Is a New Car a Waste of Money?

Buying a new car gets a lot of flack. Mention buying a new car, and somebody is bound to tell you that the new car loses a third of its value as soon as you drive it off the lot. Or some similar percentage. Instead, you’re supposed to buy a 2 or 3 year old gently used car. By this theory, you miss the depreciation, but still get the benefits of the new car. But are things really that simple?

Taming the Depreciation on a New Car

The depreciation argument is the biggest point against buying a new car. And for good reason. Across the board, a 2 or 3 year old car will sell at roughly 2/3 the price of the sticker price (MSRP) of a new version of that model. But it’s not uncommon to buy a new car for less than the sticker price. Depreciation basically comes down to the difference between the purchase price and the car’s current value. So the further off the sticker you buy your new car, the less it depreciates when you drive the car off the lot.

 

There are several ways to shave off the price of your car purchase. You can try the age old tradition of haggling at the car dealership (which I hate with a passion). However, since haggling works on both new and used models it’s not necessarily relevant to this argument.

You can also knock the price down on new cars with dealer incentives. While there are sometimes incentives out there for all purchases, the majority apply only to new vehicles.  There are almost always incentives out there, but sometimes manufacturers or dealers are trying extra hard to move new cars or bump sales and make those incentives extra juicy.

The car market is a fickle thing. Supply, demand, dealer quotas, gas prices and incentives all play a role in how much you’ll be able to buy your car for. Sometime patience is your best friend. If you shop at the right time, however, you can score a fabulous deal on a new car, which will take a huge chunk out of your car’s depreciation.

A New Car Warranty

In general, a new car comes with a better warranty than a used model. Depending on the warranty, this can save you big time down the road. I buy Hyundai primarily because of their 10 year, 100,000 mile powertrain warranty (as opposed to the more typical 50,000 mile). A lot can go wrong in 100,000 miles.

On a side not, I would not suggest shelling extra for extended warranties. If the car comes with a complimentary warranty, great! But these extended warranties are typically priced to be money makers for the car dealership.

A New Car Has No Past

When you buy a new car, you’re not risking that the former owner didn’t do regular oil changes. You also don’t have to worry about a former owner that drove the car hard. No redlining the engine in the past, no excessively worn brakes or suspension, etc.

A New Car Needs Fewer Repairs and Maintenance

It should go without saying that a new car needs fewer repairs and maintenance, but this does partially offset the increased depreciation that a new car takes on. Fewer repairs and maintenance also means less hassle.

You Can Keep a New Car for Longer

Regardless of whether you buy a car new or used, the car buying process itself has costs built in. Assuming you use a dealership, every transaction theoretically has dealer profit built in. The dealer also has ‘refurbishing’ costs built in- replacing tires, detailing, fluid top offs. Depending on the state, each transaction can incur significant titling fees, taxes, licensing fees, etc. On top of this, you’ll spend a significant amount of time researching and shopping every time you replace a car. When you buy new cars, you can replace your cars less often, incurring these built in costs less often.

A New Car is Simply Nicer

There’s no getting around the fact that a new car is simply nicer than a used car. It looks nicer, likely has better safety features, probably has more bells and whistles. These may or may not be worth paying a little extra for.

The Math Probably Favors a Used Car

When all is said and done, unless you score a fabulous deal on your new car, the math will probably still come out ahead on a used car, but perhaps not to the degree you’d expect. Use a tool like Edmund’s True Cost to Own to compare a different cars when you’re car shopping. But keep in mind that whatever you knock off of Edmund’s purchase price can also be deducted from your ‘cost to own’ since Edmunds factors in depreciation.

Life is not all about the math, however. There are other non-financial benefits of buying the new car. It’s up to you to decide how much these are worth and whether you want to pay a premium for these extra benefits or not. Perhaps you do. Or you might decide to settle for a new lower end vehicle rather than a used version of a more expensive model. My new Hyundai Accent, for example, cost far less than many used large and midsized sedans, not to mention SUVs.

Buy What You Can Afford

Sometimes you can only afford a used car. If buying a new car means you have to go into debt, you’re probably better off skipping the car payment and buying a used car in cash. New car benefits aren’t worth the headache of stretched finances.

Older Cars Have Their Own Benefits

Older cars also come with their own pros and cons. Of course, cars get cheaper as they age, so the older the car, the more accessible it is to a tighter budget. You can get away with just putting liability coverage on the car (if this is legal in your state), saving on insurance premiums. Also, because of their low value, older cars do not depreciate much anymore. It’s not unheard of to sell a 13-year-old car for more than you bought it for when it was 10 years old.

People often want to ditch their old car to save on maintenance. But if you’re willing to put up with the hassle, maintenance doesn’t cost as much as people think. Sure, your car might be in the shop every few months, but your yearly maintenance costs will almost always be lower than the depreciation on a newer car.

No Clear Winner

If your budget and car savings allows you the choice between new and used cars, there’s no right or wrong choice. You get what you pay for (kinda). Research your cars on Kelly Blue Book and Edmunds to make a more educated decision one. And when you make a purchase, be happy about it. If someone tells you that you threw your money away on that new car, shrug and smile. Or send them to my blog.

Related Reading

The Easiest Way to Get a Great Deal on a New Car

How To Self-Insure Your Car And Save Thousands (Maybe)

Are Car Loans for Dummies?

Should I Replace My Old Car?

 

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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.