Hey there! For most people, Buying cars will be the second highest Purchase that they will make in their lifetime, trailing only behind buying a house. Something else to think about, is that most people will purchase numerous cars over their lifetime.
According to CNBC, the average American will purchase between 9 and 10 NEW vehicles over their entire lifetime!
Add that fact up with the average price of a new car, which is almost $35,000, according to Kelly Blue Book, so you can expect the average American to spend about $350,000 on new cars over the course of their life!
This doesn’t even account for the numerous used cars that the average person will purchase throughout their life.
With all of this information, I ask the following…
Should You Buy A New Or Used Car?
I have heard arguments for both sides of this debate, and it is something that many people are extremely passionate about discussing. On the new side of the coin, people who prefer to purchase new vehicles will often cite the reliability of owning a new vehicle, better gas mileage, safety, lower cost of ownership, and low to zero maintenance costs. On the used side of the coin, people who prefer to purchase used(or pre-owned) vehicles cite the upfront cost savings, depreciation of a new vehicle, cheaper repair costs, and dependability of major brands.
Let’s dive into the facts and see which side of the coin will be better for you!
Advantages of Buying a New Car
Let’s start with new cars. I outlined a few benefits to buying a new car above that people typically reference when they make the argument to purchase a new vehicle over a used vehicle. Below are all of the benefits to buying a brand new car:
New Car Warranty
Most new cars come with a warranty. These can last anywhere from around 3 years and 30,000 miles, up to 10 years and 100,000 miles, depending on the brand you choose. Either way, you’ll have piece of mind in knowing that you won’t be forking over thousands of dollars to make a major repair anytime soon.
Low Interest Financing
Dealerships will often offer zero or close to zero percent financing when buying a new car. The benefit to this is that you’ll be able to make payments on your vehicle without paying much, if any interest to the bank over the lifetime of your loan.
Efficiency and Fuel Mileage
With newer cars, comes newer technology and more efficiency. For example, according to Edmunds, a 2000 Toyota Camry averages 24 MPG, while a 2018 Toyota Camry averages 34 MPG, a considerable increase that will save you money at the pump.
Available Convenience Features
Newer car have more available features, including things like bluetooth connectivity and backup cameras, just to name a couple. These features certainly add more convenience to our daily drive.
Safety Ratings
As with all of the other items listed, as technology develops, vehicles become safer to drive as well. Newer vehicles will have the latest in safety technology to ensure that all of your passengers arrive to their destination in one piece.
Disadvantages of Buying a New Car
Where there is good, there is also bad. Here are some of the drawbacks to purchasing a new vehicle:
Depreciation
When you buy a new car, it loses value as soon as you drive it off the lot. In the first year alone, a new vehicle can lose around 25% of it’s value! Check out this Edumunds article that gives some great illustrations regarding depreciation in the first 5 years of a vehicle’s life.
Unknown Changes
With each new model year comes new changes and new technology. Sometimes these changes can be good, but sometimes they can be bad. There are often recalls issued for some of these problems. For some of the largest recalls in history, check out this US News article. Many of these problems didn’t come to light for several years.
Sales Tax
This one has varying impacts, depending on where you live, but the average US sales tax is about 8.5%, which means you’ll be paying about $3,000 in taxes alone when you buy a new car!
Insurance Cost
With a higher purchase price, comes a higher insurance cost as well. There are numerous factors that go into insurance rates, but one thing you can be sure of is you’ll be paying a higher premium to insure your shiny new car.
Car Payment
Very few people are able to pay cash for a new car, so it’s likely you’ll be shelling out several hundred dollars every month to pay for your new car.
Advantages of Buying a Used Car
As with a new car, there are certain benefits to purchasing a used car. Below are many of the benefits of buying a car that is used:
Purchase Price
This has to be the single most important benefit to buying a pre-owned vehicle. You can find good quality used cars in almost any price range, from a couple thousand dollars up to about 75% of the cost of a new car if you decide to buy something less than a year old.
Insurance Rates
Depending on many variables, insurance costs can be a considerable amount of savings if you opt to purchase a pre-owned vehicle. This alone could save you hundreds or thousands of dollars annually.
Competitive Financing
The market for used car financing has come a long way, and depending on your credit history, you can expect to receive a pretty competitive interest rate if you opt to finance your used vehicle purchase.
Cash Transaction
By saving money on the purchase price, many people are able to budget appropriately and save up their money to purchase a used car with cash. This is my recommended method of buying a vehicle and it allows you to eliminate a monthly car payment and use that money for a better purpose, such as paying off other debts or saving for retirement!
Warranty
Depending on the age and miles of the pre-owned vehicle you decide to purchase, many of them will come with a certified pre-owned warranty or could still be under the original factory warranty. If not, you can usually purchase an extended warranty at a low reasonable cost that will cover any major repairs that may occur.
Disadvantages of Buying a Used Car
Maintenance Costs
As vehicles age, minor things will naturally begin to need to be repaired. However, the costs of these repairs is generally low and as mentioned, you can purchase an extended warranty to cover major expenses should they occur.
Maintenance History
When you purchase a pre-owned vehicle, you do not have all of the history of the maintenance that’s been done to the vehicle. I highly recommend purchasing a used vehicle with a comprehensive history. Owners that have maintained records of their maintenance that can provide you with this information are the sellers you’ll want to look out for.
Safety Rating
As mentioned above, newer cars have better technology and higher safety ratings. typically, the older the vehicle you buy, the less safety features are going to be found on the vehicle. Remember the good ‘ol days without airbags and seat belts?
Compromising on Vehicle Features
When you purchase a used vehicle, once you find the car you like, you don’t have the option to simply state that you want the car to be red instead of blue. It is an art to shop for a used vehicle. Find the features that are must haves for you, and make sure the vehicle has those features.
Making a Decision: New or Used Car?
Now that you have all of the information, you’re ready to make a decision on which direction you will go. Will you take the advantages of a new car and the price tag that goes with it? Or would you rather make some compromises and save yourself thousands of dollars? The choice is yours!
What Would I Do?
I have made more than my share of financial mistakes in my life, and one of these mistakes was purchasing a new vehicle. I’ve actually had experience with purchasing a new vehicle, as well as leasing a new vehicle, and as I look back on both of those decisions, I have nothing but regrets. Here is why…
The first time I decided to purchase a new vehicle was during a family trip from my home state of Michigan to Florida. I had recently paid off a 2007 Volkswagen GTI with my tax refund, so I was living life without car payments and it was wonderful! During the trip to Florida, we had some mechanical issues and took it into a dealership for inspection.
The repair bill was going to be $1,800. OUCH!
What Did We Do?
We ultimately decided to purchase a brand new VW Golf, which had just a few additional features than the GTI, but functionally it was identical. We paid about $27,000 for the car and after trade in we were now looking at about $350 a month in a new car payment! The kicker, we made a $2,000 down payment on the car.
Not only did we spend more upfront than the repair cost by $200, but we walked out of there with a huge car payment. I will say the car was great for the couple years we owned it, but the older car that was just as functional would have done us just as well and we could have saved that $350 per month to be used for much better things, such as saving for retirement or paying off debt!
Fast Forward
Fast forward a couple years. My 3 kids were getting older and the room in the back of the Golf was getting a little tight, so we decided to upgrade to something a little bigger. Because of the depreciation of the car, we were upside down in our loan, which meant we owed more than the car was worth.
We decide to lease a Mitsubishi Outlander and rolled our negative equity into the lease payments. Our payment stayed about the same, but with the lease, we had mileage limitations and other requirements to fulfill.
If I had kept the 2007 GTI, until we needed a larger vehicle, then opted to purchase my current vehicle, a 2003 Cadillac Escalade, which I paid for with cash and fits my family of 7 very comfortably, I would have saved myself a ton of money and a lot of financial headaches, as well as possibly avoiding the bankruptcy that occurred during my divorce.
I can tell you with 100% certainty that I will NEVER be making the financial mistake of purchasing a new car ever again, and I hope you do the same.
Final Thoughts
As you can see, I do not recommend purchasing a new vehicle. If you want the peace of mind that comes with a new vehicle, purchase a certified pre-owned vehicle that is between 3-5 years old and save yourself a ton of money in depreciation costs, insurance, and taxes.
If you’re like me and really enjoy saving a ton of money, opt for a cash purchase that fits within your personal budget!
Which side of the coin are you on? New or used car?
-Real Money Robert
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