Should you buy a new car?
This is a question most car buyers ask themselves (and just about everyone they know) when the time comes to purchase a vehicle. You can bet everyone will have an opinion, generally based on personal experience. As with most personal experiences, those who had a bad one will offer the strongest opinion. One of the best things you can do when looking to buy a vehicle is to do some research. That’s what this is all about.
Usually, the first thing that happens when you decide to purchase a new car is sticker shock. As in “Wow! This car is really expensive!” Actually, that depends upon the car. A high-end sports car? Yes, they’re expensive. Your basic sedan? Probably not, particularly when compared to the related costs (interest rate, insurance rate, monthly payments) you’ll have when you purchase a new car as compared to those costs when you purchase a used vehicle.
YOU CAN CHOOSE THE VEHICLE YOU WANT
There are a lot of benefits to buying a new vehicle. The biggest benefit is that you can get the vehicle you want. Whether you’re looking at a new car or truck, a car dealership will have a wide variety of each in the size and price range you want. You’ll be able to buy one in your favorite color. You can equip the vehicle with whatever features you like. You can get leather upholstery. Or cloth. You’ll be able to upgrade the audio system and make sure the vehicle has the communication and navigation system you want. You can also test-drive any or all of the vehicles at which you’re looking. If the exact vehicle you want isn’t at the car dealership, the dealer can possibly find it at another dealership for you. Your dealer will buy the vehicle from the other dealer and you’ll have the car or truck you want.
Compare that to shopping for used vehicles. When you buy used, say a 2016 model, you’re getting the latest automotive technology…for 2016. Plus, you’re getting old accessories and features, including outdated safety features. There are a lot of changes in the automotive business every year. When you look at a used vehicle that’s three or four years old, you’re looking at old technology. There are enticements presented to make pre-owned cars look like a good alternative. Some dealers will offer a discounted interest rate on certified pre-owned cars. However, these interest rates are generally higher than those available on new cars. It’s a simple proposition: what you see is what you’re going to get. There’s a word for it and that word is SETTLING.
CHEAPER AUTO LOAN
Another benefit is buying a new car is the interest rate on your auto loan. There are two items to consider here. First, interest rates for new car buyers are lower because these car buyers generally have better credit ratings. New car buyers also benefit from lower, promotional interest rates and cash rebates that are sometimes available when buying a new vehicle. Second, lenders see less risk in auto loans for new cars than used cars. Combined, these elements can help deliver the monthly payments you’re willing to make for your new vehicle. Understand, car buyers with less than stellar credit can qualify for new car loans, but their interest rate will usually be several points higher than car buyers with good credit scores. There is a benefit here for these buyers. When you make monthly payments on a new vehicle, you’re building a better credit score.
There are some people who will tell you not to buy a new car unless you can pay cash. While it’s great to not have a monthly car payment, there are benefits to not pay cash for a new vehicle. It doesn’t make a lot of sense to spend thousands of dollars on a vehicle when low interest rates are available. Keep your savings or use the money for something else. Don’t pay a dealer $20,000 to $30,000 when you can make a down payment for a fraction of either amount, get an auto loan with a low interest rate and help build your credit history. Cash is a nice tool to use when making a car deal, but it makes more sense to use it for your down payment.
DEPRECIATION AND TRADE IN VALUE
Some of the people you ask about car costs will mention depreciation. Car buyers aren’t generally thinking about depreciation when shopping for a new vehicle. There’s an old adage out there that goes “…a car loses 50% of its value as soon as the rear bumper crosses the dealer’s driveway…” Yes, cars depreciate. No, cars don’t depreciate that quickly. It’s a good idea to spend some time, before you get to the car dealership, looking at the resale value of vehicles. A good source for this information is Consumer Reports. The vehicle with the current highest resale value will bring in 61% of its Manufacturer’s Suggested Retail Value (MSRP) after five years. That’s really good. Chances are you’ll be making at least 60 monthly payments on your new car. You’ll want that car to be worth as much as possible when its paid off.
Another benefit to buying a new vehicle is insurance. Your auto insurance rates will likely increase when you start driving a new car. How much depends upon your insurance company and the year, make and model of your previous vehicle. The insurance rates for new vehicles are surprisingly low, especially if you’re trading in a vehicle that’s pre-2018. Insurance companies love the fact new vehicles are full of safety features and anti-theft devices. Couple those with a good driving record and your insurance rates might even go down.
There are people who will tell you used cars are cheaper to insure than new cars. That’s not true. A lot of items go into determining the cost of car insurance. Parts for new cars are readily available, not so much for older used cars. How popular is your make and model with car thieves? The most popular cars to steal are mid-90s Honda Accords and Civics as well as early-90s Toyota Camrys. Why? The parts used on these older models are basically the same parts used on newer models.
THERE’S USED AND THEN THERE’S USED
Another aspect to think about with used cars is exactly HOW used they are. If you are looking at used cars and find one that’s one or two model years old, chances are it was a rental car. Keep in mind the people will drive a rental much differently than the way they’d drive their own car. Rental cars have some HARD mileage on them. Speaking of mileage, the automotive industry average is 15,000 miles driven per year. Most cars are traded in after three to five years on the road, meaning they have 45,000 to 75,000 miles on them. Plus, cars tend to start having mechanical problems at the three-year mark. When cars begin to approach the 100,000-mile level, it’s good to have credit cards to help cover maintenance.
IS THERE A BETTER TIME TO BUY?
There are four good times of the year in which to buy a new car. The exact dates are March 31, June 30, September 30 and December 31. These are the last days of each quarter. Car dealerships are either looking to wrap up the quarter with great sales numbers or are looking to hit their quarterly goals. Either way, your total costs will generally be lower when you buy at the end of a quarter.
Don’t forget the biggest plus in buying a new car or truck: that new car smell. It doesn’t cost anything, but it can provide the greatest thrill in driving a new car.