Whether you are buying a car for the first time or looking to replace the faithful set of wheels you’ve had for a while, you should never buy a brand-new car.
Yes, we understand any car you purchase will be new to you. What we’re saying is that you shouldn’t buy a car fresh from the factory off the lot. Used cars are by far the better financial bet. Here’s five reasons why.
New Cars Tie Up Your Cash
New cars cost more than used cars. If you’ve done any shopping around, the relative expense of new versus used cars might seem so obvious you wonder why we’re mentioning it. The average cost of a new car is $33,651 versus $18,800 for a used car. And of course, with some diligent comparison shopping, it is very likely you can get it for even less.
Well, think of it this way. You’re in the “putting down roots” years. You may be saving for a house. You might have young children or be planning a family. The amount of money you save by avoiding the new car could help you with a down payment and child care.
New Cars Depreciate in Value
Any new car, no matter the cost, depreciates in value before you get it home. Literally, by the time you have owned it one minute, it has lost 11 percent of its value. So if you paid $20,000, it will have lost $1,800 in value by the time you’ve navigated out of the dealer’s lot. By the end of one year, it will have lost 19 percent of its value. And by the end of five years, it will have lost more than 60 percent.
The depreciation affects its resale value. If you’d like to sell your car at the end of three years, it will be worth 58 percent of its value. In other words, a fair price might be $11,600 for a car that cost you $20,000 just 36 short months before.
Many Car-Related Costs Are More Expensive
There are many costs associated with purchasing a car. Taxes. Insurance. Registration. Almost all of these are more expensive with a new car than with a used one.
Part of the reason is the higher cost of a new car. Taxes, of course, are based on the vehicle’s purchase price. Your $20,000 car will be taxed at $20,000. A $12,000 used car is taxed at $12,000. It also costs more to repair a new car than an old one, a reason your insurance premiums might be higher.
Car Payments May Leave You with Negative Equity
If you need a car loan to purchase a new car, you will of course be paying more over the life of the loan than the car is worth. Interest payments that add to the principal of the loan occur with any long-term loan for a major purchase. A home mortgage, for example, will also cost more than the original amount of the mortgage due to the interest payments.
Here’s the key difference between mortgages and car loans, though. Home prices have at least some potential of appreciation. You may be paying more than the mortgage over the life of the loan, but your house may have gained in price. You have an asset. With a car, you don’t. Cars only depreciate, unless you have a vintage classic. If you have a five-year car loan, you may paid more than the car is worth by the fifth year. You have negative equity.
Timing Can Result in a Better Deal
When considering any car purchase, timing is a good strategy. First, the time of the year in which you buy a car can make a difference in how much you spend. In general, new car models roll out in during the fall. When they do, dealers are very keen to sell the past year’s models still sitting on the lot. In other words, this fall, cars will be sitting on dealer’s lots that have never been owned. They just aren’t the brand new models. These “old” models are often sold at steep discounts to the sticker price. If you need a car loan, dealers often offer financing at 0 percent. It doesn’t get much better from a price standpoint.
Second, if you have a particular make and model in mind, you can set your sights on buying it after a year of depreciation. Check the ads with your desired car in mind. It will cost significantly less as a used car. Yet just a year after being purchased, it is highly unlikely to have incurred major mileage or maintenance issues. It can be the car of your dreams, still in great shape and cheaper than 12 months ago.
There are many reasons to avoid buying a new car. The expense on all fronts is likely to be higher than for a used car, and you likely have multiple uses for your money.