- The reasons to buy new or used aren't the same for everyone
- Depreciation is the single largest expense of car ownership
- Maintaining a used car requires more time and money
Once you've finally decided to replace your current car, the next question to ask yourself is: Should I buy new or used?
That depends. Unfortunately there is no one-size-fits-all answer. There are sound reasons to buy new and sound reasons to buy used.
Too often the only questions we ask ourselves: Will I look good behind the wheel? and How big a monthly car payment can I afford? Neither of these questions will help you make smarter car buying decisions.
Here's a tip: Buying a car based on how much car payment you think you can afford per month will almost always ensure you buy too much car and pay too much for it. It's also the wrong question to ask yourself when deciding between new and used.
When making the new vs. used decision, each of us must examine our unique set of financial and life requirements. A little introspection is good for the soul and the wallet.
For most people, we think it makes more sense to buy used, but there are some exceptions.
Here are four questions to help you be a smarter consumer and navigate the new-used decision-making process.
Do You Have a Down Payment or a Trade-In with Equity?
If your credit is good, you may have less problem buying new with little or no down payment than buying used. That's because many manufacturers offer incentives for new cars that simply aren't available in the used-car market. These are typically in the form of rebates, cash incentives and discounted financing.
Financing a used car will almost always require money down, whether in cash or a trade-in with equity.
If you do your research and wait for the right opportunity, you may find a new car with a large enough manufacturer incentive to cover the down-payment requirements.
Is There a Good Reason You, Rather Than Someone Else, Should Take the Huge New-Car Depreciation Hit?
Depreciation, or the loss in a car's value over time, is sneaky because it's a hidden cost most of us don't face until trade-in time.
But if a car depreciates, say, $7,500 from the time you buy it to the day you sell it, that's like throwing $7,500 away. That's $7,500 you will never get back and won't have available to spend on other things.
There's usually an emotional tie with a car that's missing in our relationship with the vacuum cleaner or washing machine; but in reality, a car is just another appliance. It's not a buddy; it's not an investment. It can convey status and provide some pleasure, but it won't make us smarter, better looking, more interesting or wealthier.
Because of depreciation, generally it makes more sense to buy used and here's why: On average, a new car loses between 20 and 30 percent of its value the moment it rolls off the dealer's lot. Some cars can depreciate up to 50 percent in the first three years.
You don't have to take our word for it. Kelley Blue Book has a Cost of Ownership calculator designed to figure the average five-year costs of any vehicle, including depreciation.
According to that calculator if you purchased a 2012 Honda Accord EX Sedan with a suggested retail price of $25,875, it would depreciate a whopping $6,735 in your first year of ownership and $1,883 in the second. That is, it would be worth 74 percent of its original value after the first year and 67 percent after year two. It would only be worth $15,525, or 60 percent of its original value, after three years. And Honda has a better track record for retaining value than many other brands.
How do you feel about throwing away $10,000 every three years?
If you purchased a two-year-old EX, the average retail price, according to KBB.com, would be $20,675. That's a purchase-price savings of $5,200 - all of which is depreciation.
Depreciation, though, has little affect on owners who drive a car until the wheels fall off. After more than a decade or two, that old beater won't be worth much in terms of trade-in or resale value any way. Those same owners, however, don't seem to mind driving an older car, so why not buy a two-year-old model to begin with and save more than $5,000 on the purchase price?
Buying used should also translate into lower insurance premiums and personal property taxes - meaning even more savings.
Can You Afford to Maintain and Repair a Used Car?
Some carmakers offer free maintenance for the initial years of new-car ownership. That's in sharp contrast to the average cost of upkeep for a used car. It can be argued that buying used is just assuming someone else's problems. It's a roll of the dice.
You can take some steps to minimize the likelihood that you are buying a "problem" used car by having it inspected by a qualified mechanic and obtaining a detailed vehicle history report from an agency like Carfax or AutoCheck before buying, but some issues may still go undetected.
No matter how well a car has been cared for, at 30,000 plus miles, some bits and parts are going to naturally wear out; consequently, maintenance and replacement costs will be higher for a used car than a new one.
Unlike depreciation, repairs and maintenance are hard costs that must be addressed as they arise. KBB estimates that a two-year-old Honda Accord EX will cost $1,838 in maintenance and repairs the first year you own it. Those costs drop to $880 the next year, but it's still a substantial amount. These are costs for which you will need to budget. Do you have the discipline to do that?
If you buy a nearly new used car, you may inherit some portion of the new-car warranty providing some protection for a few months or even a couple of years. Many car companies now provide powertrain warranties for five, six or even ten years. But be sure to check the automaker's rules on transferring the warranty before you buy. Many car companies also offer certified pre-owned cars that cost a little more, but offer a factory-backed limited warranty.
Can You Cope With the Time a Used Car Spends in the Shop?
Not only does a used car cost more to keep operating, but it will likely spend more time in the shop. It may only be a day here and there, but could be a week or more for bigger repairs.
On average, new cars spend less time in the shop. Moreover some manufacturers or dealers offer loaner cars during routine maintenance visits while a car is under warranty. Can you deal with a used car's extra down time?
Once you answer these questions for yourself, you will figure out whether it makes more sense for you to buy a new or used car.