This is part of a seven-post series discussing our journey to buy a new car. Scroll to the bottom of this post to explore the entire series.
Today’s entry is a guest post from Jason at My Money Minute. Jason is an attorney from the great State of Texas, where he lives with his beautiful wife and 3 dogs. Jason’s blog is all about “Personal finance and all that implies…in minutes a day.” He writes about how all aspects of our lives–family, spiritual, career, politics–intertwine with and reflect our financial behaviors.
In today’s guest post, Jason tackles the basic question at the heart of every car purchase and an age-old personal finance debate–New vs. Used. I’m excited to hear your comments!
The Philosophical Divide
In our world, there are the few great issues of our time that are so polarizing, you end up on one side or the other based on a world viewpoint and lifestyle philosophy. Major issues such as Republican vs. Democrat, dog people vs. cat people, and Leno vs. Letterman. 😀
Such is the dichotomy of buying a car: Some will only buy a used car, while others refuse to buy anything but a brand new car off the lot. If you can forgive my split-personality, let’s take a look at what both sides have to say on the major issues.
Why You Should Buy A New Car
1. Sticker Shock
For the automobile industry, the last few years have been rough to say the least. The economy went south, and sales declined massively, while at the same time, the cost of new cars had already skyrocketed. As we weather this recession, deals have popped up left and right. For instance, just before the new year, GM offered massive discounts and incentives to buy up the remaining Saturn and Pontiac vehicles available prior to closing their product lines. In the months before that, the government stepped in and offered the “Cash for Clunkers” program that cut prices on new vehicles for those who qualified for the rebates.
Additionally, there’s a shift from big SUVs to smaller, more economical vehicles. Light SUVs and small cars cost less than the gas guzzlers. Right now, you can get plenty of brand new cars, including this Hyundai, for under $20,000. When you can get a brand new car under $20,000, why buy used?
2. Financing
In an ideal world, everyone would buy their cars with cash. More than likely, however, you will be financing your car. In an effort to entice customers, numerous dealers are offering financing at rates that used car financing can’t touch. According to U.S. News & World Report, 0% financing is being offered by all the major American automakers, along with Toyota & Mazda. Other car companies are offering similarly low rates.
3. Safety
To many out there, safety is the most important issue when buying a car. When you buy a new car, you have all the technologically advanced safety features that weren’t available on older models.
4. Less Risk & Repairs
With a new car, you have less risk of major repairs. When you buy a used vehicle, outside of a generic CARFAX report, you have no idea who has driven your car, or whether they took care of your vehicle. The risk of finding a lemon is obviously higher with a used car, and a risk you don’t need to take given the current market.
5. Warranty
Last year, Hyundai offered it’s “Hyundai Assurance” program. Its now-famous warranty states that if you purchase or lease a qualified Hyundai and lose your job within the next year, you can turn the vehicle back in to the company without worry of owing negative equity. Just like with 0% financing, dealers are able to offer better deals on warranties than when you buy used. Even if it isn’t as drastic as the Hyundai Assurance program, almost all new vehicles offer a 10 year/100,000 mile warranty.
6. Driving It ‘Till It Dies
If I plan on driving my car for the foreseeable future, rather than trading up in 2 years, the relative difference in price between new and used is not much. If I plan on driving it for 10 years, I’d rather have a new car that was “all mine”. It’s worth the extra money over the long haul to have the peace of mind in knowing your car history.
The Rebuttal: Why You Should Buy Used
1. Sticker Shock, Indeed!
No matter how you slice it, a new car costs far more than the same model just a few years old. For example, take a Nissan Maxima. According to Kelly Blue Book, a brand new 2010 Maxima runs about $29,000. Similar reports show a two year-old, 2008 Maxima with 30,000 miles on it, will set you back around $21,000–and that’s if you bought from the dealer! At best, there’s an $8,000 difference in price. Also, Cash For Clunkers and the GM closeout deals on Saturn and Pontiac have ended, and there’s no sign of those deals coming back soon.
Additionally, the average cost of a new car continues to rise. According to the FTC, the average cost of a new car now tops $28,400, and the average monthly car payment is well over $450! It’s simply more frugal to buy a used car.
2. Financing
The numbers don’t lie – a local bank quotes 4.99% auto loans. Even a great rate like that pales in comparison to 0%. But like I said, the numbers don’t lie. Take a look at the Maxima example from above.
- 2010 Maxima priced at $31,000 with 0% financing = $31,000.
- 2008 Maxima costing $21,000, with a $2,000 down payment, financed at 4.99% over 60 months = a total cost of $23,500.
That’s still a difference of $7,500, just to have a car that’s two years newer!
3. Safety
At this point in technology, the actual safety difference is practically nothing between vehicles that are two years apart. Most vehicles still have the same body style! The differences, if any, are creature comforts, not safety-related. You may have a better drop-down DVD player, but both new & used will have airbags.
4. Risk & Repairs
As a numbers game, it IS true that any used car would be more likely to have repair issues than a brand new car would. You don’t always know who owned your car before you, and you don’t know how they treated it. My rebuttal here comes from Fiscal Fizzle’s previous post in this series, titled “Would You Buy A Rental Car?”. In the comments of the post, a very relevant question is brought up – are rental cars actually driven that much harder than other cars? The point being, cars are durable, and it’s still very unlikely to end up with a lemon.
5. Warranty
It’s true that new vehicles typically come with 10 year/100,000 mile warranties, but here’s the thing — they are transferable! If you buy a used car with 30,000 miles, you still have 70,000 miles of warranty! Not to mention, you would know if any warranty work was done on that initial 30,000 miles of driving.
6. Driving It ‘Till It Dies
This is a common excuse reason to buy brand new car. Even if you do drive your car for a decade, does that justify the extra $7,500? Given the risk between new & a 2-year old used vehicle is relatively minuscule, it just doesn’t make sense. Take that money and invest it, or at least use it to help pay for your next vehicle!
Conclusion
Taking the arguments from each side into account, I can’t justify buying new over used when comparing between the same model. The only way, for me, to justify buying new is when you base your decision on a budget limit. That is, you would rather buy a brand new Hyundai Sonata over a 2-year old Nissan Maxima, which both sell for around $20,000. Even in this case though, why not buy a used Hyundai Sonata and save even more money?
I tend to side with my split personality that favors used cars. What about you – do you buy new or used cars? Why? What are other factors not discussed?
Photo by emilio labrador
This is part of a seven-post series on our new car journey. Below are links to posts that have already been published as part of this series:
Fiscal Fizzle 
This is a pretty elaborate way to analyze a car purchase, but it makes a lot of sense. We buy our new cars usually for cash and drive them for about 10 years or even longer, when we either trade them in or donate them.
I would add one more thing to your list when you compare new versus used. When you finance a car, you are required to get comprehensive and collision insurance which usually costs quite a bit more for a new car than it costs for a lower priced used car. These higher insurance payments have to be added to the cost of the car as long as your car loan is not paid off in full.
Great points about insurance! I would only add that I have personally found comp/collision to vary greatly, and it’s not always about age. Case in point–my 10-year-old car was about as much to insure as the 2-year-old car we just bought in terms of comp/collision.
I’m sure it has to do with safety features, reliability in an accident, theft data, etc, etc…
But a great point–at least with a non-financed car, you have a choice in whether to get the insurance at all!
Without a doubt I will always buy used. I see it as no comparison. The amount of money you can save is totally worth it. Just buy a car with relatively low miles on it, and it’s almost the same as buying new. You can still receive financing, not 0.00%, but still, your example makes that point quite clear. The warranty issue is also a huge plus if you buy a car within its warranty as well. Really I feel it as no comparison!!
Since there are a lot of 1-2 year old cars available for grabs, the warranty benefits are definitely a big plus!!
Buying new for under $20,0000 IS compelling! However, the reality is that variety is very limited in that price range. So the better question might be, “would you rather drive a two year old Maxima or a brand new Hyundai?” I’ll take the Maxima!
The basic problem with buying new is that after a year or two, it isn’t new any more, and you’re beginning to think you might have been better off with a higher value model for the same amount of money. Besides, with proper maintenance, today’s cars are manufactured well enough to last for 10 years and beyond easily.
The better deal might be a four year old Maxima for $15,000, but that takes the debate in a different direction.
.-= Kevin@OutOfYourRut´s last post: Over 50 – No Pension, No 401K – What Now? =-.
You bring up a great point–within your defined budget, you really open up a lot of options for yourself by going used, simply because more cars will fit within your price range!
@ctreit – Great point about comprehensive insurance coverage. At some point on a paid vehicle, you don’t need it, and that saves you some dough.
@MyFinancialObjectives – Agreed. To me it doesn’t seem like much of a comparison either. These days with the Internet, you can search high & low for the exact used model you want, and can get it at a great price.
@Kevin – That IS the question, and I would (and have) taken the Nissan Maxima. My current car is a 2000 Maxima that just went over 200k miles! Your point about a 4 year old car is pretty valid too, although the points about safety, repairs, and warranty become more valid the older a car gets.
Totally love my “new” Saturn SL1, even though she’s 15 now. Was recently talking to my husband about the “drive it till the wheels fall off” philosphy, and he noted that we could replace them when they did. And we’ve had a couple of mechanics tell us that as long as we maintain our car, the way we do, we can keep it as long as we want. So I would like to see if I really can keep her forever! What do you think about that?
15, Wow! Good for you.
I really like the idea of keeping a car forever, but I think that at some point, the “value curve” would start to go down for me, instead of up. 15 years is a long gap between generations of safety features, and when you’re trucking a family of kids around, that’s something that’s very important to me now (even some of the most recent features like side curtain airbags and stability controls, etc. that weren’t even available 5 years ago).
So while I applaud you for doing it, I think 10 years is a good max for me when I think in terms of the cost-to-value.
I bought a new Honda Fit 3 years ago, and plan on driving it until it dies. My previous car, a former rental car had died.
Reasons:
1. I like small cars.
2. I like the practicality and cargo room of hatchbacks and in previous years there weren’t any on the market.
3. Small cars with high ratings from consumer reports, etc. don’t depreciate much.
I’ve been able to fit, but not at once:
Full size dryer
Four drawer lateral file cabinet
13 book sized moving boxes, a 4′ artificial christmas tree, and a disassembled shelving unit.
I could move pretty much anything I owned in the Honda fit if I made enough trips. Say if I took a job that was an hour away and wanted to move to a nearer apartment. But I’d need to jigsaw in my dressers. And disassemble the futon frame and bed frame.
I’ve heard good things about Fits. I’m curious to hear more your rental car experience, though. Were you fairly happy with that car?
It’s at least 3-4 years before we buy another car, and I haven’t made up my mind completely yet, but I’m pretty sure I’d never buy new again. Unless it was a sports car… 😉
I am weighing buying used vs new Honda CRV. I am not considering anything more than 3 year old. In this case, it seems the new car is not financially worse off than a 2-3 year old one. Two main reasons: 1. the cost difference between a new and a 2-year old car is not more than $5k dollars. 2. The lower interest financing on new car (1% rate on new vs 5% rate on old) saves ~$2k. So essentially you are saving only $3k on a 2 year older vehicle which is less than normal depreciation. So in this case buying new makes sense. Obviously Honda depreciate less than avg car and so the math would work out different for other brands.
What would you buy and why on this very specific case.
Money: Around $29.000
Options:
2011 Accord EX-V6: New
2008 Lexus ES350: 44,000 miles.
Not choosingby size/speed. I’m more into Efficiency/Engine and it’ll probably stay 3years with me. Big question might be Which car is better? The smart choice will be a new “regular” Accord or an Older “lil-luxury” Lexus.
Looking into what I think is good in the marked… honda, toyota, lexus, audi (not any more expensive than that) but well, dont know much about cars in general… then so hard to decide.
Comments are really welcomed, even long ones !!
Need more orientation in the Why … this or that one.
Thanks
Given your need for the car for 3 years, I would go with the new one (assuming they cost the same, right?). You’ll pay less in maintenance (in theory, given a good warranty) than with something used. That’s my 2 cents.
My dilema is a bit different. My problem is that I’d like a Tundra over a Tacoma. Still undecided….really like the more interior room of the Tundra. When it comes to new or used …the depreciation (reduced price) of the used isn’t much lower than the new car price. The difference isn’t $8,000. It’s more like $2,000. Of course I could be wrong…I didn’t do a spreadsheet …just the one in my head. When it comes to options it’s hard to see them all on webpage listings…..seems like they leave things out. Anyway, for $2,000 difference wouldn’t I be better off buying new. Special note: I was looking for a Ford F-150 originally, but after are 2005 escape limited just had a coil go bad and blow the main computer and $2,000 in repairs, hotel, and car rental….I’m really ticked off and am now leaning towards Toyota. Really could use some good advice
Michael, I did a quick Kelly Blue Book look-up just to see and I found:
2009 Tunda Regular Cab 8ft V6 4.0 2WD Auto 30K miles is $17,040
2011 of similar specs is $24,735.00
(Difference of $7,695)
Given that, if I were in the market, I would go for the used. Not sure why you’re looking at a $2K difference, I don’t think the local market would vary that much but I could be wrong. Can you give us some more details on that?
So, on Monday I have a debate speech on buying new vs. used car.. I was wondering if you guys can give me some info about the advantage and disadvantage of both sides..Thank you guys so much..