Once you have an idea of the kind of car you want and roughly how much you're looking to
spend, the next question might be: new or used?
A used car will often cost less than a new one. But a new car may be more reliable and
have fewer unexpected repairs that can impact your schedule and budget.
For this example, let's take a look at two cars- one new, and one used, and then compare
and contrast all the variable expenses you might encounter with each car over the next
five years - like, the cost of the car, the cost to finance it, the cost of gas, insurance,
and finally maintenance and repairs.
But first, let�s start with the cost of the actual car.
So over here, let�s say we have a brand new car with a sticker price of nineteen thousand
dollars�
and over here, we have a used car that is the same make and model as the other one,
just five years older that we found for sale by its owner for ten thousand dollars.
Now you may be wondering why is the used car so much cheaper than the new car? There are
a couple of factors- one is that the new car comes with a warranty which will cover some
of your repair expenses,
but the biggest factor in the price difference is depreciation.
As a car gets older, it loses value, that is, it depreciates.
So this new car that cost nineteen thousand dollars, after five years might only be worth
about ten thousand dollars even if you�ve kept it in good condition.
And the same car might only be worth about five thousand dollars in another five years.
As you can see, depreciation doesn�t happen at a constant rate.
Sure, it�s almost always going to go down, but a new car loses value fastest the moment
you buy it, but then slows to a more constant rate after the first few years.
If you plan on driving your car until it falls apart, depreciation won�t matter as much
because you�re not going to resell it. But if you plan on trading it in or selling it
after five years, it can make a big difference. With a new car, in five years, your car might
be worth about nine thousand dollars less than what you initially paid. And with the
used car, over five years, your car might only be worth five thousand dollars less.
Now let�s take a closer look at some other differences, starting with the financing.
You may be wondering if you can finance a car you buy from an individual? Fortunately,
you can get this kind of financing from a bank or a credit union.
But when you purchase a used car, you�ll likely get a higher interest rate than when
you buy a new car.
So, let�s say the annual percentage rate, or APR on a five-year loan for the new car
is three point five percent. And the APR on a loan that you get for the used car could
be something like four percent.
Using an online loan calculator, you�ll find that on the new car, you�ll be paying
about twenty thousand seven hundred dollars over five years�that�s nineteen thousand
dollars in principal and one thousand seven hundred dollars in interest, with monthly
payments of about three hundred fourty five dollars.
On the used car, you will pay about eleven thousand fifty dollars over five years: ten
thousand dollars in principal and one thousand fifty dollars in interest with monthly payments
of about one hundred eighty five dollars.
So even though you have a higher interest rate on the used car, you�ll pay much less
in interest and in monthly payments because your principal is much less on the used car
than on your new car.
Next let�s compare gas mileage. Let�s say the new car gets thirty three miles per
gallon and the used car gets twenty nine miles per gallon and you drive about fifteen thousand
miles per year. Let�s also assume that gas will be a constant four dollars per gallon.
[take this next section very slow]
Over five years� taking the miles driven� divided by the miles per gallon� times the
price of gas per gallon� we would be spending about...
[resume normal speed]
nine thousand one hundred dollars for gas for the new car and about ten thousand three
hundred fifty dollars for gas in the used one.
Then there are insurance rates to consider. Insurance rates vary based on a lot of different
factors, and in looking at new versus used, the difference in the rate for you will likely
be based mostly on the replacement cost of the car. The more valuable the car, the higher
the insurance rate. So while a new car might get you some discounts for new safety features,
generally a used car that�s less valuable is going to cost less to insure.
So with a new car, your insurance might cost one thousand five hundred sixty dollars a
year. Over five years: seven thousand eight hundred dollars.
And with a used car, your insurance might cost one thousand two hundred dollars a year,
and six thousand dollars over five years.
Now let�s look at maintenance and repairs. This is the trickiest cost to estimate because
it�s unpredictable and major repairs can have a big impact on your budget.
With a new car, major repairs may be covered by a warranty in the first few years. So let�s
estimate that over five years you spend three thousand dollars total on maintenance and
repairs on the new car.
Now, when you buy the used car, you do have the option of buying certified pre-owned-
this will cost a bit more, but it�ll also come with some sort of warranty.
But for this example, let�s just stick with the car you bought from its previous owner.
The cost of regular maintenance typically increases as the car ages�and so does the
chance of needing a major repair. Major repairs can be inconvenient too� they take time
and sometimes you might have to get a rental car while yours is in the shop.
For the used car, you might be lucky and only need to spend around four thousand dollars
on maintenance, but a more realistic number may be around six thousand dollars on the
used car.
So adding this up�
� you�d spend a total of fourty thousand six hundred dollars on the new car and thirty
three thousand four hundred dollars on the used car over five years. That�s a difference
of about fourty thousand six hundred minus thirty three thousand four hundred� seven
thousand two hundred dollars less on the used car.
Now, keep in mind, this doesn�t take into consideration the value still in the cars.
The new car probably has a few more years left in it than the used one and if you were
to resell them, you�d be getting about ten thousand dollars for the new car rather than
about five thousand dollars for the used car.
But we�re looking at a lot of variables, after all. With certain cars and situations
the new one may end up costing you less than the used one. And there are multiple other
things to take into consideration.
A new car will probably be more reliable, with newer features and it may be safer or
better for the environment. With a used car you�ll have lower monthly payments, which
could be good for your budget, but it may also be less reliable and you could have larger
unexpected costs when it comes to repairs.
By looking at your own needs and budget, and doing the research and the math on the cars
you�re interested in, you can figure out which is the best choice for you.