When you read books or websites about saving money, one tip you come across repeatedly is to never buy a new car. After all, according to the car-buying site Edmunds.com, a new car loses nearly 10% of its value the minute you drive it off the lot, and another 10% after a year of driving. Buy a late-model used car instead, it is said, and you get practically the same car for 20% less.
There’s a lot to be said for this argument, but it doesn’t tell the whole story. For one thing, a used car isn’t always cheaper than a new one in the long run – it depends on a whole host of factors, such as how old the car is, how gently it has been driven, and how long you plan to keep it. And on top of that, cost isn’t the only factor to consider when buying a car.
The truth is, “Never buy a new car” is the kind of one-size-fits-all financial advice that seldom works for everyone. In real life, your mileage – as well as your car’s – may vary, so it makes sense to look carefully at all the factors involved before deciding whether new or used is right for you.
New Cars vs. Used Cars
Buying a car is a big decision. It’s one of the most expensive purchases you’ll ever make, and one that stays with you for years. So before you take the plunge, it makes sense to think long and hard about what’s most important to you, and whether a new car or a used one is the best way to get it.
Naturally, the cost is a big part of the decision. However, features, reliability, and cost to insure are also important – and for some people, they’re worth paying more for. Here’s a head-to-head matchup of new cars versus used cars on all four criteria, showing which comes out ahead in each category and why.
1. Purchase Cost
Winner: Used Cars
The biggest argument in favor of buying a used car is that it’s cheaper. Cars.com, a website devoted to all things car-related, says that for “less than half the price of the average new car,” you can get a used one between three and four years old that’s bigger and more feature-packed than a brand-new econobox.
A 2012 analysis by Consumer Reports backs up this claim. The editors compared five 2012 cars with two-year-old and four-year-old equivalents and calculated what each one would cost to purchase with a 60-month loan. In every case, the four-year-old version was the cheapest, costing anywhere from $5,000 to $9,000 less than a new one. Two-year-old cars were also cheaper than new ones, but only by $2,000 to $4,000.
However, these figures show only how much the car costs to buy, not how much it costs to own. They include the purchase price of the car and the interest payments, but not maintenance, repairs, insurance, or depreciation – the drop in a car’s book value over time. A separate Consumer Reports article looks at in these additional costs, and it shows that the longer you keep a car before trading it in, the less it costs per year to own. Depreciation is usually steepest during the first two years, so the longer you hold onto it after those first two years are up, the less it costs per year.
This means that if you’re the kind of person who likes to keep a car until the wheels fall off (like me), your cost per year can get so low that the benefit of buying used disappears completely. When my husband and I bought our last car (after our 16-year-old Honda Accord could no longer run), we discovered that a two-year-old Honda Fit with a manual transmission cost approximately $13,000, while a brand new Fit cost around $15,000. Since we expected to keep the car until it was at least 15 years old, our cost per year would be around $1,000 for either car, so there was very little financial benefit to choosing the used one.
2. Insurance Costs
Of course, the upfront cost of buying a car is only part of the cost of owning it. You also have to pay for gas, maintenance, and auto insurance. According to Consumer Reports, about 10% of all the money you pay over five years to own a car goes into the pockets of your insurance company.
You’ve probably heard that new cars are more expensive to insure than older ones because they cost more to replace if they’re stolen or damaged. However, the truth is a lot more complicated.
It’s true that more expensive cars generally cost more to insure, and new cars tend to be more expensive than older ones. But new cars also have several things going for them that can make their insurance rates lower:
- Safety Features. A car with modern safety features – such as anti-lock brakes, traction control, and airbags on all sides – looks better to insurers. In the first place, it has a better chance of avoiding an accident – and even if there is an accident, the passengers have a better chance of escaping serious injury. All that adds up to less money the insurance company has to pay out. Thus, insurers offer discounts for cars with the latest safety features – and new cars are more likely to have them than used ones.
- Theft Rates. Surprisingly, a sexy new car isn’t usually the most appealing target for thieves. They’re more likely to go for a popular model with parts that have remained unchanged for years, because it’s easy to strip it down and sell off the parts. According to the National Insurance Crime Bureau, the most commonly stolen cars in 2012 were Honda Accords and Civics dating from 1990 to 2000. By contrast, newer Hondas are less likely to be stolen because they have more sophisticated anti-theft technology – which, in turn, makes these newer cars cheaper to insure.
- Cost of Parts. Once a car has been discontinued, it gets harder and harder to find replacement parts for it. This makes repairs more expensive, which in turn makes claims more costly for insurance companies. This means that a used car from a rare vintage can cost more to insure than a more mainstream new car.
Because there are so many factors involved, there’s just no way to say whether new cars or used cars are cheaper to insure. Basically, this one is a toss-up.
Winner: New Cars
One cost that’s definitely lower for new cars is maintenance. A new car doesn’t need any routine maintenance at all for the first several thousand miles, and even after that, it can keep running smoothly for several years with just the occasional oil change and tune-up. Pricey items like tires, brakes, a battery, or a new exhaust system aren’t likely to be needed for at least three years.
Of course, routine car maintenance isn’t the same thing as repairing something that breaks unexpectedly. Even on a new car, you can occasionally have problems, such as a starter that fails without warning.
But when that happens, you’ve got a warranty to cover you. Because the factory warranty covers the cost of major repairs for the first few years, owners don’t generally have to pay for anything except routine and inexpensive care (such as oil changes) during that time.
According to Consumer Reports, maintenance and repairs together account for only 1% of a car owner’s costs during the first year of ownership. However, the longer you keep the car, the higher that figure becomes. Over the course of five years, you can expect about 4% of your total costs to go toward maintenance and repair; over eight years, the figure rises to 6%.
In many cases, paying less for maintenance isn’t enough to make up for the higher purchase price of a new car. However, the benefits of a more reliable ride go beyond lower repair costs. There’s also the convenience of not having to drag your car back and forth to the repair shop all the time, as well as the peace of mind from knowing it won’t leave you stranded.
And speaking of peace of mind, if by some chance you do find that your new car keeps breaking down, you can get a refund or a replacement under your state’s lemon law. These laws, which vary from state to state, protect buyers of new cars that develop major problems within a certain period of time – usually a year or two after purchase – and can’t be fixed after multiple attempts. Buyers of secondhand “lemons,” on the other hand, are just out of luck. This guide from CoPilot advises keeping an eye out for certain red flags that suggest trouble in a car’s past.
Winner: New Cars
When you buy a new car, you can choose any model on the market and load it with the exact features you want, right down to the paint color. If you truly can’t be happy with a car that doesn’t have a trailer hitch, or fog lamps, or a fold-down rear seat, you can definitely find one that does. Of course, you have to pay extra for a car that’s loaded with options, but at least you know they’re available.
With used cars, by contrast, your choices are much more limited. This is the main reason my husband and I ended up buying a new car – we knew we wanted a safe, fuel-efficient car with a manual transmission, and we could find almost no used cars on the market that fit that description. Although we eventually tracked down that two-year-old Fit, it didn’t have the improved safety features found on the newest model. So with the cost per year being equal, the Fit with better features was the better choice.
Certified Used Cars – A Good Compromise
One risk with any used car is that unless you’re buying from someone you know personally, you can’t be sure how well the car has been maintained. Having the car checked by a mechanic is one way to minimize this risk. Another alternative is to buy through a certified pre-owned (CPO) program. These programs offer a compromise between the lower price of a used car and the improved reliability of a new one, making them the best of both worlds for many car buyers.
CPO programs originally started with luxury brands like Lexus and Mercedes-Benz, but today they are available from most car manufacturers. Cars in these programs are typically less than three years old, with relatively low mileage and no history of major damage. They also have to pass a series of strict inspections, both mechanical and cosmetic. Once a car is approved, the program gives it a new warranty that extends beyond the original factory warranty and includes the same features found on a new-car warranty, such as roadside assistance.
Certified used cars cost more than other used cars, but they make up for the higher price by taking much of the risk out of buying used. In addition, some manufacturers offer special financing for certified used cars, usually at lower rates than they offer for either new cars or conventional used cars.
Getting the Best Deal
Whether you choose a new car or a used one, you don’t want to spend any more on it than you need to. Smart car shopping strategies can help you get the best deal no matter which kind of car you buy.
One important tip for both new and used cars is to check reviews and ratings for the model you’re interested in. Search for the make, model, and year of the car accompanied by the word “complaints.” You can also find ratings at the consumer-review sites Cars.com, Edmunds.com, and J.D. Power.
Also, find out how pricey it is to repair and insure the car you have in mind. High-end foreign cars, in particular, often have hard-to-find parts that add to their repair cost. Consumer Reports has information about the overall cost of ownership for many models – and if the model you’re considering isn’t listed, try searching for the car’s make and model with the phrase “cost to repair” or “cost to insure.”
Once you’ve settled on a model that appears to meet your needs, take it for a test drive prior to purchase. No matter how the car looks, you never know how well it really fits you until you’re actually behind the wheel. Ideally, try to drive the car on a rainy day to see how it handles in bad weather.
Finally, be prepared to haggle. Negotiation strategies are somewhat different for new cars than for used ones, but it always helps to check prices carefully. The more you know about how much the same car – or a similar one – would cost elsewhere, the more confident you can be when negotiating a deal. Likewise, the more you know about how dealers make money on new cars, the more likely you are to avoid paying for protection plans and optional features you don’t really need. Set your expectations with this list of common car-buying pitfalls from Ms. Career Girl.
Buying a Used Car
Buying a used car involves more research than buying a new one. First, you have to find out who actually has the car you want for sale. Then, once you find a car you like, you have to do more digging to find out how much it’s worth, how well it has been maintained, and even whether the owner has the legal right to sell it.
Here are several steps to follow:
- Shop Around. Today, used-car buyers have more choices than ever. Many large cities boast used-car “superstores” with massive inventories and haggle-free shopping. You can also search for used cars on sites like Cars.com, Autotrader, and CarMax, which put hundreds of classified ads – mostly from dealers – at your fingertips. Just type in your ZIP code to find cars within a 100-mile radius of your home. Local classified ads on Craigslist also include a “Cars and trucks” section with listings from both dealerships and private sellers. You can even buy a car online from eBay Motors, which offers free shipping, a warranty, and a money-back guarantee.
- Check the Book Value. Before you even start looking at used cars, check the prices of the specific models you’re interested in. Free websites such as Edmunds.com, Kelley Blue Book, and the National Automobile Dealers’ Association make it easy to check the value of a specific car based on make, model, year, and condition. You can use these sites to check both the trade-in value of a specific model and the typical price it fetches at a used-car dealership. The difference between these two prices is the amount of room you have for bargaining with a dealer. If you’re buying from a private individual, you have a little more leeway – as long as your offer beats the trade-in price, it’s a reasonable deal for the seller.
- Check the Vehicle’s History. Once you find a specific car you’re interested in, you can research its history through a service like CARFAX or AutoCheck. These sites track down the vehicle’s history based on its vehicle identification number (VIN), which you can usually find on a metal plate just inside the windshield. This can tell you, for example, whether the reading on the odometer is accurate or whether the car has ever been totaled in an accident. CARFAX charges $40 per car report, or $55 for an unlimited number of reports within a 60-day period. AutoCheck charges $20 per report or $45 for unlimited reports in a 30-day period.
- Check the Title. If you are buying from a private seller, there’s a risk that the seller may not be the legal owner of the car – which means that after handing over your money, you won’t legally own it either. To protect yourself, you can order a car title history report from the National Motor Vehicle Title Information System. This website, run by the U.S. Department of Justice, offers a choice of 11 different providers to run a title check for you. Some of them check the title only, while others check the vehicle history as well.
- Get It Inspected. Before signing anything, it’s an absolute must to have the car examined thoroughly by a mechanic you trust. Your mechanic can find all the problems the seller doesn’t tell you about, and possibly even doesn’t know about. A pre-sale inspection costs around $140 using a service like Lemon Squad, which is money well spent if it ends up saving you thousands of dollars in repair costs. Ideally, you and the seller should settle on a price for the car before the inspection. Then, if the mechanic finds problems the seller hasn’t disclosed, you can go back and reopen the bargaining to have the price reduced to cover all the necessary repairs. Note that many used-car dealerships won’t allow you to get a car inspected by an outside mechanic – which is a good argument for buying from a private seller.
Buying a New Car
Buying a new car is simpler in many ways than buying a used one, since you can simply walk into a dealership and ask to see the specific model you want. The complexities come in when it’s time to negotiate the price. Since new cars are more expensive, most buyers choose to finance them, and dealers know every trick in the book for negotiating a loan to squeeze the most money out of the sale.
To protect yourself, you need your own book of tricks to counter theirs:
- Pay Cash If You Can. According to Consumer Reports, about 11% of the cost of owning a car over the first five years is the interest you pay on the loan. If you borrow $25,000 to buy a car and pay it back over five years at 4.5% interest, by the time you pay off the loan you’ll have paid nearly $3,000 in interest. So if you can scrape together enough cash to buy the car outright, you can cut the bottom-line price by $3,000 instantly.
- Find Financing Elsewhere. Few buyers can manage to buy a new car for cash, but there are still cheaper options than a dealership loan. Unless the dealership is offering special low-interest financing, you can probably find a better rate at a local bank or credit union. A credit union is your best bet, with rates around 0.5% to 1% lower than bank loans, according to CNN Money. Once you’ve managed to get a pre-approved loan from your bank or credit union, you can then turn around and ask the dealership for a rebate in lieu of low-interest financing, cutting the purchase price of the vehicle.
- Do Your Homework. Before you start haggling over the price, do a little homework. Use a site like Edmunds.com or Kelley Blue Book to find out both the manufacturer’s suggested retail price (MSRP) and the invoice price – that is, the price paid by the dealer – for the car you want, and write down both numbers. The salesperson may try to negotiate by working down from the MSRP, but you can do better by focusing on how much you’re willing to pay above the invoice cost. Aim to settle on a final price about 2% above the invoice price. You can also use the site, TrueCar to see what others paid for the same car you’re considering.
- Keep Price and Loan Terms Separate. Another trick dealers use is to bundle the negotiations for the purchase price and loan terms together by focusing on the amount of your monthly payment, rather than the total amount you’re paying for the car. Yet what sounds like a great low payment often doesn’t look so great when you realize you’re paying it every month over five years. To avoid playing this game, insist on negotiating the purchase price and loan terms separately. Get the final price for the car nailed down before you even start talking about the loan – or reveal that you’ve already secured financing somewhere else.
- Check Trade-In Value. If you’re planning to trade in your old car, wait until after you’ve settled on the price for the new car before discussing the trade-in value. Plan ahead by checking sites like Edmunds and Kelley Blue Book to figure out how much you could get for your old car in a private sale. If the price the dealer offers you for it is close to that amount, accept the offer. However, if the dealer low-balls you, it’s probably worth the extra work to sell the car yourself or take it to another used-car dealer.
- Skip the Extras. While doing the paperwork to close the deal, the finance manager is likely to try to tempt you with various mechanical and financial add-ons. One extra you can expect to be offered is an extended warranty, which isn’t worth the money unless the car you’re buying is notoriously unreliable. Another service many dealerships try to tack on is security etching: having the VIN etched into the glass of the windows as a deterrent to thieves. VIN etching is a worthwhile precaution, but it’s not worth the $200 or so most dealerships charge for it. Police departments and local service clubs often offer this service for only a nominal fee, and you can also do it yourself with a DIY kit that costs around $20.
Ultimately, the choice between a new car and a used car boils down largely to your personal happiness and peace of mind. If a new car is going to put a big strain on your personal budget, but you can easily afford to buy a decent used one, then you’ll probably have less stress and more satisfaction with the used car.
On the other hand, if you can manage the payments on a new car much more easily than you can handle the extra trips to the repair shop for a used one, then go ahead and buy new. And if you’re on the fence about which matters more, perhaps a certified used car is your best compromise between cost and convenience.
Whatever your inclinations are, take the time to crunch the numbers before you decide. Choose a particular car that interests you and figure out how much it would cost to own over five years if you buy it new and if you buy an older model used. Seeing the numbers in black and white can make your choice a lot clearer.
What’s the best car you’ve ever owned? Did you buy it new or used?