Should I buy a new or used car?

Parents and son washing their car in their drivewayImage: Parents and son washing their car in their driveway

In a Nutshell

Maybe you’re looking for a vehicle, and you’re unsure if you should buy a new or used car. But before you walk into a dealership or start shopping online, know that there are pros and cons for each option to consider. New cars tend to be more expensive, but you may be able to get exactly what you want. A used car could save you money, but you might have to compromise on features and worry more about maintenance.
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There’s no getting around it — car shopping can be stressful. Even before you sit down to haggle on the price of a car, you’ll need to decide on the make and model you want and whether you should buy new or used.

For some people, picking out a car and deciding whether you want to buy new or used can be an easy decision. Some prospective buyers may be focused on saving as much money as possible and would never consider buying a new car. Others may want to pick out the exact vehicle of their dreams and like knowing that they’re the first and only owner.

There are also many people who might be up for either option but want to know the pros and cons of buying a new versus a used car. If you’re one of them, read on.

Benefits of a new car

A shiny new car can offer the latest bells and could even come with a warranty and roadside assistance — giving you peace of mind that you may be covered should you be met with certain car troubles. Let’s take a look at a few other major pros of going with a new car. 

Capitalizing on financing offers

Dealerships may offer new car buyers special financial incentives, like cash back or 0% financing during a promotional period. These offers could help lower the upfront cost, making the car more affordable.

If you’re considering a used car, you still might be able to benefit from offers and incentives. For example, some manufacturers offer special promotions on certified pre-owned vehicles if you finance through the dealership.

But if you have low credit scores, you might not be eligible for special offers on new or certified pre-owned cars.

Customizing your car and getting the latest technology

One great perk of buying a new car is customization. If you want a specific color, interior or features, you may be able to tailor a vehicle to your liking and then order it through a dealership.

Buying a new car might also be the only way to get the latest tech features. Think lane-change warnings, adaptive cruise control or even built-in software that can alert you when someone (like your teenager) is speeding or driving without a seatbelt.

Getting comprehensive warranty coverage

New vehicles often come with a bumper-to-bumper and powertrain warranty, along with roadside assistance. These warranties can help assure buyers that qualified repairs may be covered.

If you’re considering a used car, a warranty isn’t necessarily out of the question. Cars that are only a few years old with low mileage may still be covered by a type of manufacturer’s warranty — if it can be transferred to a new owner. Certified pre-owned cars purchased through a new car dealership may also come with an extended factory warranty.

Paying less for repairs and maintenance

A new car’s warranties may cover many types of common repairs. In contrast, if you buy a used car, you might want to start a repair fund. Even cars known for their reliability can break down at times, and if you’re lucky enough to have a warranty that covers certain issues, it still probably won’t cover everything.

For example, normal wear and tear will have you buying new tires or brake pads, which may not be covered by a warranty. Depending on the mileage, a used car could require costly maintenance or repairs.

Consumer Reports found that the owners of certain 2007 and 2014 car makes and models — and only for car brands that were part of the survey data — paid on average anywhere from $10 to $390 in repairs and maintenance over a 12-month period. But in a car’s 10th year, they paid on average anywhere from $315 to $1,125.

Doing less legwork

The initial steps in buying a used or new car are similar. You set a budget, identify potential makes and models within your price range and do some pricing research. If you’re buying a new car, the next step would likely be to head to some dealerships.

But if you’re buying used, you might need to shop around a bit more and explore the used-car inventory in your area. If you want something specific, like a certain color or features, it might take a while to find the right car. Once you do, you’ll want to get a copy of the vehicle history report and set up an inspection — both of which can cost you money. If you’re buying from a private seller, you’ll also need to look into the car’s title. 

Benefits of a used car

Buying a used car could save you money. Here are a few benefits of buying a used car.

Slower depreciation

A new car depreciates, or loses value, as soon as it leaves the dealer’s lot. In fact, it could lose 20% or more of its value within the first year, depending on the make and model. This might not matter to you if you plan to own the car for a long time. But if you finance your car and plan to sell it in the next couple of years, you may find that you aren’t able to sell it for enough to cover what you owe on your car loan.

How to get out of a car loan when you’re upside down

Used vehicles generally don’t depreciate as quickly as new vehicles do. After the first year, depreciation of used cars can slow to around 9% to 12% each year for some models.

Lower cost

Here’s the big one: If a brand-new car is worth about 20% less after the first year, why not buy a car that’s almost brand new and potentially save some money? While many people don’t immediately sell a car after buying it, you can often find vehicles that are just 1 to 2 years old. If you go this route, you might pay less for the car — and might save on auto insurance, too. Lower-priced cars are typically less expensive to insure.

If there isn’t a big difference in cost between a new model and the 1-year-old-version of the same model, you may find that financing the used car is more expensive. While the older model will likely cost less, interest rates on used car loans are typically higher than loans for new cars. Experian State of the Automotive Finance Market report shows that in the second quarter of 2020 the average interest rate for new-car loans was 5.17% compared with 9.78% for all used-car loans.

The benefits of a large down payment

Depending on your financial situation, you might have a better chance of getting approved for a lower-cost used car loan, especially if you’re able to put down a large down payment. Without a hefty car down payment, getting approved for a loan that covers the generally higher cost of a new car can be difficult, especially if you have lower credit scores.

Next steps: Shop and compare

There are pros and cons to buying both new and used cars, and what you decide on may come down to your personal preferences and financial situation. Just be sure to compare your options, negotiate the sale price and shop around for your auto loan if you’re not paying cash. Getting preapproved for loans from a few lenders can also help you get a few estimates and compare your options, too.

Hear from an expert

Q: What advice do you have for someone looking to buy a car in the next six months?

A: “Basic sound financial strategies don’t tend to change much over time. Buying a car is no different. A consumer should not be beholden or loyal to a single seller. They should shop around. Getting as educated as possible about the current car market is also essential. Cars are assets that depreciate very quickly (as opposed to something like houses); they are not investments. If a consumer can purchase a reliable used car without any financing, that is the best option in terms of total wealth. Issues like appearance, reliability, safety may push people to more-expensive cars, and that can be reasonable in some situations. But if one can buy a perfectly fine car without financing, there is no reason to spend more. In fact, there are several other better places to put that money, like savings, housing or education.”

Dr. Alex Brown, Professor of Economics, Texas A&M University

About the author: Louis DeNicola is a personal finance writer and has written for American Express, Discover and Nova Credit. In addition to being a contributing writer at Credit Karma, you can find his work on Business Insider, Cheapi… Read more.