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.
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.
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.
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.
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.
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?