New and Used Cars

Which one should you buy?

by J.D. Rucker

New car smell can be added to a used car. Rebates and discounts can make a new car priced like used. There are many different opinions on the advantages and disadvantages of buying a new car, but there are just as many opinions regarding used cars:

The real question is, "Which car is best for you?"

Some very wealthy people have never bought a new car in their lives. With so many super-low mile used cars out there, what's the point of paying thousands more for a few miles less?

Then there are those who refuse to buy used, regardless of their financial situation. They would rather spend more on buying new than get into a high quality vehicle that has had someone else behind the wheel.

After all is said and done, it really comes down to personality and goals when deciding between new and used cars. The 20/20 rule applies: 20 percent of people will never buy new, while 20 percent of people will never buy used. For the other 60 percent who are undecided, this article is for you.

Selection

Between huge dealer inventories, the option of dealers trading and bringing in a vehicle from another dealership, and custom ordering which is becoming more popular, the selection factor goes hands-down to new cars.

But for popular vehicles, it is nearly as easy to find a used car. The Internet makes it simple for someone to search around the corner or across the country for that perfect used car.

Price Matters

Even in today's ultra-competitive new vehicle market, where MSRP has been replaced by Invoice as the starting mark for price negotiations, a car still loses 10 to 20 percent or more of its value the moment it hits the street.

Low-mile used cars a year or two old can be dramatically less expensive than their brand new counterparts. There are exceptions - Hondas, for example, tend to lose less off the top because they rarely have rebates and their reputation is very strong.

Interest Rate

For the 95 percent of us who borrow money and make car payments, interest rate becomes an issue. New cars are less of a risk for the lender, so their bank rates are lower than on a used car.

The manufacturer loan divisions make it even more appealing to buy new, with zero percent financing available on most vehicles at some point after their release.

Two or three points against a $30,000 loan can mean big money on a 4 to 6-year note. For shorter loans, the rate is less important.

Loan Term

While the rate is normally lower for new cars, the term is usually longer. A prudent buyer can get the same payments on a used car as on a new car, only for fewer payments.

There is also the option of extending the term on a used car purchase to the length of a new car. Some loan companies will extend a note to 6 or more years on a 3-year-old vehicle because they expect it to still be running after that amount of time. In those cases, the payments can be much cheaper than on a new car.

Peace of Mind

Going back to the new car smell, new car knowledge is also very appealing. A rough driver who doesn't do car maintenance and likes to drive 90 mph in their Kia Rio can really hurt a vehicle, even with low miles. When you buy a used car, you take the risk of not knowing the bad things it went through - until it starts having problems prematurely.

Equity

Vehicles are not like homes. They depreciate, regardless of what happens to the market. Some depreciate less than others, but no matter what, every passing day makes it worth less than the day before.

Used cars have already absorbed the initial depreciation and are closer to leveling out on the depreciation scale. The first 2 to 4 years of a vehicle's life result in a loss of up to 75 percent of its original value. In the first couple of years on a standard 5-year note, it is nearly impossible to trade in a vehicle that was bought new with no money down and not have negative equity.

With used cars, it is still difficult, but not nearly as hard as it is with new cars.

Final Thoughts

How often you trade, how well you negotiate, and the make and model of the vehicle you buy will determine many of the pros and cons of a new or used vehicle. Prudent buyers will seek out quality dealerships to help determine which is best.

If there is no local dealership that is trustworthy enough, do the research online. Check out Kelley Blue Book for new car values and UsedCarsOnly.com to compare used car prices.

Whether you buy new cars or used cars, information is the key to making a good decision.