Buying a New Car Could Be Cheaper Than Buying Used

Quick Facts About New vs. Used Car-Buying Costs

• New car interest rates run typically lower compared to used cars.
• New cars typically come with longer warranties, providing peace of mind with bumper-to-bumper coverage.
• Consider factors such as depreciation and insurance costs, which impacts the overall cost of owning a new or used car.

Most shoppers automatically assume that buying a used car will be cheaper than buying a new one in a similar style, but that’s not always the case. Various factors have raised the price of used vehicles, especially since the COVID-19 pandemic and the subsequent microchip shortage. Additional supply scarcity, steep interest rates, and high demand have also played a role in the overall cost of automobiles even since exiting the pandemic. Keep reading for a look at why buying a used car can sometimes be more expensive than buying the latest model from a dealer’s lot.

• How a New Car Can Be Cheaper Than Used
• Should You Buy a New or Used Car?
• Maintenance Costs

How a New Car Can Be Cheaper Than Used

These days, it can still be challenging to find a used car within your budget. If you’re in the market for a popular model, limited inventory can raise sticker prices. Specific features or preferences may also be hard to find in the used market. Alternatively, a new vehicle with the latest technology standards could be a better choice than an older car where the same features were only available as part of an upgrade package.

New car inventory is healthier than it has been for some time, and many automakers offer incentives (lately they average nearly $3,400 per vehicle) and discounts on specific models, especially since 2024 models need to move off dealer lots. Manufacturers built fewer cars during the pandemic, and those reductions will restrict used car inventory for years, contributing to higher resale prices.

It’s also worth considering that new cars have bumper-to-bumper warranties. Maintenance and upkeep costs are usually lower in the first few years of a car’s life. Despite a higher upfront cost for a new car purchase, the ownership expenses may be lower over a few years because fewer repairs and parts replacements are needed.

Interest Rates

Car loan interest rates spiked in recent years, with the Federal Reserve hiking numbers in an effort to curb economic inflation. There is no certain timeframe for when the Fed may lower its rate. However, economic indicators point to the possibility of a lowered rate this fall. As a result, a used car may be more expensive than a new one because most lenders offer higher rates on used vehicles  than new cars, even if you have excellent credit.

A used car carries far more risk to a finance company than a new vehicle. Lenders know a new car has no wear and tear, while a used car’s condition is more of an unknown. It’s also easier for lenders to project new car depreciation. This is not the case for a used car when its future value is far more uncertain.

As a result, a shopper considering a new car at a specific price and a used car that’s only slightly less expensive may find the monthly payment to be higher on the used car because of the interest rate — and it can be enough to send shoppers back to the new model.

For example, Cox Automotive, the Autotrader’s parent company, reported that its Dealertrack volume-weighted average new auto loan rate tracked at about 10% vs. used loans at 14%. Read on for an example.

2024 Honda Civic LX

2021 Honda Civic LX

In our above example from Autotrader, we found a used 2021 Honda Civic LX with less than 6,000 miles, a clean vehicle history report, and one owner. However, when you do the math, it may make more sense to at least consider the new Honda Civic LX. Yes, you may need to pay more taxes on the new vehicle. However, the new vs. used interest rate difference makes it more appealing with the car payments looking so similar. We found plenty of other examples.

Use our car payment calculator to do some math of your own on new vs. used models you may be interested in.

Additionally, for qualified consumers, some carmakers offer low interest rate offers, further reducing the monthly car payment. Search our deals to find the offers: Best Car Deals This Month.

High Demand for Used Cars

The demand for used vehicles is arguably higher than ever with people looking for ways to keep their car payment down.

Used Car Shortage

Higher demand affects dealer inventory. A challenging economic landscape plays a significant role in spending behavior. As consumer budgets tighten, many buyers want to choose used cars over newer models for the cost factor, including taxes, and vehicle insurance. Drivers are also keeping their vehicles longer, opting to take better care of their current car in hopes of extending its lifespan.

Additionally, the after effects of COVID-19 shortages still play a role in the used market. Since the microchip shortage disrupted production levels, many manufacturers are still trying to return to their pre-pandemic rhythm.

Should You Buy a New or Used Car?

The decision to buy a new or used car will always depend on your unique circumstances and preferences. Consider these factors to help guide your decision:

• Budget — Your budget will likely be the top priority when shopping for a new or used car. Sometimes it simply comes down to which car you can afford to drive off the lot. Be mindful of additional expenses and pay attention to more than monthly payments. Use our car affordability calculator to help estimate costs by a payment that fits with your monthly budget.
• Depreciation – Consider how the vehicle’s value will decline in the next few years. A used option may cost more upfront, but if its value holds steady, it may be better for your bottom line when it’s time for your next car.
• Safety Features – It’s tough to put a price on safety, and better safety features can be worth significantly more in emergency situations. If you’re a frequent commuter or if you ride with young children, a new or newer used car with the latest safety technology may be the better option.
• Warranty – Buying an out-of-warranty used car may end up costing more than a new model with a factory warranty if a major component breaks soon after purchase.
• Availability – Sometimes, it comes down to what’s available. Assess the inventory in both the new and used markets and evaluate your options from there. It may be better to shop for another car before you really need it. That way, you can wait for what meets your needs rather than settle for what’s on the lot.

Maintenance Costs

Modern cars are generally more reliable than vehicles from five or 10 years ago, but that doesn’t mean they’re immune to breaking. A shopper who thinks they got a great deal on a used car may find the vehicle needs a lot of maintenance. Since many used cars come without a warranty, these costs may be entirely out of pocket.

Also, more and more automakers offer free maintenance on new models. This means shoppers can buy a new car and receive complimentary scheduled maintenance, such as oil changes and tire rotations. Between that assurance and the potential hassle of used-car maintenance issues, a new car may come off cheaper than a used one, even though it doesn’t seem so upfront.

While buying a new car may seem daunting — especially if you’re familiar with pre-owned models — we suggest weighing your options carefully to make sure you really are saving money with a used car.