There are over 25 million auto loans every year in the United States, with the majority of drivers using finance to pay for new and used vehicles. Car loans are some of the most common secured loans in the country and for many Americans, a car is the second most expensive purchase they will make in their lifetime.
But shopping for a new car and applying for a suitable car loan is a stressful experience filled with uncertainty and difficult decisions. One of the most difficult decisions is whether to opt for a new car or a used one. In this guide, weâll showcase some of the pros and cons of both options, pointing you in the right direction and helping you to make the right choice.
Reasons to Buy Used
It is satisfying to own something that is brand-new. Itâs fresh out of the factoryâyouâre the first to use it, the first to experience it.Â
Consumers are prepared to pay a premium just to be the first owner. iPhones and other tech are great examples of this. You could save 30% on the price of a new phone by opting for a refurbished model. The screen and case will be near-perfect, the hardware and software will be fully functional, and everything will be backed by a warranty. However, you donât get the satisfaction of peeling back the protective stickers and being the first to open the box.
Itâs a similar story with cars. There are no stickers to peel and boxes to open, but you canât beat the new car smell or the way the steering wheel feels in your palms.
Thatâs not all, either. There are many other benefits to owning a brand-new car and using your auto loan to acquire one.
New Cars Depreciate Fast
A $200,000 mortgage acquired today might cost you $300,000 or more over the lifetime of the loan. However, in a couple decades, when that mortgage is in the final stretch and you own a sizeable chunk of home equity, youâll likely have something worth $250,000, $300,000, or more.
If you get an auto loan on a new car, itâs a different story. As your interest increases and your payments exceed the original value, the current value nose-dives. At the end of the term, you could have something that is worth a small fraction of what you paid for it.
As an example, letâs assume that you purchase a $40,000 car with a $10,000 down payment and a $30,000 loan. With an interest rate of 6% and a term of 60 months, youâll repay just under $35,000 over the lifetime of the loan.
However, as soon as you drive that car out of the lot, the price will plummet. At the end of the first year, it will have lost between 20% and 30% of its value. If we assume a 20% loss, that car is now worth just $32,000. The irony here is that you will have paid just under $7,000 in that year, and as the years progress, you fall into a pattern where the more you pay, the less itâs worth.
In the next 4 years, the car will experience an average deprecation of between 15% and 18%. Again, letâs assume a conservative estimate of 15%. That $40.000 purchase will be worth $27,200 at the end of year 2; $23,120 at the end of year 3; $19,653 in year 4, and $16,705 at the end of the loan.
And donât forget, that vehicle cost you $45,000 in total.
Unless youâre buying a rare car that will become a collectible, all cars will depreciate, and that depreciation will be pretty rapid. However, used cars donât suffer such rapid deprecation because they donât have that inflated sticker price. If you take good care of them and pay a good price, you wonât stand to lose as much money.
Used Cars are Cheaper
As stated above, all cars depreciate, but if the first year suffers the biggest drop then why not buy a car that is just a year or two old?
Itâs the same car and offers many of the same benefits, but youâre getting it for up to 30% less on average. For a $40,000 car, thatâs a saving of $8,000. Once you add a 20% down payment, your loan only needs to cover $25,600. For a 6% loan, thatâs just $495 a month, compared to the $619 youâd pay on a $40,000 new car with the same 20% down payment.
That puts more money in your pocket and less debt on your credit report. Thatâs a double-whammy well worth sacrificing a new car smell for.
Itâs Still Nearly New
If you buy a used car that is just a couple of years old, you can still get something that has been well maintained and is just as impressive as it was the day it rolled off the lot.Â
Think about the last time you bought a brand-new car, computer, phone, musical instrumentâor anything else that came with a premium price tag. You probably kept it in perfect condition soon after buying. Everyone goes through a period of doing their utmost to keep a new purchase immaculate and the more they pay, the longer than period lasts.
Most consumers will keep a car in perfect condition for at least two or three years, but no matter what they do, they are powerless to the depreciation. This means you can get an almost-new, perfect car that is nearly a third cheaper than it was when it was new.
Reasons to Buy New
Î used car doesnât provide you with that enjoyable, tactile experience. You canât enjoy the ubiquitous new car smell and you wonât be the first owner. However, there are numerous benefits to buying used instead of new, not least of which is the amount of money you will save now and in the future.
More Finance Options
You have a few more options at your disposal when it comes to financing a new car. Many dealerships offer low-interest and even no-interest financing to encourage you to sign on the dotted line.Â
These deals often have hidden terms, penalties, and other issues, and if you fail to make a payment, they wonât hesitate to take your car from you. However, if youâre struggling to finance elsewhere and have your heart set on a brand-new car, this could be your only option.
Make sure you read the terms and conditions closely and donât let them bombard you with small print and sales talk. They are there to sell you a car. All they care about is your signature on that contract and if that means glossing over a few of the terms, they wonât hesitate.
More Customization and Better Features
Technology is advancing at a tremendous pace and this can be felt in all industries, including the automotive sector. A lot can happen in a few short years and if you buy a used car as opposed to a new one, you could miss out on a host of electronics, safety features, and more.
Customization is also possible with new cars. You can request colors, fabrics, and other aesthetic changes, as well as additional features relating to the power and performance of the vehicle.
New cars offer bumper-to-bumper warranty cover, which means that youâre covered in the event of an issue. If major repairs are needed, you wonât be out of pocket, and these warranty plans tend to offer roadside assistance as well.
This can be true for used cars as well, with the manufacturerâs warranty being transferred when the car is in the hands of a new owner. However, the warranty is at its longest and most useful when the car is first purchased.
The warranty wonât cover everything, and you will still be responsible for normal wear and tear. However, because the car is new, it should require less maintenance and may take several years before you need to make significant purchases.
Surveys suggest that new car owners pay anywhere from $0 to $300 for maintenance during the first 12 months, with this fee spanning between $300 and $1,100 once the car is a decade old.
Used car purchases take time. You need to find the vehicle, inspect it, negotiate with the seller, and then hope you can agree to a price and payment plan. If you want something specific with regards to colors and features, you may have to search many inventories and individual sellers before you find something that fits.
With a new car, you simply agree to a budget and see whatâs available. If you need any tweaks or changes, you can request them directly from the dealer.
Summary: New vs Old
There are two ways at looking at this. Firstly, there are more advantages for buying a new car and these include some pretty important ones. However, the advantages for buying used are much bigger and if your bank balance or credit score is low, that could be the deciding factor.Â
In any case, itâs important to look closely at the pros and cons, evaluate them based on your personal situation, and donât rush this decision.
Auto Loan: New Car vs Old Pros and Cons is a post from Pocket Your Dollars.