You’re on your way to work when smoke starts billowing from the hood of your car—it’s done; dead on the side of the road. Your ’92 Honda didn’t quite make it to 400,000 miles. Maybe it was the skipped oil changes or the fact it was never washed once; none of that matters, now. It's time for a new car. But should it be a new car?
Buying a new car can feel like a great idea. And that is exactly how the dealerships want you to feel. All those incentives and cash back bonuses! But those costs are often hidden in the price of the new car. The manufacturer and the dealer are going to make money no matter how awesome the deal feels to you, and you’re going to lose money through depreciation.
Depreciation happens the fastest in the first year for a new car. You lose anywhere between 20 to 30 percent by driving off the lot. That means a $25,000 car can lose $7,500 in value because you signed the purchase papers. And if you’re not careful, this depreciation could put you upside down on the loan you took out to buy the car. But you’ve got that new car smell, so that’s nice.
The maximum value is gotten out of a car when you own it outright and no longer make monthly loan payments on it. But, when the average vehicle is owned for a little less than six years and the average new car loan term is 67 months (just shy of six years), most people aren’t getting the most value out of their cars. Especially when you realize that the five-year mark is when most cars take a second big dip in value. Getting a new car right as you pay off your current car when it’s at its lowest value creates a cycle of getting the lowest value for your money.
Many people point out that the benefit of owning a new car is the factory warranty. A warranty can be a great help if you have a lemon. But warranties tend to run out right around the time you pay off the vehicle. Most basic warranties run out at three years or 30,000–36,000 miles. Powertrain coverage is usually about five years or 50,000–60,000 miles. Cars are generally well engineered these days and most are able to go well over 100,000 miles without major problems or needing to take advantage of a warranty.
A used car will have lower insurance rates because most auto insurance is based on the value of the vehicle. For a new car, the sale price is the last known price, and so rates are going to be higher. Sadly, even when paying a higher monthly rate, if you wreck a new car your chances are slim of getting a replacement from the same year. Supplies of year-old vehicles are limited. But, when you move into the three- or five-year-old age bracket for vehicles, the market gets a lot bigger when looking for an equal, or even better, replacement.
People used to shy away from used cars because there was no way for the average person to know the history of the car. Thumping panels listening for Bondo or spotting telltale signs of frame damage are acquired skills. Today, thanks in part to the National Motor Vehicle Title Information System, much of a vehicle’s history is linked to the vehicle identification number (VIN). You can know most of the history of any given vehicle by searching the VIN and paying a small fee. Better yet, have the seller prove the history.
Used car market
Used cars can sometimes gain value or at least hold their value. Mercedes-Benz and BMW are renowned for holding value on the used market. Fresh paint and a good detailing can easily boost the value over the used purchase price for any car. Sports cars and muscle cars also do well in used resale, but driving them daily can require a lot of mechanical know-how or incur costly mechanic bills.
The used car market tends to be full of choices. Sure, there are more than 300 new car models available any given year, but the used market has anything from a two-year-old Civic to a 100-year-old Model A. Obviously, a new crossover is a lot more practical than something older than sliced bread, but having options is a value in itself.
In the end, is buying a new car off the table? No, feel free to make whatever decision you feel is best for you. If you can secure a loan at a good rate through your credit union and the payments fit your budget, feel free. But it’s worth knowing you can get 90–95 percent of the perks of a new car from a used vehicle for about half the cost.