New or Used: What’s Your Car Buying Approach?
Most consumers generally fall into two camps when it comes to buying a car: those who buy new for the latest technology and safety features, and those who buy used because they believe buying new is a waste of money.
We all know that a car is a depreciating asset and it loses the most value in the first year or two of ownership – hence the old saying that a car loses 20 to 30 percent of its value the minute you drive it off the lot. That’s why, historically, the best deals can be found on used cars that are one or two years old.
Related: What you need to know before buying a new car
The problem is that both car sellers and buyers have figured this out and so supply and demand have caused the price of used cars to rise accordingly.
New cars, on the other hand, have become increasingly more affordable as car dealer incentives, creative financing, and low interest rates have driven prices down. It’s common to see loans at seven or even eight years today to help buyers take home a new car.
I bought a new car in late 2012. Being acutely aware of the pitfalls of buying new, I made a few rules before taking the plunge.
1. Financing
Most consumers can’t afford to buy a brand new vehicle in cash so they’ll need to finance the purchase. It can be tempting to drag the financing out over 5+ years to keep monthly payments low, but a long-term loan is a mistake for several reasons.
For one, you might end up buying more car than you need. A $40,000 vehicle financed over 96-months comes to less than $450 per month.
Most warranties only cover three-to-five years, after which you’re on the hook for maintenance costs that might start to surface. Who wants to be on the hook for used car maintenance while still paying new car premiums?
Related: Why I bought out my car lease
I took out a four-year loan and plan to drive the car at least 12 years. That’s eight payment-free years to save and invest for other purposes.
2. Affordability
Of course, the lower the term on your car loan, the higher the monthly payment. If you decide to buy new (or finance used) you’ll need to determine how much car you can afford and how that payment fits into your monthly budget.
Consider the 50/30/20 spending formula that I wrote about in a recent article. No more than 50 percent of your after-tax dollars should be spent on needs – meaning housing, transportation, and daily living essentials.
Our monthly car payment comes in at around 8 percent of our after-tax dollars. Add-in gas, insurance, and regular maintenance, and the total expense is still under 10 percent – which fits in with most expert “rules of thumb”.
3. Make and model
Consumers pay a premium for brands based on their reputation for quality and service. We’ve all heard of Toyota and Honda owners who drive their vehicles for a decade or more. But other carmakers have caught up in terms of quality while their pricing still lags behind the premium brands.
I looked at several SUVs on the market before deciding on the Hyundai Sante Fe. Hyundai has come a long way since the days of the Pony and Excel and has developed an excellent reputation for design and durability.
Related: How often should you service your vehicle?
The Sante Fe was considerably less expensive than its Toyota and Honda counterparts – by as much as $10,000. When the best you can negotiate off a new car is one or two thousand dollars, saving $10,000 by going with a different, but comparable brand makes a huge difference.
Final thoughts
You’ll never win an argument by declaring that buying a new car beats buying used. But conditions today suggest that it’s not as bad a deal as it used to be. The key is to avoid buying too much car for too long a term and paying too much premium for perceived brand quality.
What is your car buying mentality? Are you in the new or used camp?
I looked at 1-2 year old cars… The trouble was they were coming off lease from rental car companies. No thanks!
I found buying new was the best deal, but I bought with the intention of driving the car 10-12 years. IMHO, it doesn’t matter if you buy used or new if you choose wisely and get a good deal. The people who pay the most are the ones who want something new every three or four years.
Hi Elizabeth, those lease-backs can be a scary proposition. I bought a lease-back once, but that’s only because I was knew the driver history – it was mine 🙂
Buying new every 3-4 years is a surefire way to destroy your wealth.
Our latest vehicle purchase was 2 years old and purchased from a dealer, it had one previous owner who traded it in for the newest model. I think this is a great strategy and you can save big buying vehicles that are 2-3 years old with low mileage. You can still get your money out of new cars so long as you keep it 10+ years. Our first vehicle was bought 7 years ago as a new car and the plan is to keep it for another 4-6 years. I don’t like having debt so if I can’t pay for a car in cash I simply don’t buy. Whether you buy new or used you can get the most for your money by keeping it for as long as possible
Hi Dan, I agree that it’s best of both worlds if you can find that perfect 2-3 year-old vehicle and pay cash. However, that’s not easy and there’s something to be said about a bumper-to-bumper 5-year warranty.
We just bought a new Mazda 3 for cash which is a well rated vehicle- after one week so far we like it. We sold our 6 year old smaller car and based on what we paid new and just sold it for, it cost us 2,000 per year( not including expenses) to drive it which is less than it would have been to lease. I agree with others that you might save some by buying a car a couple of years old but either way it is best to keep your cars as long as possible.
Congrats, Liz! Buying a new car in cash is no easy feat these days.
We buy used (8-10yrs old). This ONLY makes sense because I can do most of the required maintenance. This includes major work such as timing belts, new clutch, etc. New front brakes can cost me less than most people spend on an oil change.
I wouldn’t recommend buying old without this ability so it doesn’t make sense for most. Repairs can be extremely expensive when paying a shop $110/hr.
I aim for $1,000 per year on purchase price of car including maintenance over the time of ownership. right now we have a 1999 Honda CR-V that has cost approx. $4,500 ($3,200 purchase + $1,300 in parts) that we’ve had for just over 4 years and will be selling this spring. My drive to work car is a 1995 Mazda MX-6 (yes 20yrs old this year!) that I’ve been driving for 4 years that cost approx. $2,000.
As we get a little older..with the kids entering school, we’re going to upgrade the family vehicle – live a little right??
Hi JV, I agree that unless you have the skill to assess and repair your own vehicle you’re taking a big chance with an older used car.
It’s been good to have a newer vehicle for hauling around a young family. We don’t put a lot of km’s on our two vehicles (Sante Fe is at 28,000, and my 2007 Tucson just touched 90,000), so I’m hoping they’ll stay trouble-free so we can drive them for many more years.
I used to buy used. Old, cheap, “mostly” reliable. I’m a skilled hobby mechanic and there’s nothing I can’t figure out or repair… However, it became a huge inconvenience when a vehicle would need repair and I needed that vehicle to work. So now I have a rule that everything I drive for work has to have a warranty. I like to drop it off at the dealer, get a loaner car, and pick it up later. My current plan is to save and continue to replace my vehicles every 4 – 5 years. I don’t like to finance longer than 4 years and always aim for 1% or less. At this point, im OK with having a car payment for life. I have a high stress job and I don’t need to worry about my vehicles. If I have the cash, 2 year lease backs are still the way to go but with incentives and low financing that only makes sense with cash. I’ve ended up with two Ford Escapes. They’re cheap and you’re invisible on the road. Throw them away when you’re done…
Thanks for sharing, Kurt. It’s interesting how your approach has changed over the years due to time (and necessity).
“That’s eight payment-free years to save and invest for other purposes.”
Why not save for another car during this period so you will never have to make payments again?
Hi Gerry, yes that’s true. If I save half that payment over eight years I’d end up with almost $40,000.
Since I have a lot of TFSA room I planned to save and invest the difference inside my TFSA, which allows for flexible withdrawals if I decided to pay cash next time.
I don’t agree that a TFSA is the proper account to use for car savings … I think the TFSA should be treated like a retirement account and leave it alone. If you are going to use the money in the short term like 5 years, you don’t want to invest it, you pretty much have to leave it sitting which doesn’t pay interest and doesn’t provide any worthwhile tax benefits.
For future purchases, don’t use the TFSA, Use your TFSA like a retirement account.
Well I purchased my first new car one year ago and I love it! If you had told me that I would like it as much as I do I wouldn’t have believed you.
That being said…I am on my own and so cash up front was not an option…but interest free was! Yes I know I will be paying for the next seven (now six) years, but I’m eight or less years from retirement, and a car that I know the history of, and that will have a reasonably low mileage seemed like a good fit. If my circumstances change for whatever reason and I have extra cash, I could certainly pay down the loan..but for now it is working perfectly for me!
Thanks for all of the interesting articles:)
I just realized a lot depends on how much you drive! We put an average 50,000km/year on our vehicles… 12 years isn’t even an option.
I had purchased in cash a new van and held replacement value car insurance. (So if within 24 months of purchase your vehicle was written off it was replaced at purchase cost.)
28 months after purchase my eldest was in an accident and the vehicle was written off.
I had thought we would have this van like it’s predecessor for a similar 13+ years. We replaced with an SUV with the insurance check. No money out of pocket. We have 4 children so were looking for a certain size vehicle.
If we had financed this vehicle we would have been upside down on the loan as the amount depreciated was still more than the loan balance would have been at this time.
Sometimes we think “life” won’t happen to us, always good to be prepared for any potential “what ifs”.
I never regretted paying the cash
I had always gone used – all the new price achieves is a false sense of prestige. I have no bad experiences. The savings can be stunning. A few years ago I decided to try a luxury car for a few years for fun. I got a beautiful Lincoln 3 years old for $17k, down from $60k new.
A big selling feature for buying new is supposed to be the warranty. However it is normally set up to expire before any major problems are likely on any car.
My current car was my first new one. I got it in 2010 when Pontiac had it’s liquidation sale on.
I am more reluctant to go used on a motorcycle. However I just replaced the old one with a 2 year old dealer demo with low km and full warranty. This decision is more important since I put far more km on the motorcycle.
I seldom finance – if tempted I’d just buy cheaper. However my new bike is financed. BMW would not lower the price for cash, so I went with their .9% financing. Hard to resist.
After having driven my ’93 Toyota Camry for 375 kilometers (actually I bought it used in ’03) I fall into the used car category. My experience with car repairs and maintenance is quite satisfactory. I offer this advice for used car owners…always check out the shop’s reputation for good work at reasonable prices. Ask the Service Adviser who specializes in older vehicles. By that, I mean shop around by means of talking to others who require running vehicles that need a fair bit of attention during their lifetime. Taxi drivers and pizza delivery guys usually have a good handle on who’s good and fair. And, constant monitoring of ongoing regular maintenance requirements is essential. My shop gives me a freebie oil and lube service every fifth time I’m in. If big things like the tranny or the engine give you serious problems, get ready to move on to another gem. Otherwise, new is ok but there is no insurance that the same repair costs as used will not appear. That 30% loss hurts.
The last car I bought was used. We decided on a 3 year old Subaru, and had we bought new we estimated it would have cost us $15K more. The nice thing about buying used is we had the cash to pay it off in full. If any damages happen, we seem to not get as upset as opposed to if it was a new car
You need to get your hands on an old buick. Its not as sexy as anything else on the road but they are reliable. I bought an old 2002 buick in 2007 with 80,000KM on it for $6000(I think i overpaid…) but I currently have 230,000KM on it and I only changed the oil, tires, and windshield wipers. It will probably last me another year but my parents are wanting to get rid of their 2011 fully loaded buick lacrosse. It has 80,000KM on it, and I’m going to buy it from them because I drive 60km to work each day so I need something reliable to rack the miles on. If i can keep finding gently used vehicles like this I think I’ll keep it for 6-7 years and find another one. Its pretty cheap as long as the car doesn’t have a pile of issues.
My current car I bought it brand new. It’s approaching 9 years old and I plan to drive for another 4-5 years if I can do that. If I had to buy a car now I’d probably buy a used one that’s about 3-4 years ago with low mileage. I read somewhere that you should watch out buying a 1-2 year old car since most people wouldn’t sell their car that new unless the car was in some accident.
I may buy brand new as well with the intention to drive it for 10+ years.
Bought my first new car, a Honda in 1992. Sold it in 2012 with 404,000 km. We bought another honda in 2006 and with 300,000 km on it now, we hope to drive it for another year. Would only ever buy new..
So YYCGirl: why not buy a two year lease back and save even more. When you’re running the mileage that high, what’s wrong with starting at 30k? Just curious.
I also purchased a Sante Fe a few years back based a lot on what you say in your article. I buy new as I know nothing about vehicles, don’t really want to know anything about vehicles, and want no maintenance hassles at all. Mission accomplished. It costs me a little more for sure, but the lack of aggravation over the years has been well worth it to me. Still, I plan to drive this car (and my Hyundai Elantra bought at the same time)well beyond the end of the payments (3 years to go on each) before moving to a one vehicle family once the kids move out.
I used to be in the buy used camp. When I needed to buy a new vehicle, I didn’t like how expensive the cars were for the amount of mileage that they had. In addition, many 1-2 year old cars were all former rentals so that nixed that.
I discovered that for $2,000 more, I could buy a new car with 5-year extended warranty on top of the original 3-year warranty and 0.99% financing. Add to that the interest was already included in price $600, and while I chose the 7-year loan, that loan gave me the flexibility of extra payments and breathing room if I had an issue with my cash flow. So far, all abnormal repairs was fixed for free ($1000 in all that basically paid for my extended warranty) and that awesome feeling of not having to take my car to the repair shop every two weeks! 😀 my car will be 3 years old this May and I only have 1.5 years to go to pay off my loan if I continue with the extra payments. I plan to keep my car for at least 10 years (all my previous cars were at least 15 years old).
Interesting debate as always.
I don’t mind buying new cars, as long as it is 0% financing AND you intend to keep the vehicle for at least 10-12 years.
You get the full warranty this way as well, should something go wrong in the first 5 years or more depending upon make and model.
Just my take of course!
Mark
Just curious, why pay the total price of a new car in cash? If you have the cash, why not take advantage of a low rate financing option, say 1% or less, and invest the cash? If you can earn a return of say 6% annually, then you are ahead by 5% each year.
@John
Most new cars bought in cash will have a cash incentive that nears 10% discount on the vehicle. That’s the cost of the 0% financing 🙂 Nothing is free. While 0% looks attractive, you are still paying for it one way or another. Fortunately for car dealership, consumers are always strap for cash so the consumers compare financing.
I have put some rules around buying my used cars.
1. buy from reliable car manufacturer.
2. don’t buy a new model, wait for the second revision (usually 4 years)
3. be aware of maintenance cost (oil changes, brakes, winter rims, …)
4. I look for 40,000 – 80,000 km
We took a balanced approach. Our main vehicle we bought new and it is now 6 years old. We will drive it for another 4 years. Our secondary vehicle we bought used. As it does not get a lot of use we saved a lot by buying a 4 year old vehicle with high mileage. These were mostly highway and we had the vehicle thoroughly inspected. It is 8 years old now and we will drive it for another 2 years. Many years ago we started putting money away monthly and have always paid cash for our vehicles (no financing after the very first vehicle). By making monthly payments to yourself (for your next vehicle), you can save a lot on interest. We plan to keep our vehicles until they are 10 years old, but have been lucky enough to keep some of them for more.
My spouse and I have always bought new. We live 2 hours drive away from the nearest car dealership. We travel 8 hours each way to visit family 12 times/year. My work is 50 kms from home by remote highway. All of these distances, we have no cell phone coverage, so for us it made sense to buy new. Having a good warranty is also a huge plus. We have never financeda car, but were lucky enough to buy new. Our vehicles have always been the cheapest base model with air conditioning (a must). We always bought at a timewhen thenext years model was out and the deales were seling off last years stock.