If you’ve decided to replace your aging vehicle, you’re not alone. Every year there are more than 1.4 million new and used cars sold in the United States with an average value of $29.3K1
TV, radio, and social media bombards us with ads for new vehicles, touting incentives, and financing deals if you act quickly. But is buying a brand new car the best choice? While there is no definitive answer to this question, here is some information to help you come up with the right choice for your next vehicle purchase.
The new car vs. old car question
The question of whether to buy a new car vs. old car is all too common. Unfortunately, different people will arrive at different answers to this question based on several factors. These include such things as your budget, your transportation needs, and your particular taste in vehicles.
There are advantages and disadvantages to both new cars and used cars. Here is a run-down of these factors and some information on how to weigh your options.
The advantages of new cars
Buying a new car is a significant investment, but its advantages can make it a sound one. Here are the main pros to consider.
Better financing rates. Although used cars are cheaper, you will probably pay higher interest rates than if you financed a new vehicle. New vehicles often come with low-interest financing or cash rebates offered as an incentive to new-car buyers. Lenders will usually charge a premium for used cars, — typically, 1 to 2 percentage points.
Latest safety and tech features. New vehicles also have the latest in safety features and driver assistance technology. These include lane departure warning, adaptive cruise control, autonomous braking, and blind-spot monitoring. These features were initially only available on higher-end cars; you can now find them on affordable new vehicles.
You know what you are getting. One of the biggest advantages of purchasing a new car is the factory warranty. When you buy a car with a full factory warranty, you receive a minimum of 3 years or 36,000 miles coverage. This means that you can eliminate worries about large repair bills for those first years of ownership. On the flip side, many of the used cars sold at dealerships were previously rental cars. Rental cars often get considerable use (and abuse) in a short time. If you do go the used route, you may want to choose leased vehicles. Leasing companies are notorious for being very careful when inspecting the vehicles before they put them up for sale. The people who lease cars are charged for any necessary repairs, which encourages them to take care of them.
The disadvantages of new cars
While the advantages of buying a new car make the vehicles seem like an attractive choice, they’re not for everyone. There are some significant downsides to purchasing a new car.
They are expensive. The biggest disadvantage to purchasing a new car is the cost. The average new vehicle costs $29,300, while the average used car sells at $20,600. Not only are you paying more for a new car, but your tax payment on that purchase will also be higher.
Depreciation. New vehicles lose 20% of their value, on average. The cost of depreciation can be even higher in some models.
Insurance prices. Depending on the particular vehicle, your auto insurance rates might also increase for a new vs. a used vehicle. It’s a common misconception that all of those advanced safety features will get you lower insurance rates. Major insurance companies don’t grant discounts for safety features until they have been in use for many years and proven their reliability and usefulness in reducing accidents.
Speaking of reliability, this is the final disadvantage of purchasing a new car. You could buy a make and model of a vehicle that is faulty or simply unreliable. This is particularly true if you decide to have a brand new vehicle in its first model year. You don’t want to be a guinea pig testing a new vehicle with a hefty price tag.
The advantages of used cars
There are several advantages to purchasing a used car, with the price being chief among them. You might not realize that your brand new Jeep Cherokee is worth $10,000 (or more) less than when you drove it off the lot, but that’s the reality.
Someone pays for the initial depreciation. The better option is to let someone else take the hit for that first one or two years of depreciation, and then purchase a slightly used vehicle that still has many of the advantages of a new car. These cars are more affordable, have many of the most advanced features, and still have at least a year left on their warranty.
Lower price tag. By purchasing used, you can also get more car for your money. Let’s assume that you budgeted to buy a brand new Jeep Cherokee. You can take that same amount of money and buy a slightly used Jeep Grand Cherokee that might even have some nicer features such as leather seats and a tow package.
Lower insurance rates. It’s also possible that your auto insurance rates will be lower for a used car than for a new vehicle. Auto insurers look at the cost to repair or replace a vehicle, which is often less in an older car.
While it might not seem like a lot, your cost to register a used car will also be lower. Most states calculate the registration cost for vehicles based on the car’s age so an older car will have lower registration costs.
The disadvantages of used cars
Although buying a gently used vehicle may often be tauted as the smart way to go, it’s not without some disadvantages. Here are a few.
It could be a lemon. Head into a new car dealer and they will be quick to tell you that you’ll be purchasing someone else’s problems if you buy a used car. Depending on the vehicle, this could be true. Fortunately, there are things that you can do today to check the condition and history of a used car. Vehicle history reports from companies like Carfax or AutoCheck can tell you if the vehicle has been in an accident. It’s also a good idea to order an inspection of any used vehicle that you’re interested in so that you can identify any major mechanical issues.
Unlikely to have warranty coverage. If you’re buying a car that is more than three years old, you’re probably going to be on the hook for any future repairs. This is because most vehicles that are past this age won’t have warranty coverage anymore, which is another reason why that pre-purchase inspection is so important.
Fewer choices. When you buy a used car, you won’t have as many choices in colors and options as you would if purchasing new. If you’re patient, however, you can almost always get close to what you want thanks to the many car search websites that allow you to specify your dream car characteristics.
Higher financing costs. Financing a used car can be more complicated than getting an auto loan for a new car. New car dealers like to entice buyers with deals like 0% financing. Unfortunately, they reserve these deals only for customers with the best credit.
Certified previously owned vehicles
Let’s assume that you’d like to buy a used car but are still worried about inheriting someone else’s nightmare. Luckily, there is a program that addresses this perfectly where you can buy certified previously owned vehicles.
These are relatively new cars with low mileage that a major dealer “certifies” as being in sound condition. A certified preowned (CPO) car hasn’t been involved in an accident and has been thoroughly serviced and inspected by the dealer.
A CPO vehicle also comes with an extended warranty, which is the biggest benefit of this choice. Where a 2014 Lexus RX350 might be out of warranty this year, the same car under a CPO program will have six years of warranty coverage and unlimited miles.
When you find certified previously owned vehicles, you’ll notice that they are priced higher than those not in a CPO program. Often, the benefits and peace of mind are worth this additional price.
Comparing your options
As you weigh your car purchase options, consider both your budget and your preferences. Even if you don’t have a large down payment available, you should be able to find an auto loan that can suit your needs.
Look beyond the sticker price of the car and consider the total cost of car ownership. Use a calculator like the one found at Kelley Blue Book and find out the 5-year cost to own each vehicle. This considers such factors as depreciation, financing, fuel, repairs, and insurance. Also, shop around for auto insurance before you make your choice. The best major auto insurers can help with free quotes.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.