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Do you really love that new car smell? Guess what? Now you can buy it in a bottle. And that’s a good thing, because you probably shouldn’t buy a new car.
You know they’re expensive. Still, once you’re making enough money doesn’t it make sense to buy a new car? Maybe as a personal choice, but not as a financial move.
In fact, when Thomas J. Stanley and William D. Danko researched their book “The Millionaire Next Door” they found that more than 20% of millionaires buy used cars. For some wealthy individuals this is just one more of the many smart money moves that help them build and preserve their wealth.
Of course, a richer person might buy a three-year-old Bentley or lightly-used Ferrari instead of the used Ford minivan my wife and I bought a few years ago, but the reasoning is the same. It starts with the simple fact that…
1. New Cars Cost More
No surprise here, and we aren’t talking about sticker price alone. It’s total expenditures over time that you should consider. And this is where we bust the myth that a new car makes financial sense because it requires fewer repairs.
You see, when comparing the total costs over six years (which includes maintenance and all of those repairs), Edmonds.com found that buying a three-year-old car beat out buying a new car by thousands of dollars.
Saving money is the single biggest reason to buy a used car. Who couldn’t use a few thousand dollars extra? So most of the rest of this list details the reasons why you save so much when you buy used or “pre-owned,” as the sale’s person will say.
And before you get tempted by the idea that driving a new car somehow provides you with a different, better experience than a used one, consider this: even if you start new, aren’t you driving a used car once you’ve driven it a while?
By the way, when we bought our van we paid about $8,000, which was $15,000 less than a similar new model would have cost. And no, we have not spent anywhere near that much on repairs.
2. You Pay More Interest
How much will you save when buying a used car? That depends partly on whether you pay cash or finance the vehicle. Interest rates are normally lower for new car loans, so you might think that’s a reason to buy new. But because you usually borrow significantly more money for a new car you normally pay more in total interest charges than if you buy a used vehicle.
Use an auto loan calculator to compare costs for specific loan amounts.
If you pay cash you eliminate all interest costs. That’s what we did when we bought our van. And for most of us, saving up enough money for a nice used car is probably more realistic than saving up to pay cash a brand-new car.
3. New Cars Depreciate Faster
At some point you’ll have to trade in or sell your car, and that’s when you’ll realize how much value it has lost. When Edmonds.con did their comparisons they calculated the remaining value of each vehicle at the end of six years. Not surprisingly, depreciation is greater with new cars — a big part of the extra cost.
According to Carfax.com, a new car loses about 20% in value the first year, and some cars can lose up to 50%. On average the depreciation is 60% for the first five years.
Depreciation does slow as the years go by, but in any case, if you buy a cheaper used car there is less total value to be lost. A $30,000 new car will probably depreciate at least $6,000 the first year according to Carfax.com, and possibly as much as $15,000. In either case, that’s more than the depreciation our $8,000 mini-van has suffered in the entire three years we’ve had it.
4. You Pay Higher Taxes and Licensing Fees
Most states have sales taxes and registration fees for any car purchase. These can be significantly higher for new cars versus used, because of the price difference.
It’s easy enough to understand the higher sales tax. Whatever the rate is, if you pay twice as much for a new car versus a used one you’ll typically pay twice as much in sale’s tax. But most states also base registration fees on the vehicle value.
For example, if you live in Santa Monica, California and you buy a new car for $25,000, your total taxes and registration will cost you $2,515, according to the DMV registration fee calculator. A used vehicle bought for $12,000 will cost you $1,241. That’s still a lot, but it’s a savings of $1,274 (not to mention the $13,000 you saved on the sticker price).
5. You’ll Pay Higher Insurance Rates
Of course the model matters too. Some cars are just plain expensive to insure, whether new or used. So to save even more money take a good look at a list of the least and most expensive cars to insure before you go shopping.
6. You Have to Fully Insure New Cars
There is another way to lower insurance premiums on a used vehicle. It has to do with the fact that you might be able to save enough to pay cash for a cheaper used car, but not a more expensive new one, and that leaves you with an additional money-saving insurance option.
You see, when you borrow to buy a car, lenders require collision coverage. But when you buy a car for cash (and if you can afford a possible loss in the case of an accident), you can drop the collision coverage altogether and pay much lower premiums as a result.
We don’t carry collision coverage on our van, saving us hundreds of dollars annually. Without a lender to dictate what kind of coverage we have to buy, we’re also free to opt for lower liability limits to lower our premiums further (I’m not recommending this, but it is an option).
7. A New Car Limits Your Choices
Let’s suppose you have to keep your vehicle purchase under $20,000. In that case you can’t buy a new Mercedes-Benz C-Class, because they start at almost $40,000 before you add options. In fact, there aren’t many new cars you can buy for less than $20,000.
Fortunately, by looking at used cars, your options open up immediately. In fact, if you would like a Mercedes Benz C-Class, but can’t afford a new one, consider a 2009 model. It makes the Autobytel.com list of the most luxurious used cars you can buy for under $20,000.
Or consider this writer’s example. My wife and I could have bought a new car, but we would never go into debt to buy a depreciating asset, so with our cash we would have been stuck with a new but small car that couldn’t be used for camping or carrying furniture. Instead we bought exactly what worked best for our needs.
In other words, buying used allows you to upgrade the kind of cars you buy, giving you many more options regardless of how much you have to spend.
8. You Worry More When You Buy New
When I lived in Colorado I sometimes saw drivers of newer 4-wheel-drive trucks avoiding scenic mountain roads because they worried about a scratch or two. That’s just sad. What’s the point of having 4-wheel-drive if you can’t have any fun with it?
Meanwhile I let the branches rub against out van on those narrow dirt roads without concern. The new scratches just blended in with the old.
Let’s face it; when you have something new and perfect you’re worried about any little thing that might damage it, right? With a new car you might also worry more about the next item on our list…
9. New Cars May Be Targeted By Thieves
Not all new cars are at more risk of being stolen. But it’s a safe bet that our ten-year-old minivan is not at the top of any car thief’s to-do list.
Of course the probability of being stolen also depends on the condition of the car and what type it is. A list of the most-stolen vehicles will tell you which models are most likely to be targeted by thieves. Consider buying less-desired vehicles if you live in a high-crime area.
10. Used Cars Can Be More Reliable
This will seem counter-intuitive. How can used cars be more reliable than new ones? It has to do with the fact that some car models are just better from day one, but you can’t know that until they have been around a while. Let me explain further…
The number and severity of mechanical and other problems varies by model. And if you look at the ratings in Consumers Reports’ Used Car Buying Guide you’ll notice that even the reliability of the same model can become much worse from one year to the next.
The important point is that because they are based on real owners’ reports, these ratings become more meaningful and accurate after a number of years. Look at that guide and at a glance you can see the rows of black marks that tell you to avoid certain cars.
In other words, with the help of a guide like this you can choose a used car that is proven to be reliable, instead of taking your chances with a new car.
By the way, if you don’t subscribe to Consumer’s Reports, you can find their car buying guides in most local libraries. They list cars by model name and year, with ratings for everything from brakes and electrical systems to paint quality.
If you decide to buy a used car instead of a new one, do some research. Consumers Reports, in addition to the ratings in their used car buying guide, has free online resources on how to avoid buying a lemon and used cars to avoid. You can also buy a report on a vehicle’s history from an online service like CarFax.com.
Will your next car be new or used? Tell us your reasoning in the comments below, and happy frugaling!