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Should You Buy a Car New or Gently Used?

Sep 11, 2018 4 min read Kara Perez

Key Takeaways

  • Determine your monthly budget and overall car cost budget.
  • Be honest — with yourself and the dealer — on your car needs.
  • Evaluate the total cost of owning the car, not just the upfront price tag.

 

It's a long-standing money debate: Should you buy a car gently used or brand new? Proponents of buying used cars tout lower sticker prices and more car for the money. Those in favor of buying new often stress safety features and low maintenance costs. But is one financially better than the other? The short answer is: it depends.

 

 

We're a nation of drivers, and a lot of us are going into debt for it. According to the Federal Reserve Bank of New York, Americans owed $1.2 trillion Opens in new window in auto loans in 2017. But the cost of ownership is more than just an auto loan. Vehicle registration, insurance, maintenance, and fuel efficiency also contribute to the total cost. With that in mind, what is your monthly budget for your car?

Knowing your numbers gives you a purchasing guideline, and knowing the tradeoffs to each option will help you compare deals.


The pros and cons

Buying a used car will almost always be the cheaper choice up front. The perks can include a lower sticker price, a higher trim level for less money, and sometimes, lower insurance costs. The downsides include potentially higher maintenance costs and fewer, if any, warranties.

You can buy a used car from a dealer or from a private seller. Private sellers don't offer financing, so be prepared to pay in cash or to arrange your car loan through a local bank or credit union.

If buying a new car feels like the right choice for your family, it's going to require savvy negotiating skills. New cars are in perfect condition, have more options for financing, and offer custom colors and features. Some new car dealers throw in perks that have real value (like free oil changes for a year and 0% financing). If you don't care for certain upgrades like a sunroof or premium wheels, you have the option of choosing a cheaper trim package. However, new cars depreciate in value quickly.

When comparing vehicles, you'll want to take into account all of the financial impacts of each choice.


How car choice affects auto loans

Auto loans are pretty simple; you borrow a set amount of money for a set amount of time and agree to pay it back, plus interest. The type of car you buy will influence the overall size of the loan, but it also affects the interest rates that are available to you. In general, used cars garner higher interest rates.

Your interest rate is crucial to saving money on a car. Auto loan interest rates can vary monthly, and they have increased in the last couple of years. According to Edmunds Opens in new window, February 2017 saw average interest rates on new cars at 5.2%, up from 4.9% in February 2017. Jerome Powell, the Fed Chairman Opens in new window, also appeared in front of Congress in February 2017 to say that more interest hikes are expected this year.

However, there are some factors within your control that can affect your interest rate, including the length of the loan, your credit score, and your debt-to-income ratio.

 

Ways to save

By managing the factors that are under your control, you can save money and open up more car buying options.


Go for shorter loan terms — Longer-term loans have lower rates; however, you could pay more overall because you have more payments. A shorter loan period means you'll have higher monthly payments but will pay less in the long run.

Negotiate everything — From the interest rate to the actual price, everything is up for negotiation. If you're buying a new car, opt out of high-priced features to save money.

With used cars, there are no optional features, but you also don't have to pay full price for upgrades as you would with a new car. Research the value of the car and take into account its mileage, condition, age, and even color. In New England, for example, white cars are cheaper than other colors.

Bigger down payment — In general, the larger your down payment, the better your financing deal. You'll owe less to start with, and you'll qualify for a lower interest rate. Aim for a 20% down payment.

Pay cash — For new or used cars, cash is a powerful tool. If you can pay up front in cash, you can use that as leverage to negotiate a lower price.

Time it right — The best time of year to buy a new car is in December, when dealerships are trying to rid their lots of unsold inventory. If you can't wait until the end of the year, consider buying at the end of the month, when sales people may be trying to hit their monthly sales target. Price shop earlier, then wait until the last week to negotiate.

Boost your credit score — If you're applying for a car loan, you'll get the best deal with a high credit score (FICO score of 700+). Some dealerships will offer zero-percent financing to new car buyers with good credit with a high down payment. Boost your score by paying your bills on time and paying more than your minimum on credit cards to lower your debt-to-income ratio.

 

 

What you can do next

Whether you go for a new or gently used car, knowledge is power. Instead of comparing cars, compare deals (car, financing, total cost of ownership).

 

Kara Perez is a freelance writer in Austin, Tex. She specializes in personal finance and travel writing, and loves hiking, sushi, and sleeping late.

 

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