Buying New vs Used Cars

Introduction

Millions of new vehicles hit America’s roadways every year, along with tens of millions more used vehicles that get sold annually. And with research showing that the average American owns 13 cars over their lifetime, there’s a good chance a new vehicle purchase may be on the horizon for you and your household.

When it comes time to start shopping, one of the biggest decisions to make is the choice between buying a new vehicle or buying a used one. This decision will affect not only the vehicle you buy and the price you pay but also the features of your vehicle and the long-term value of this investment in a vehicle.

Having trouble choosing which path you want to take? In this guide, we’ll walk through all of the different things to consider when choosing between a new or used vehicle.

No matter which option you go with, we’ve also got tips to make the most of that purchase and keep more money in your pocket over the long run.

Chapter 1

What criteria should you consider when buying a car?

Every consumer has their own list of priorities, needs and wants when it comes time to buy a car. In many cases, the criteria that are crucial for one vehicle buyer are completely different from what another buyer is seeking.

When you start the hunt for your next vehicle, you’ll need to make decisions based on what you believe is best for you. But you should also make sure you’ve considered all the angles when it comes to buying a vehicle.

Some of the top criteria to consider include:

The vehicle’s overall fit with your needs: If your primary use of the vehicle is commuting to work, is it fuel-efficient and reliable? If you’re buying a vehicle to accommodate your growing family, will it fit your family and its luggage as your children grow in the coming years?
Your auto loan interest rate: Lower rates equal a lower monthly payment and a lower overall cost of the vehicle you buy. When you shop around for financing, your interest rate will likely be the greatest influence on your decision of where to finance your auto loan.
The long-term value of your investment: Are you buying a vehicle that you can use for years to come? How does the expected price depreciation for one vehicle compare to depreciation for an alternative option? How will fuel costs and projected maintenance costs affect this value?
Your future vehicle needs: Are you buying a vehicle for a short-term need, or do you anticipate that the next vehicle you buy will be a vehicle you can drive for years to come?

Chapter 2

Do you need financing for your purchase?

Are you planning to take out an auto loan to afford your new purchase? Auto financing can be a great option, offering low rates — and, in some cases, free introductory promotional periods — that will encourage many buyers to finance even if they can afford to make an outright purchase.

When it comes to financing, you’ll want to consider how financing options differ for new and used vehicles. Dealerships often offer special interest rates for financing on new vehicles, providing an incentive to buy new while also reducing the long-term cost of a new versus used vehicle.

These deals often aren’t offered to used vehicle purchases. But you can still get a great rate by shopping around and soliciting quotes from multiple lenders. And keep in mind that while a used vehicle won’t fetch the best promotions and interest rates on the market, you also aren’t getting hit with the instant price depreciation that comes with buying a new vehicle.

Chapter 3

How do new and used vehicles depreciate?

No matter what type of vehicle you buy next, the odds are high that you’ll someday want to sell that vehicle. This is where depreciation of your next vehicle purchased will affect you the greatest.

If you’re planning to own your next vehicle for decades, depreciation might not be a major factor in your decision. But for most buyers, the rate of a vehicle’s depreciation can affect how much you spend on vehicles over your lifetime. The average vehicle being driven on American roadways is now 12.1 years old, and the longer those vehicles are driven, the more depreciation will eat away at their resale price.

Keep in mind that depreciation isn’t always a bad thing. A long period of vehicle ownership may depreciate the resale value of that vehicle significantly, for example, but you’ll also generate value by avoiding additional vehicle purchases the longer you own the vehicle.

As a general rule of thumb, new vehicles lose around 20% to 30% of their value as soon as they’re driven off the lot. Between years two and five, research suggests that a used vehicle will depreciate between 15% and 18% percent per year — which amounts to a total depreciation of 60% of the vehicle’s value after five years.

The older your vehicle is at the time of purchase, the less dramatically this depreciation will affect its resale value. But the lower upfront price will be balanced out, at least in part, by repairs and maintenance that will be coming up soon in your vehicle’s life span.

Resources

6 Things to Consider Before Financing Your New Car

Should I Get My Car Loan Through a Credit Union or a Bank?

Four Financial Tips for New College Grads

Does Your Financial Situation Scare You?

Chapter 4

What matters most, modern features or lower costs?

Price depreciation is one of the biggest financial factors to consider when buying a new or used vehicle, but there are other important factors to consider as well.

These include:

Safety features and safety ratings: How protected will you and your passengers be in an accident? This may be particularly important to parents and drivers who expect to transport a lot of passengers.
Vehicle technology: Onboard computers and modern conveniences will be far more prevalent in newer vehicle models, but the farther back you go to buy a vehicle, the more basic the technology will be.
Warranty coverage: If you buy a new or low-mileage vehicle from a dealership, a warranty may cover major breakdowns or repairs up to a certain date or mileage number.
The cost of parts repair and replacement: If you don’t have a warranty to cover certain repairs, the cost of an older vehicle needs to account for the additional work that will be done on the vehicle.
Reliability: Are you buying a vehicle based on comfort and performance or practical concerns such as reliability?

Chapter 5

How do you choose between new and used vehicles?

Whether you choose to shop for a new or used vehicle — or shop inventories of both — you can create additional value from your purchase by approaching this purchase strategically.

From interest rate shopping to dealer negotiations, here are some tips to maximize the value of whatever kind of vehicle you buy:

Shop around for the best interest rate—especially if buying used. Lower rates will save you on the overall cost of your vehicle.
If buying new, brace for your vehicle’s sudden drop in value. While a new car might be the best choice for you, it will also come with a significant loss in value. Depending on the amount of the vehicle purchase you finance, you could find yourself owing more on the vehicle than it is worth on the resale market.
Find out what kind of warranty comes with any used vehicle. Warranties offer financial security against major repair costs.
Visit a dealership prepared to negotiate. If you want the best price on a vehicle purchase, you will likely need to negotiate down both the sale price of a vehicle and the trade-in value of your current vehicle.
Factor in the cost of vehicle registration and insurance. Depending on the vehicle and your local registration and insurance costs, this can add up to thousands of extra dollars per year.
Make sure your total car payment fits into your budget. Don’t let your desire for a shiny new vehicle tempt you to buy above your means.
Compare fuel efficiency to project fuel costs over time. The higher your vehicle’s miles per gallon, the lower your fuel costs. The savings can be even higher with a hybrid or all-electric vehicle.
Don’t let your emotions make your decisions. While vehicles are an inherently emotional purchase, you need to calmly review numbers and the value of any purchase before making any major decisions.
Be prepared to walk away from a vehicle you love. If the price isn’t right and the seller won’t budge, protect yourself from overpaying and pass on the purchase.

Buying New vs. Used Cars

Introduction

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