When shopping for a vehicle, it’s hard to pass up shouts of “zero down!” or “no payments for six months!” It’s tempting to indulge in that new car smell and the feeling of being a vehicle’s first-ever owner.
Unfortunately, buying new will likely cost more than you think. The good news is you can still find a relatively new vehicle—without falling into the trap of overpaying for good value. Let’s look at the top three reasons buying used cars is the smarter financial choice.
Numbers Don’t Lie
Not sure who to trust? Numbers always tell the truth, so start there. According to Experian’s most recent State of the Automotive Finance Market report, the average new car loan is $29,880 with a term of 68 months. Since payments average $499 per month, new car owners can expect to pay about $33,932 over the course of that loan.
For a used vehicle, on the other hand, the average loan amount is $19,100 with a term of 63 months and average monthly payment of $364. Over the course of that loan, you can expect to pay about $22,932. Between the two options lies a whopping $11,000 gap.
Avoid First-Year Blues
There is another force that new car buyers should keep in mind: depreciation.
A new car loses about 11 percent of its value the moment you leave the lot, as pointed out by Edmunds. By the end of the first year, average depreciation ranges from 15–25 percent. By 5 years, you can expect your new vehicle to have lost about 60 percent of its original value.
Why does this matter? If you’d like to sell or trade in your car in roughly 10 years, chances are either move will result in a pretty hefty financial loss to you. When your car depreciates faster than you pay down the balance, you’ll find yourself upside down in your loan—owing more than it’s worth. Or worse, you could be under water, which means you owe significantly more than the car is worth.
Depreciation plays a part in your insurance as well. If your new car is totaled in an accident—especially within the first 5 years—you’re likely to only get what your car is currently worth. Not what you paid for it or what you still owe on your loan. Gap coverage can help offset the difference in the event of an accident. But if you sell or trade it in before the depreciation evens out, you’ll end up paying the difference.
You Can Find the Balance
Many shoppers worry about buying lemons when searching for a used car. But between buying new and used, there is a sweet spot. Purchasing a car that’s between 1–2 years old—and trading or selling it before the 5-year mark—can save you a ton of money. Depreciation takes the biggest toll within the first year. When you buy used, the previous owner takes that hit, not you. Depreciation will work in your favor allowing you to get a much better deal for your money. Plus, strong dealerships set high standards for pre-owned vehicles, taking the worry out of buying used.
If you plan on keeping the car for a while, buying used cars at the 3- or 5-year mark gives you the best value.
While that new car smell is tempting, if you can resist it, you’ll reap the benefits. Finding a quality used car can get you all the bells and whistles you want without breaking the bank.