You’ve probably heard it all before – the pros and cons of buying a new vehicle. But have you actually looked at the math before making an informed decision? Don’t leave it up to anecdotes or general sayings on car buying, make sure your next purchase is a smart one.
Buying New is More Expensive
Regardless of what you’ve heard, buying a new car is the most expensive way to purchase a vehicle. I know what you’re thinking, the possible repair costs of a used car will end up making a used vehicle purchase more expensive than a new one. Well we’ll break down those myths and several more in just a few paragraphs.
The Biggest Cost is Depreciation
The biggest expense when purchasing a vehicle is the total vehicle cost itself. If you purchase a $50,000 vehicle it doesn’t make sense to make $50,000 worth of repairs when you can just repurchase the same car. Therefore, the number one cost you want to look out for is depreciation.
On average, a new car will depreciate 20% in the first year. You might not be paying for repairs that first year but you are paying a 20% premium for buying the latest and greatest model. Take that depreciation out another 2 years and the value of the car will drop upwards of 50%. That’s right, you could purchase two for the price of one if you’re willing to purchase a used vehicle.
Don’t be Fooled By Repair Cost
It’s true that the cost of repairs on an older vehicle is more than that of a new vehicle. However, new vehicles become old vehicles pretty quickly. Let’s say that the lifespan of a new car is 10 years. After those 10 years the car just explodes in your driveway – albeit, without any fatalities. Therefore, if you purchased a new vehicle you would pay the same repair cost as someone who bought the same model but 3 years older. Your repair cost would be spread out over 10 years while theirs would be condensed into 7 years.
At year 7 their car will explode but your car will still cruise for another 3 years. So what’s the price of that 3 year premium? 50% of the car’s value – that’s right, it comes back to depreciation. Since they purchased the vehicle for 50% of the price they can drive the same car for 14 years at the same price as your 10 year “new” vehicle.
When to Buy a New Car
The only time you should buy a new car is when you can afford a new car. If you must have the latest and greatest technology and all the new features of a new car you will have to be willing to pay the higher cost. For those who are trying to get out of debt or fix their finances, a used car does the job. For those who are financially stable with a 6 figure salary, a new car is just a minor expense in the grand scheme of their finances.
Another thing to take into consideration when thinking about a used car purchase is that if you buy a car that is 2-4 years old, the vehicle still might have its factory warranty. The car market has been increasingly competitive over the last decade, and many manufacturers are offering additional ‘perks’ that go along with the car, such as 6 year/60,000 mile ‘bumper to bumper’ warranties, and 10 year/100,000 mile power train warranties. Additionally, if you purchase a car through a certified pre-owned program you may be able to opt for an extended warranty, or purchase an after market warranty from a private party for a very low monthly cost!
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