I love the question of “should I buy a new or used car?” because it’s such a controversial question in the personal finance space.
People swear by only buying used cars. Others swear by buying new cars.
Like most personal finance decisions, the answer is not cut and dry.
Some people may be better off buying new while others are better offer buying used.
Let’s talk about the advantages and disadvantages of buying a new or used car.
My Own Bias of Buy A New or Used Car – What I’ve Owned
For full transparency, I’ve owned two new cars and one used car. My first used car was purchased for me as my first car. It was a 1993 Acura Integra, and I loved it.
I enjoyed driving it, but a few pretty pennies were dumped into it as it aged. It became a very expensive car over time. After it put me in a dangerous situation, we decided to repair it and sell it. I owned the car for about four years before selling it.
My next car was new. I paid for one-third in cash, a family member paid for one-third in cash, and I financed one-third of it. This was after the Financial Crisis when there were many great financing deals. I financed one-third of the car for 0% interest for a number of years.
It was a 2012 Mazda 3. Like my Integra, I also chose to get a manual transmission car even though I was living in Seattle. Let me tell you – starting on a hill with a slope of around 20% in the rain in a manual transmission car is not always a fun endeavor when people don’t leave much room behind you.
I sold the car in 2018 with less than 40,000 miles on it because I wanted something bigger and more well equipped for Pacific Northwest winters. I was hiking more and wanted the flexibility to go up into the mountains or across the state without worrying about chains.
My latest car is a 2019 Subaru Forester, which I bought new. I paid for it in cash. It’s a boring car, but a very practical car for road trips, gets decent gas mileage, and is great in the winter.
Now that you know what I’ve owned and my own bias, let’s talk about the advantages and disadvantages of buying a used versus a new car.
Advantages of Buying a Used Car
Cheaper
In normal, non-pandemic times, used cars are usually cheaper.
Many people can find reasonably priced cars with little wear and tear that are 2-4 years old for a fraction of the price of a new car.
Although they are cheaper, you still get recent technology, a clean car, and most of the bells and whistles of a new car.
Less Depreciation/Better Resale Value
New cars depreciate rapidly.
It’s estimated that new cars decrease in value 20%-30% the first year. For example, if you bought a car for $30,000, you might only be able to sell it for $16,800-$24,000.
Between years 2-6, it might depreciate 15%-18%.
If you are keeping track, that means by the end of year five, your car may be worth about 60% or less.
For a $30,000 car, that means it might only be worth $12,000.
With a used car, someone else is usually taking the depreciation hit in the early years, and then the depreciation tends to slow.
Each brand and car depreciate at different rates. Some hold their value better than others, but this gives you an idea of why used cars tend to have better resale value. Most of the decline in value is significant in the early years and tapers off later.
Car Insurance Rates Are Lower
Since one factor car insurance companies use to set rates is the value of the car, used cars are usually worth less and have lower insurance rates.
A used car is cheaper to replace if it is damaged in an accident, which means you may have lower insurance premiums.
Less Stress with Dinges and Scratches
Do you know how when you buy something new, you try to keep it as pristine as possible? The same happens with a new car.
If your used car already has dings and scratches, you are less stressed or concerned about the next ding or scratch.
Lower Registration Fees
Some states and counties set registration fees based on the value of the car. When I was in Seattle, the regional transit authority(RTA) tax was $110 for each $10,000 of vehicle valuation. This meant more expensive vehicles paid higher registration fees.
With a used car being worth less, you may have lower registration fees.
Disadvantages of Buying a Used Car
Less Reliable
As I experienced with my first car, used cars can be less reliable. If something breaks, you are the one stuck paying for the repair unless you have some sort of extended warranty for a used car.
Plus, you have to spend the time taking it to the shop, coordinating the repairs, and picking it up again.
Financing More Expensive
Used cars are more expensive to finance if you are not paying cash. For example, a used car auto loan may be a few percentage points higher than a new car auto loan.
To give you an idea of the increased cost, if you had a $20,000 auto loan at 2.5% versus 5%, the payment would be $355 for the 2.5% rate and $377 for the 5% rate.
Repairs May Be More Costly
Since new cars are often covered by a warranty, repairs may be more costly on a used car. Also, if the mechanic is not sure what is wrong, you may go through a series of repairs, which all cost money, before finding the one that really fixes it.
Harder to Find What You Want
My struggle has always been finding exactly what I want in a used car. I have a former colleague who was phenomenal at finding slightly used cars in great condition, but it took a considerable amount of time and effort.
Since many cars come in different trims, you may be after a particular trim that is hard to find. Then, factor in a color you want. On top of that, there may be additional features you desire. Good luck finding the used car with everything you want.
If you aren’t picky or have the time, perhaps finding the used car you want won’t be too much trouble.
For others, you may spend a good deal of time scouring the internet for the car you want. Don’t forget to value your time in the search!
Advantages of Buying a New Car
Fewer Repairs
One of my favorite reasons to buy a new car is that there are usually fewer repairs. Fewer repairs mean fewer last-minute problems that require time away from work or loved ones. It also means less money being spent.
New Safety Features
This is often an overlooked benefit of buying a new car. Safety features have come a long way in the past few years.
If one feature could save your life, could it be worth the extra money?
That’s why I find it strange when really wealthy people drive very old cars with nearly non-existent safety features. Take Kirk Cousins as an example, who was driving a very old GMC passenger van.
I like frugality and being mindful of spending, but if you are earning millions (or tens of millions) of dollars per year, isn’t worth it to protect your body and mind that earns you that paycheck with a newer car that has better safety features?
Less Costly Repairs During Warranty Periods
New cars often come with a warranty that lasts a few years on many parts and even longer for other systems in the car.
There is peace of mind in buying a new car that you are unlikely to need to spend a lot of money in the first few years of ownership.
Of course, the caveat is that once the car is out of warranty, the repairs may be more expensive as newer parts with more advanced technology are often more expensive.
Easier to Find the Car You Are Looking For
As I mentioned earlier, finding the exact used car you want can be a struggle.
With a new car, you can get exactly what you want. Even if you can’t find something in the current inventory, you can custom order. You pick the color, trim, and extra features.
The only time you need to spend is deciding what you want – not where to find it.
Better Gas Mileage
New cars generally have much better gas mileage. My SUV gets almost as good of gas mileage as my sedan 10 years earlier.
Newer engines run more efficiently, and new advancements have been made to increase the miles per gallon.
As gas prices bounce all over the place, new cars may offer more relief the next time you fill up in a newer car.
Lasts Longer
The other benefit of buying a new car is that you probably don’t have to worry about choosing another car for a long time.
New cars can easily run for 100,000+ miles with some going 200,000+ miles.
A new car is usually going to last much longer than a used car, which means you don’t have to worry about spending a significant sum of money again for quite a while.
Disadvantages of Buying a New Car
More Expensive
Buying a new car comes with a steep price tag. It can take longer to save for a down payment, or if you are financing, you may pay more in interest.
For some, buying a new car is out of the question, and for others, it doesn’t fit their values because they prefer spending less on cars.
Depreciation in First Few Years
Another major disadvantage of buying a new car is the depreciation in the first few years. Remember, you may see your car value decline by 60% during the first five years.
The car value usually has steep declines in the first few years. Then, it usually decreases in value a little each year, but not as quickly as the first few years.
This is why you will often see a $30,000 new car sell for a low-to-mid $20,000 price tag when it’s a couple of years old.
Once it passes the first few years, you see less of a decline each year.
Car Insurance Rates Higher
New cars also usually have higher car insurance rates.
Since the insurance company has to take into account how much it would cost to replace a car, more expensive cars are going to cost more to insure.
However, there are many factors that go into car insurance rates, so keep in mind price is just one factor that may determine how much you pay for auto insurance.
More Stress with Dings and Scratches
Remember the last time you bought something new? Maybe it was a laptop, car, musical instrument, or something else. Regardless, you probably were afraid of damaging it.
You carry it around with care for weeks, sometimes months, until that first scratch or ding washes away the newness.
The same happens with a car.
I’m tempted to inflict a ding or scratch on any new cars I buy in the future to take away the fear of scratching them for the first time.
Although this is minor, it’s something to consider. With a used car, it probably already has a ding or a scratch, and you may be less stressed about whether it gets another.
How Long Do You Plan to Keep It?
Economically, a good used car is usually going to be more inexpensive than a new car over time.
However, we don’t always have to choose the most economical or “smart” money decision.
If you buy a new car and plan to keep it for a long time (10+ years), a new car isn’t a bad option. Since new cars usually lose value the most in the first five years, it’s tough to justify a new car every five years unless you really prioritize new cars, have plenty of money, and don’t want to lease.
Buying a new car every five years is somewhat like accepting that you are going to lose half the value you put into it. By owning it longer, you suffer the rapid depreciation in the first few years, but you also own it when the car doesn’t depreciate as quickly.
Personally, I’ve found peace of mind in a new car, but part of that is shaped by my experience with my first car and the number of repairs it required. I know that with a new car, the repairs will likely be infrequent and take up less of my time. I’m willing to pay a little extra for it. Plus, I don’t have to search high and low for the used car I want.
Whether you go new or used, how long you plan to keep the car is a key factor.
Summary – Final Thoughts
Buying a new car shouldn’t be something that people get shamed for. Also, buying a used car shouldn’t always be seen as a frugal or cheap choice.
Buying a new car and a used car have their advantages and disadvantages.
New cars usually come with fewer repairs, more peace of mind, and newer safety features, but they are also far more expensive, depreciate quickly, and may cause your auto insurance premiums to increase.
Used cars usually come with a lower price tag, lower car insurance rates, and a slower decline in value, but they may be less reliable, repairs may be costly, and it can be harder to find what you want.
Think carefully about your own values, financial desires, and how long you plan to keep the car to determine if new or used is right for you.