To Buy New… or Not?

People ask me — should I buy a new car? Or does a used one make more sense? And my answer is always the same.

It depends.

What do you value most?

Let’s have a look at some of the variables.

* With a new car, you don’t have to worry about the car

You know what you’re getting; it’s new. They’re all the same. No miles, no wear and tear; no damage. No worries about whether it was wrecked and repaired, how it was maintained or whether the dealership is trying to cover up flood damage. If anything’s wrong with it, it’s fully covered under the warranty. You will pay nothing to fix anything. All you have to worry about — as far as the car goes — is the price and the color and the options.

You hardly even have to look at the thing. In fact, you can safely buy it from afar — over the Internet — from a dealer in another county or (state).

With a used car, you have to worry about the car above all else. No matter how great a “deal” it appears to be, if it turns out to have major problems, they will be your problems — and the cost of fixing them will come out of your pocket.

* Financing will be easier to get (and cheaper) –

Interest rates on new car loans have been at “free money” levels — at or below the annual rate of inflation — for years. Given this fact, it can make financial sense to buy debt. Provided you are comfortable with making payments for the next 6-7 years (the average length of a new car loan today).

In contrast, loans on used cars are usually much higher — and the duration of the loan will usually be shorter — because it’s based on the lower (depreciated) value of the used car.

That means a higher monthly payment.

As far as getting the loan: That’s easier with a new car because the new car is at its highest value point when it’s new. It’s worth something. Banks and credit unions will almost automatically loan you money at competitive interest on any new car, assuming you have good credit. You also usually have the option of financing through one of the car companies’ in-house financing arms (e.g., GMAC). You can and should shop around for the best deal on money — which can be as important as getting the best deal on the car.

Used cars, on the other hand, are worth less — and much closer to being worthless. Banks are more reluctant to loan money on such things.

* More choice –

Unless it’s the end of the year — or the model you’re looking at is an old model about to be retired or replaced with a new version — you should be able to get it in whatever color you want, equipped the way you want. The dealer will probably try to sell you one off the lot in a color you may not particularly like and without some of the equipment or features you wanted — because he wants to clear inventory. But that doesn’t mean you can’t order the car your way.

The dealer wants to make the sale, regardless.

With used cars, you usually have to compromise. There is a more limited supply and you probably have a hard time finding one that checks off every box (color, equipment, mileage, condition). You usually end up accepting something less than optimal — such a second or third choice of color — because the car is otherwise what you were looking for.

And now, for the other side of the coin:

*Your money will be tied up for years in a depreciating “asset” –

While interest rates on new cars are low, monthly payments are often very high. Because the principal on which they’re based is very high. The average price paid for a new car is currently around $30,000 — which works out to about $400 a month over six years — assuming zero percent interest.

So, for six long years, you have a $400 monthly nut to cover — in addition to your other expenses, including those not anticipated. That means $400 each month that’s not available to spend on other things that may come up — such as a replacement washing machine or medical bills.

Also, at the end of the six years — when you have finally paid off the loan — your “asset” will be worth much less than you paid for it. Cars are appliances that — like toasters or washing machines — wear out.

The longer you own one, the less it is usually worth.

*You will generally pay more to insure it and always pay more in taxes –

People sometimes fail to take into account the peripheral expenses that attend buying a new car, such as the cost to insure it and (in states where this applies) the cost of property taxes.

Both are based on the value of the car — which is at its highest point when it’s new. While the insurance mafia may give you “credit” for all the “safety” features a new car comes with, the fact remains that the premium will still be largely based on the replacement cost of the car, in the event of a total loss. If the car is worth $35,000 (as opposed to $3,500) you can expect the premium to cover it will reflect that fact.

Property taxes absolutely will — and they can be a killer. Depending on where you live (and the assessed value of your car) they can be as much as $1,000 or more annually, for several years — until the car depreciates sufficiently.

It’s a very smart idea to find out what you’ll pay in taxes — and insurance — before you commit to buying a new car.

And used cars?

*You will almost always pay less for the car, but more to keep it up –

Even if you buy one that still has a portion of its original new car warranty in effect, or you buy an extended warranty, wear items such as tires and brakes are almost never covered under warranty. And because the car is used, it will have been used. It will have wear and tear on wear items such as tires and brakes — and those are things you will have to pay for.

And if it’s no longer covered under warranty — the original factory one or an extended one you bought — then whatever goes wrong or needs fixing will be money out of your pocket. Cars are mechanical things and mechanical things wear out, eventually — no matter how well you treat them. The more they’re used (the higher the miles) the greater the odds something’s going to need attention sooner rather than later.

These expenses are (or can be) offset by the lower price you pay for the car itself — but don’t forget to factor them into your purchasing decision.

*Used cars are individuals

There are no two alike — very much unlike new cars.

Therefore: Worry about condition first, price second.

All cars start out the same, but each one lives a different life. They are driven differently, treated differently, maintained differently. Two same-year, same-make, same-model used cars will be very different cars — even if they are exactly the same color and have exactly the same features and equipment.

One may have higher mileage; the other been smoked in. One may have had its oil changed regularly, “by the book,” with high-end synthetic oil by a conscientious owner. The other may have rarely had its oil changed — and always with the cheapest-grade stuff on sale at Wal-Mart.

It’s always a gamble — even if you have the car thoroughly checked out by a mechanic you trust. But always have the car checked out by a mechanic you trust before you buy.

It at least reduces the chances you’ll be left holding the keys to what was once someone else’s problem — but which is now your problem.


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