates: New cars may receive better financing options than used cars. Some dealers offer interest rates as low as 0% for up to six years. Used car loans may come with a higher interest rate, depending on how long of a term your loan is.
- Rebates and incentives: Dealerships sometimes offer generous incentives that could reduce the cost of your new car by thousands of dollars.
- Newer technology and safety features: When you buy the latest model of a car, it has the newest designs, latest technology, and best safety features. A used car that is a few years old may be an outdated model without these features. Top-of-the-line safety features could earn you a discount on your insurance, depending on the insurer you choose.
- Warranty coverage: New cars often come with warranty coverage for the first several years and many thousands of miles driven. Some used cars may offer warranties, but they may be limited in scope or provide protection for a shorter time frame.
How to make the right choice for you
Choosing between a new vs. used card is a personal decision. There are good reasons for either option, but the right decision could become more apparent as you look at the impact of each choice.
Buying a used car often makes more sense financially than buying a new car, but it also depends on the car you choose. Many factors go into that financial decision, such as your budget, insurance costs, reliability, and how long you can expect to own either car.
Consider your budget
Your budget for buying a vehicle is one of the biggest factors in your choice between a new vs. used car. For the same make and model with similar options, the new vehicle will be more expensive than the used vehicle. This means that you might have to make a bigger down payment and that the loan payments may be greater for the new car.
Review your budget to understand how much of a down payment and monthly payment you can realistically afford. To stay within your budget, you might have to choose between a used car of your dreams and a new car that is more modest.
New cars typically offer lower interest rates, which can help close the gap compared with a used car. Also, new car loans may offer a longer loan term compared to used car loans. Before visiting the dealership, research finance options for both new and used cars. It might even help your negotiations if you've already been pre-approved by a local bank or credit union.
Pay attention to insurance costs
Whether your old car is paid off, most states require drivers to carry auto insurance. This means you'll be paying auto insurance premiums for as long as you own a vehicle.
Several factors impact your auto insurance premiums, including the year, make, and model of your car, plus personal information, such as your driving history and how many miles you drive each year. Because the value of a new vehicle is higher than a used version of the same model, the insurance premiums tend to also be higher.
On the flip side, some newer vehicles can earn you a discount on your insurance premiums because of their safety equipment. Front- and side-impact airbags, anti-lock brakes, and daytime running lights are all features that could help you save money on car insurance. Depending on the make, model, and year of the used vehicle you are considering, it may not have these money-saving features.
Think about reliability
One of the major advantages a new car can have over a used car is reliability. Consumer Reports estimates that many of today's new cars can last up to 200,000 miles, as long as you perform the regularly scheduled maintenance.
When you buy a new car, you could have many years of driving without worrying about major repairs or other reliability issues. Depending on its age, who drove the used car before you, the vehicle history, and total mileage, a used car could end up costing you money in repair costs.
Although older cars may be cheaper, they can also require additional service and maintenance expenses sooner than a new car. YourMechanic.com, a mobile automobile service provider, estimates that car owners spend $1,400 on maintenance during the first 25,000 miles of a car's life. By comparison, for the 25,000 miles from 175,000 to 200,000, the total maintenance costs increase by more than 250% to $5,000.
Research the lifespan of a new vs. used car
According to the Bureau of Transportation Statistics, in 2019, the average age of a vehicle is about 12 years. Based on this data, you should expect a new car to last for a dozen years. If you buy a 5-year-old used car, this data suggests it may only last for just seven more years.
Although you may save money on the initial purchase price by buying a used vehicle, you might need to replace your car within a shorter time frame based on the average lifespan of the vehicle. Searching for a newer used car with low mileage can be a good strategy to combat this effect.
According to Edmunds.com, a new 2021 Lexus GX 460 SUV has an MSRP of $59,100. Yet, you can find a 2-year-old 2019 Lexus GX 460 with 13,000 miles on it for less than $45,000 at CarMax. Buying a 2-year-old vehicle with very little mileage provides a savings of almost 25% off the new car list price. You could get most of the vehicle's lifespan without paying the new car price.
6 car-buying best practices
Figuring out which year, make, and model you want to buy is just the beginning of the car buying process. You'll also need to arrange for financing, get insured, and determine what to do with your old vehicle. When you're ready to buy a new or used car, here are a few steps you should follow to get the best deal.
1. Determine the value of your existing vehicle (if applicable)
Have your car appraised at CarMax or Vroom. These services will appraise your car, even if you don't buy a vehicle from them. This will give you a baseline value when negotiating on a potential trade-in. If one dealership doesn't offer a high enough value, you can choose to work with another dealership. Or you can sell it to a private party through the classifieds or another service.
2. Compare insurance policies
Getting a new car is an excellent time to shop around for the best car insurance as well. Just because your old insurance company gave you a good price on your previous vehicle, that does not mean it will have the best policy for your new (or new-to-you) car.
3. Get pre-approved for an auto loan
Consider getting pre-approved for an auto loan with an outside lender before visiting the dealership. The loan officer will help you determine how much of a down payment you'll need and might even help you figure out how long it will take to save up for the down payment. This way, you’ll know how much car you can afford before you head to the dealership.
Being pre-approved could also give you leverage when negotiating with the dealership on price and financing options. Sometimes dealerships will offer you cash incentives if you turn down their financing options.
4. Shop around with different dealerships
Each dealership has a unique mix of cars on its lot. If you don't like the options, color, or pricing, you can visit another dealership to see what they have in stock. Many dealerships have their inventory online, which makes it easy to compare cars and see what’s available from multiple dealerships.
5. Do your research
6. Use your memberships
Memberships like AAA, AARP, and Costco often have auto-buying programs. They work with local dealerships to provide pre-negotiated pricing on new vehicles. These predetermined prices may not be the absolute lowest. However, they will often save you time and hassle when you’re buying a car.
Is it better to buy a new or used car?
There are advantages to both strategies. As someone who previously only bought new cars, I've converted to buying used because used car dealerships make the process so much easier now than before. Cars are built to last longer now and extended warranties are available. Plus, used-car financing at attractive rates is relatively easy to obtain.
That said, there are also perks to buying a new car. Opting for new vs. used could give you the peace of mind that your car might not need major repairs for several years. New cars often come with factory warranties and extended warranty options. They may also offer safety features that could earn you a discount on your insurance premiums.
What's the best age for a used car?
The trick to buying a used car is balancing getting a discount on the new car price without buying something so old that you'll have to spend a lot of money on repairs. Most new cars today last longer than those built a generation ago. With that in mind, it’s generally best to buy a used car that’s 3-to-7 years old. However, keep the car’s mileage in mind, as high mileage can erode the car's value.
Which car brands hold their value over time?
According to Kelley Blue Book, Toyota is the best resale brand in 2021. The luxury brand with the best resale value is Porsche.
The bottom line
When purchasing a new vehicle, you'll have to decide between a new vs. used car. Brand new cars tend to be more expensive, but they may have lower maintenance costs, longer lives, and the latest features. A used car could save you money in terms of the purchase price and insurance, but it might not last as long as a new car.
There are many advantages to either strategy. The choice is ultimately a personal decision based on your budget, preferences, and other goals you are working toward.