Buying a Car New vs Used: Which is the Better Financial Decision?

From the moment you decide you need a replacement for your old Honda Civic, there’s a sense of excitement in the air.

Buying a car is one of life’s big-ticket purchases, and you’ll need to make a careful decision when you decide on your next vehicle.

What make and model are you looking for? Do you have a color in mind? What kind of accessories do you need, are you looking for tinted windows and air-conditioning?

Deciding on your ideal vehicle is a personal choice, some people prefer Ford, while others like BMW.

Whatever your taste, there’s one question which you need to take under serious consideration; Do you buy new or pre-owned? There are various benefits and drawbacks to either choice, and you need to understand both sides before settling on your final decision.

Let’s look at both sides of this argument and the pros and cons of buying a new or used vehicle.

Buying a New Car – The Pros

No previous owner

The best benefit of buying a new car is that it has no previous owner. There’s no service history to wade through, and you don’t have to worry about any of the electrical, mechanical, or hydraulic components of the vehicle. The manufacturer delivers it to the showroom, and you drive it out on to the road in mint condition.

From there on out, it’s on you how you maintain and care for the vehicle. However, at that moment, you leave the dealership; you are the car’s first owner. You can be sure that you’re driving a vehicle that comes with a guarantee should anything go wrong.

Motor plans

If anything does go wrong, your car repairs or servicing are all covered by a motor plan. You should not have to pay for anything but gas and tires for at least the first 60,000 to 80,000-miles. Servicing costs are a significant expense for people that buy pre-owned vehicles. Having a car that has its entire service plan in front of it gives you some peace of mind.

Motor plans come in handy, and they allow you to service your car at regular intervals. If you’re going on a vacation with the family, and you’re taking the car, you’ll need to maintain the vehicle before the trip. If it’s a used vehicle without a motor plan, you might decide to forego the servicing to save money for the vacation. However, if you have a service plan, there are no costs attached to the service, and you and your family have a safer trip.

Ease of Credit Access

The auto industry is a key part of the backbone of America’s economy. The GDP figures rely heavily on new car sales, and both manufacturers and the government want to keep people buying new cars. As a result, there are fantastic dealer specials on new vehicles throughout the year on selected models.

You’ll also find it very easy to secure credit on a new vehicle, even if you have a bad credit score. If you do have a subprime credit score, then you can expect the lender to charge you a higher APR on your purchase agreement. A higher APR means that you’ll probably be paying between 20 to 30-percent more for your car than someone who has good credit.

Status

There’s nothing like the thrill of driving around in a brand new car. It takes months for the wow factor to wear off, and during this time, the vehicle provides you with plenty of joy as you show it off to your friends and family. If you purchase a newer, more expensive model from a luxury manufacturer, then you get some elevation in status along with a new car.

Read: How To Pay Off Your Car Loan Early: Complete Guide

Buying a Used Car – The Pros

Affordability

The best benefit of purchasing a pre-owned vehicle is the affordable sticker price. When you buy a used car, the sticker price can be anywhere from 30 to 90-percent less than the original sticker price when the vehicle left the showroom floor.

You don’t have to worry about depreciation eating away the value of your vehicle. When it comes time to sell, you’ll take a much lower percentage hit than someone that’s the first owner of the car.

Paying Cash

Some lenders will finance a second-hand vehicle, but they are few and far between. Most lenders focus on financing the new car market. Therefore, you’ll most likely have to pay for your car with cash.

It’s for this reason that the used vehicle market has such low prices when compared to the new car market. Depreciation can eat away the value of a vehicle quickly, especially if you hold onto it for more than four years.

Insurance Costs

When you buy an older model vehicle, your insurance costs will be cheaper than purchasing a new car. Off-set this cost-saving throughout a loan agreement, and it could add up to significant savings compared to buying a new car.

Get a Better Model

Since you’re buying a used car, you can afford to reach up and buy a better model car than something new that’s the same price. Instead of going with that 2019 BMW 1-series 116i, you could afford a BMW 130M-package for the same price as a used model.

Buying a New Car – The Cons

Expensive

Buying a new car is costly. Vehicle manufacturers keep updating models with the latest technology components. While this makes cars safer and more enjoyable to drive, it also increases their cost as well.

Two decades ago, the technology available in mid-range family saloons was laughable compared to today’s vehicles. However, these advancements come with a cost, and you can expect sticker prices for new cars to continue to rise in the future.

Depreciation

The moment that you drive your new car off the lo, take in that new car smell. Enjoy it while it lasts, because the sticker price of the car drops by between 20 to 35-percent as soon as your tires hit the tarmac.

As a result of the rapid depreciation, you’re behind the eight-ball from the beginning of the deal. Make sure you have gap insurance to cover any shortfall in insurance values. The last thing you want is to have an accident in the first year. The gap in your insurance coverage could leave you owing the lender money

Insurance Costs

Insuring new vehicles is a burden on your budget; they cost so much more in monthly premiums than insuring an older model car. Check with insurers before signing up with any company. Always ask your insurer to adjust your premium every year to keep pace with the depreciation of your vehicle. Look for insurance providers that offer no-claims bonuses for responsible drivers.

Read: How to Get a Car Loan with Bad Credit: Complete Guide

Buying a Used Car – The Cons

Previous owner

The biggest drawback of buying a used vehicle is that you have no idea how the previous owner used to drive. You also have a minimal indication of the service history of the car, unless the previous owner kept a service manual.

A service manual should be the first thing you look at after assessing the exterior and engine of the vehicle. A good owner will keep accurate service data with the vehicle dealership. If they choose to service the car with a private mechanic, make sure they have records of all of the previous services.

However, even though the car might have a sold service history, you still have no idea how the owner used to drive the vehicle. If you’re buying a sporty model car, such as a Ford RS model, then the previous owner probably had plenty of fun driving the motor to redline.

Servicing Costs

With a used vehicle, you’re liable for the servicing costs involved with maintaining the car. Therefore, if your Ford RS needs a new clutch because the previous owner had a heavy foot, you have to fork out cash for the repair instead of putting it on a service plan.

Status

Buying a used vehicle isn’t exactly something to shout from the rooftops of your neighborhood. However, you’ll still get some joy out of your new ride for a while.

Finance or Cash?

Is it better to buy a car on finance or pay for it with cash? If you decide to finance a new vehicle, you get the benefit of paying off the car for over three to five years. Some auto dealerships are now offering 7-year terms on new cars.

This strategy has plenty of benefits, and it helps keep your monthly budget under control. Paying cash for a car upfront removes the responsibility of paying monthly installments for the car, but you might need to access your casings to buy a depreciating asset. Buying a depreciating asset with your savings is never a good idea, and you’re better of going with finance in this case.

However, purchasing on finance also means that you have to pay interest charges on top of the sticker price. People also don’t take into account that their insurance premiums will be higher as well.

Think About Interest and Insurance

Interest and insurance costs are factors you need to take into consideration before signing the sale agreements for your car. When you purchase a pre-owned vehicle with cash, you don’t have to concern yourself with paying any interest on the deal.

However, when you take finance on the car, you’ll have to pay the lender interest on the deal. Your interest rate depends on your credit score. People with credit scores over 800 or more will receive the best rates and can expect an APR of around 3 to 5-percent.

If you have good credit, you’ll get a few points more added to the interest rate. If you’re a subprime lender, you can expect to pay up to 24-percent APR on your financing. If you’re dealing with a 10-percent interest rate, you can expect to pay almost half of the car sticker price in interest over a 5-year loan term. The interest makes buying a car a significantly higher expense than purchasing a used car for cash.

Insurance also plays a significant role in your monthly vehicle expenses. Before you close on the car you want, make sure you call around to a few insurers before you head into sign the purchase agreements. Most lenders won’t let you drive a new car off the showroom floor unless you have proof of insurance first.

The Verdict – Take a Lease Instead

There’s a third option that requires your consideration as well. Ask yourself how important ownership of a car is for you. If you’re the type of person that wants to change their vehicle every three to five years, then why buy your next vehicle?

Ownership is over-rated, and leasing is the way of the future for millennials that want to get a new car. Leasing allows you to benefit from lower monthly payments on the same type of new car you were interested in buying. The leasing rate can sometimes be up to 25-percent cheaper than the hire-purchase rate.

Read: Leasing a Car: Complete Guide & Mistakes to Avoid

The deal is that after three years of payments, you have enough equity left in the car to cover the outstanding balance you owe. If you mistreat the vehicle and fail to maintain it, you might be liable for any additional damages or misuse payment at the end of the lease term.

However, if you drive your vehicle respectably, and you maintain it properly, then you can expect to get fair market value for your car. After the transaction completes, you simply take out another lease on a new car, and the cycle repeats.

With this strategy, you never own the vehicle. However, it’s not like you’re a collector driving a 1969 Corvette. Modern cars are like cellphones; manufacturers build them, so they eventually fall apart. Why pay for maintenance when you can get another vehicle instead?

By taking a lease, you never have to worry about your car getting out of its service plan. There’s no worry about breaking down and having to spend a fortune on auto repair.