While shopping for a car, you are likely to encounter one of the longest-running debates: should you buy a new car, or a used car. Naturally, used cars are cheaper but the considerations do not end there.
Buying a New Car: The Positives
No Issues with Previous Owners
If you purchase or lease a new car, one of the most apparent benefits is you don’t have to worry about its past or if the previous owner isn’t being forthright with all the facts. This includes everything from accidents, up to whether they treated the vehicle to regular oil changes or rustproofing; these facts can manifest as problems later. Being certain that the car is factory-fresh means more peace of mind.
Purchasing a New Car is Easier
When purchasing a new car, you will save time by not having to conduct extra research or perform due diligence to ensure the car is inspected and tested. In addition, with private sellers the transfer of paperwork and legal ownership can end up taking a lot more time whereas a new vehicle purchased through a dealer will very likely have all the paperwork sorted out for you.
Lastly, you are more likely to get precisely the car you want, with the desired colour and trim, because everything can be ordered directly from the factory. That level of trust and assurance only exists with new vehicles.
New Cars Are More Fuel-Efficient
Year after year, auto manufacturers are introducing fascinating innovations to improve the emissions and fuel economy of their models, with even a new SUV being more fuel-efficient than a compact sedan from 7 years ago. The likelihood of you not only having the best fuel economy, but the cleanest vehicle possible, is to find a new model.
New Cars Can Have Special Financial Incentives
Manufacturers and certified dealers are known to offer special incentives to those who buy new cars, especially if they feel the models aren’t moving as fast as they should. These include cash-back deals and specialized financing that could save you thousands of dollars.
If your credit is good, you may find it’s far easier to purchase a new car without a down payment or trade-in. Why? Increased incentivisation plans that automakers offer for new cars that aren’t extended to used cars. Financing options for used cars are known to require down payments or a trade-in with similar equity, and a tip for that is to find the trade-in value prior to going to the dealership to ensure you get the absolute best value.
If you conduct the research and plan ahead for the right moment to strike – usually closer to the end of the year – you may find a brand new car with an established enough automaker incentive to cover the up-front cost and require no down payment at all.
Full Warranty Coverage
Most vehicles come with a standard bumper-to-bumper coverage that includes all factory parts and electronics that can run anywhere from 3 years up to 10, or a certain amount of mileage.
These warranties cover defects and issues with all factory parts, everything from the engine to brakes and all electronics. Warranties for new cars are already included in the car’s price, so you don’t have to pay for extra coverage from the dealer or elsewhere.
Buying a New Car: The Negatives
Buying new vs. used has some strong benefits, but that not the whole story. The following are the downsides you should be weighing:
The average new car costs at least $10,000 more than a used car. The average costs are both on the rise, but people generally understand that there is a significant gap between new and used vehicles that is likely to remain indefinitely. If you include higher monthly financing payments and the possibility of drastically increased insurance, you can experience monthly payments higher than predicted.
Here’s an easy way to calculate the best insurance for you: follow the 20/4/10 rule. Your down payment should be 20% of the purchase price, do everything you can to limit your loans to 4 years or less, and your payments should not exceed 10% of your take-home pay.
More Costly to Insure
New cars are widely known to require increased insurance payments, especially if you need to have more types of coverage. While new cars are equipped with increased safety features that make them overall safer than older models, this reduction can be offset by the expensive nature of these very safety features – cameras, lane assist, brake mitigation, etc. – and balance it out to an overall increase.
For example, you might opt-out of collision coverage on a low-value used car, but most lenders won’t permit you to mix-and-match coverages for brand new cars.
A Disproportionate Amount of Sales Tax
When you buy a new car, you’re generally paying tax on the entire car whereas when purchasing a used car, you won’t pay nearly the same amount in taxes due to the lower cost. Keep in mind that the amount you pay on a new car payment plan varies by province, so double check the rates and regulations for your area.
New Car Smell
Many people like the new car smell but be warned: the smell is the result of volatile compounds off-gassing from plastic and vinyl interior surfaces. That’s why we recommend opening the windows and airing it out as quickly as possible.
Limited Purchasing Options
Your opportunities for shopping for a new car are limited: new vehicles are solely retailed through branded franchisees, unlike used vehicles which can be purchased from a variety of sources, including franchise dealers and private sellers. Furthermore, if your geographic area has a limited amount of new car dealers, your ability to negotiate is severely limited.
Buying a Used Car: The Positives
When people say used cars are less expensive, many neglect the various dimensions for why this is the case. The following is a comprehensive list of all the ways you could conceivably save with a used car.
Less Upfront Cost
Despite the likelihood of increased financing payments owing to lack of incentives and rebates, the overall interest paid over time will be lower owing to the base price of the vehicle being lower, even for more recent used models.
For this reason, many feel used cars can be easier to budget for month over month, and the plan towards full ownership can be simpler. With a lower cost and a more aggressive payment plan, a buyer can fully own the car in far fewer years.
Better Selection of Quality Cars
Due to the price of used cars being lower and often a wider selection across more sellers, buyers can frequently get an older model that’s closer to their dream car. You could have access to a Lexus rather than a Toyota, or even find a Cadillac you’ve been thinking about for years. This is very useful for people who have their eyes on luxury SUVs. It’s your responsibility, however, to pay attention to the accumulated mileage and understand how high you are willing to go.
Avoid the Cost of Depreciation
A sizeable percentage of the car or truck value is lost during the first initial years, starting the moment it is driven off the lot. The word for this is “depreciation” and it’s a fact of life for all new car owners.
A new car automatically loses between 20%-30% of its value the moment it rolls off the lot and some cars can depreciate up to 50 percent in the first three years alone, depending on how hard it is driven and whether it undergoes regular inspections and maintenance.
The previous owner will have shouldered that hit of depreciation, and over the course of their ownership have most likely addressed any unfortunate defects that may have come bundled with the car. This is why it’s crucial not to look at the car as an investment and to understand it is to serve a strict functional purpose.
For example, a typical medium-sized family car bought three years ago will have lost $12,559 in value by now. On the other hand, the car’s fuel costs during the three years will only have been around $4,000, based on the average mileage being approximately 16,000 KM/per year. The more driving, the less your car is worth. Little do Canadian buyers know but the amount of people who owned the car previously has an effect, which the seller might not even be fully aware of.
Finally, for the gearheads out there: depreciation has little effect on owners who drive a car until it falls apart completely, or intend to perform specialized customizations over time. Keep this consideration in mind if buying from a private seller, or looking for that rare or classic car.
Less Risk with Financing
This section is in regards to what’s referred to as “being underwater” on your loan, and this applies to cars as as well as any large purchase you are paying off. Basically, when you owe more on your car loan than what the car is worth at that time, it has negative equity. This state of repayment proves to be catastrophic if the car is stolen or totaled in an accident. In these instances, you could be required to continue paying money on a car you don’t even have access to!
By having lower monthly payments and more options for financing, – and realistically taking into account what you could be facing if the unpredictable happens – you are far less likely to find yourself in this situation with a used car.
You have a Better Track on the Car’s History and Experiences
As we mentioned above, having the car owned by someone else increases the likelihood that any defective parts or electronic issues have been spotted and fixed, sometimes offsetting the price of the vehicle. Furthermore, cars develop what’s known as a “reliability record” after a few years on the road.
Potential buyers can also put some work in reviewing online car forums to explore any issues current owners are facing. While most reviews need to be taken with a grain of salt, this is where buyers can research for common trends that might not be disclosed by dealers or private sellers.
These days, it’s easier than ever to understand a car’s past by procuring a vehicle history report from a company such as Carfax.com or Autocheck.com. This way, you can get as much of the story as possible, even if it’s not 100% complete.
Buying a Used Car: The Negatives
We’ve covered all the benefits of used cars, but there are also risks involved.
Buying Someone Else’s Used Goods
If you ask people who prefer new cars as to why this is their preference, many will claim that they don’t wish to own someone else’s second-hand product – and psychologically, many people grapple with the concept of whatever the reasoning was for someone discarding it to begin with. While even seasoned buyers understand a car isn’t an investment, little things such as scratched leather or marks on the interior can make people feel uncomfortable.
As we have said, a car is not a long-term moneymaker and is just as much about emotional drivers as anything else. The name of the game is being satisfied with big ticket purchases.
You Never Know the Complete and Full History
While we have discussed the value of vehicle reports and online reviews, the truth of the matter is if the previous owner caused any problems recently they might not even show up on the report. This can be anything from how hard it was driven, to smaller wear-and-tear that could manifest as larger problems later. While everyone has an eye out for a history of accidents or even minor collisions, each model is different.
No matter how well a car has been cared for, at 30,000 plus miles, factory-installed parts are surely going to begin to fail. As a result, maintenance and replacement costs will be higher for a used car than a new one even within the first couple years. As opposed to depreciation, repairs and maintenance are hard costs that must be addressed as they arise, even more so if they are caught early.
Have you factored in this likelihood into your monthly or yearly budget?
Used Cars are Usually Sold As-Is and Cannot be Returned
The moment a contract/agreement is signed, all hypothetical problems are inherited solely by you. This is important due to those minor errors that can lead to big problems down the line, and many owners find it difficult to prove that any issues with the car at point of sale didn’t occur immediately after taking ownership. It can devolve into a he-said-she-said battle, especially if you haven’t executed proper due diligence and the car is notably older.
There is more flexibility with certified pre-owned vehicles, but on average the rule is: you cannot return a used car, even if it spontaneously disintegrates on day 3.
There’s Usually No Warranty Coverage
This does not apply to a used car that’s only a year or two old since warranties are transferrable between owners, but anything more than a few years can easily fall outside of the range of coverage, including powertrain warranties. Outside of certified pre-owned vehicles which often have additional coverage through the dealership itself, for older or private-sale vehicles your coverage is whatever you purchase for yourself and without that, you’ll have to pay out-of-pocket for any repairs.
Some carmakers offer free maintenance for wear-and-tear during the first few years of ownership, usually if you agree to have all the work done at their dealership. This is where reviews of dealerships are just as important as reviews on models.
So ask yourself this: do you have the freedom and ability to leave your car to be repaired when problems emerge? Not only does a used car cost more to maintain in peak operating condition, but it will likely spend more time in the shop. We are talking anything from an afternoon to a full week depending on what the problem is.
Summary: The Importance of Diligent Research
It’s easy to get swept up in the excitement and emotion of buying a vehicle, and predictibly the two main questions we ask ourselves: how will I look while driving it, and what’s the maximum monthly payment I can afford? To have total peace of mind, you need to be firmer on what it is you realistically need and want.
For example, the higher you believe your monthly payment can be ensures you’re probably not giving yourself enough financial breathing room and will spend each month with unnecessary worry. This never occurs to you when you’re taking a test drive and fantasizing about its presence in your future, but this is why you should come to the deal prepared with all your independent research.
Trust us, the more details you review, the happier and more comfortable you’ll be in the future.