How to compare the cost of a new and used car
Deciding whether to buy a new or used car is tough. On the one hand, the purchase price of a used car is a lot less. But on the other hand, new cars are typically more reliable and require fewer unexpected repairs.
But then back to the other hand, new cars lose 20 to 40 percent of their value just for being driven off the lot.
But then on the other-other hand, new cars often have better warranties.
You get the idea. And maybe you’re going back and forth yourself over whether to buy a new or used car. The good news is that BetterMoneyHabits.com has made it easy to compare the costs of new and used cars by breaking down all the expenses that you should consider in addition to sticker price.
Once you know what kind of car you want to buy and about how much you want to spend, it’s time to compare new and used cars. Start off by estimating what each of these expenses will be over the next five years:
Cost of car
In the BetterMoneyHabits.com example, a new car costs $19,000, but a five-year older model of the same car is available for $10,000 from the owner. So why is the used car so much cheaper?
There are a few reasons, but the real difference in the price is due to depreciation, which means the car will sell for less money as it gets older. Depreciation usually doesn’t happen at a constant rate. In fact, a new car can lose half its value within three years of when you buy it..
If you plan on driving your car until it breaks down for good, depreciation will be less important to you. But if you plan to sell your car or trade it in after, say, five years, it can make a big difference.
Cost to finance/interest
Saving and buying a car with cash is the cheapest way to buy a car. And the larger your down payment, the lower your debt, interest rate, and interest owed. Even if you purchase a used car from another individual, you can get financing at a bank or credit union. But when you buy a used car, you’re more likely to get a higher interest rate than when you buy a new car.
If you know what the interest rate would be on a new and used car, use an online loan calculator to calculate the total cost of the loan over five years. The total will include the principle, or the cost of the car, plus the interest. Even with the higher interest rate on a used car, you may end up paying less in interest if the principle balance is much lower.
Compare the gas mileage of any new and used cars you are looking to buy to estimate how much you will spend in gas over the next five years. Estimate the miles you drive each year, and multiply those by the price of a gallon of gas. It’s okay to assume the price of gas won’t change over the next five years because you’re just doing this calculation as a comparison.
The amount you will spend on car insurance will likely be based on the replacement cost of the car. So while there may be a discount on a new car for something like upgraded safety features, it generally costs less to insure a used car.
Maintenance and repairs
These expenses are hard to predict or estimate. But with a new car, a warranty will often cover the cost of repairs for the first few years. You may have the option to buy a “certified pre-owner” car if you’re buying used. It will cost a little bit more, but include a warranty.
Keep in mind that the cost of a car’s maintenance typically increases as it ages, and so does the chance of needing a repair. Repairs may even require you to rent a car while yours is in the repair shop.
Totaling your costs
So after you tally up those costs, you should have a good idea of how much a used versus new car will cost you.
Keep in mind that there will be many other factors that could impact the overall cost to you, including how much you can get for a car when you resell it.
But regardless of if you buy new or used, the larger your down payment, the lower your debt, interest rate, and interest owed. Learn more about the best way to save for a larger down payment here.
Need motivation to save for a car? Let America Saves help you reach your savings and debt reduction goals. It all starts when you make a commitment to yourself to save. Take the first step today and take the America Saves pledge to save money, reduce debt, and build wealth over time. And it doesn’t stop there. America Saves will keep you motivated with information, advice, tips, and reminders to help you reach your savings goal. Think of us as your own personal support system.
- Written by Madeline Daniels
- Category: Blog
- Published: 12 October 2016