New vs. Used

Everyone loves that “new car” smell, but is it worth the extra costs? In this article we show you why buying used is the smartest move. Plus, our experts let you know when buying new or leasing may make sense.

Buying New

Buying a new car is a fun experience. You get a car that is trendy, shiny, and has that great “new car” smell. But you also get stuck with a car that is almost instantly worth less than you paid for it. A new car drops in value dramatically as soon as you drive it off the dealer’s lot. After five years, your new car may lose 70% of its value.

If you are paying for your new car with an auto loan, this depreciation means that you will be “upside down” on your loan (you owe more than the car is worth). Do you really want to be paying $200 a month for five or more years on a car that is worth only half of what you paid for it? Not all cars depreciate at the same rate, however. A deluxe Chevy truck or a popular car like a Mini Cooper will probably hold its value better than a common car like a Honda. Do some research through a company like Kelley Blue Book to compare depreciation rates on the cars you are interested in buying.

There can be a few benefits to buying a new car. Auto loan rates are usually a bit lower when you are buying a new car than when you buy a used car. In most cases, this is a difference of 1-3% and amounts to only a few hundred dollars in loan savings, a lot less than you would save by buying a used car instead. However, if you have excellent credit, you may be able to qualify for a 0% auto loan offer from the dealership. These 0% offers are only valid on new cars and can be a fantastic deal.

Buying Used

When you buy a used car, even if it’s just a year old, you are avoiding the initial dramatic drop in value. This depreciation is usually between $3,000-7,000 during the first year. For example, let’s compare the price of a new 2006 Ford Taurus with a used 2005 Ford Taurus based upon Kelley Blue Book values:

2006 Ford Taurus - $20,000
2005 Ford Taurus - $15,000
Used Car Savings - $5,000

You can save $5,000 just by buying last year’s model of the exact same car. You can even use your savings to upgrade to a fancier car. For example, a brand new Toyota can be about the same price as a two year old BMW. These used cars often come with warranty programs that are equal to what is offered with a new car.

Plus, the used car market is a lot safer than it used to be. With vehicle history reports as well as research and pricing services online, you can ensure that you are choosing a used car that is going to be a dream come true, not a lemon.

Leasing a Car

Auto leasing programs allow you to “rent” a new car for two to five years. Instead of a loan, you work out an agreement with an automotive leasing company or local credit union. You agree to pay the lease monthly, keep the car insured, and take good care of the vehicle until the end of the lease term. At the end of your lease, you return the car and pay for any extra damages or mileage. You can also buy the car or trade it for a new car at the end of your lease term.

With a lease you are essentially paying the amount that the finance company expects the car to depreciate. Therefore, when you lease a brand new $20,000 car that is estimated to drop in value $7,000 in four years, you will pay $7,000 in lease payments. Compared to the rates you would pay for buying the $20,000 car outright, leasing is a more affordable short term option.

With leasing you pay less now, but more over time, for a car. You also assume more financial risk than someone who buys a new or used car. If you are constantly tempted by the newest cars on the market, leasing may make more sense for you than buying. In the long run, however, buying used is almost always a better choice than buying new or leasing a new car.

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