New Vs Used Car
New vs used Car, is buying a used car a huge mistake right now? That’s what we’re going to find out.
In the past, a common sense piece of advice was to purchase a lightly used car instead of a brand new car because it would save you a ton of money.
Many financial advice experts tend to go on and on about how brand new cars lose 20 to 30% of their value the second you drive them off the lot and continue to depreciate quickly after that.
Understanding the Shift in Car Values
Buying a used car that’s already suffered the depreciation hit is the thing that financially smart people do.
Well, I’m going to tell you why that’s often not the case and why buying a used car right now might actually cost you a lot more money than you think and could end up costing you more in the end. New Vs Used Car
As many of us know, the car market experienced a a severe car shortage over the past two years, and this shortage has dramatically changed the value of vehicles, what they sell for, and how much they depreciate over time.
Yes, the inventory for new vehicles has been recovering throughout the year, but they still remain incredibly low for a lot of popular vehicles, and these low inventories have been keeping the selling prices really high. New Vs Used Car
The most popular vehicles, which include compact cars, small crossovers, and SUVs, and especially hybrids, are incredibly tough to get.
The supply is nowhere near where it should be relative to the demand. Just look at one to three-year-old vehicles of these types are selling for, and you’ll see that the 30% depreciation hit that the financial experts spoke of simply does not exist.
Examples from Popular Vehicle Models
Let’s take an example of a very typical popular vehicle like a Honda Civic, one of the most popular compact cars. New Vs Used Car
Even now, one to two-year-old Honda Civics routinely sell for more or less the same price as what you can purchase one for brand new.
It’s the same story for other similar compact models like the Honda HRV, the Toyota Corolla, the Toyota Prius, and the Subaru Crosstrek.
Here is an example of a Corolla with a price that’s more or less the same as what you can buy a brand new one for.
This is also the case for popular crossover SUVs like the Toyota RAV4, the Toyota Highlander, the Subaru Forester, the Hyundai Palisade, and the Kia Telluride, and many other popular models, too.New Vs Used Car
Again, just looking at the prices of these vehicles when they’re lightly used makes you quickly realize how little sense they make.
As for hybrids, well, they’re pretty much non-existent, don’t even bother looking for used ones because they routinely sell for more or less the same price, and sometimes even a higher price than what you can purchase the equivalent brand new one for.
Used ones are selling for ridiculously high prices because brand new ones are so hard to get, and they often have a very long waiting period.
Financial Implications of Buying Used
Even so, if you have the patience to order a new one and wait for it to arrive, why on earth would you pay the same price for a used one? Now, of course, you’re obviously not going to see this happen with every type of vehicle.
Many luxury vehicles, pickup trucks, electric vehicles, and vehicles from less desirable and less popular brands do depreciate at relatively a normal rate.
But that is because the demand for these types of vehicles is not very high, and not many consumers want to buy them. New Vs Used Car
Most consumers just want affordable regular vehicles, hybrids, and crossovers from reliable brands.
So no, you’re not going to save 20 to 30% on the price for one of these specific types of vehicles when buying one lightly used.
And even if you are able to save, say, 10% on the price, it’s still not going to be worth it and could still end up costing you more money in the end.
An important thing to understand about used cars is that they often cost more to finance than new cars. New Vs Used Car
New cars typically have financing rates roughly between 3% to 6%, sometimes as low as 0% to 2% when the interest rates are incentivized by the manufacturer.
Now, you’re not going to get interest rates like that when financing a used car.
Used car rates are normally around 7% to 9% for well-qualified buyers, which means that on a typical 4-5 year car loan, you could be spending an extra couple of thousand dollars on the financing costs for a used car, and that’s going to pretty much wipe away any savings that you would have saved on the purchase price.
Factors to Consider When Buying Used
And even if you pay cash for a used car, you are still going to lose money in other ways.
Remember, a used car, even one that’s 2-3 years old, will have still lost a huge chunk of its original warranty, maybe even all of it. New Vs Used Car
And that’s thousands of dollars of value added when you’re buying a new car. So when you’re only saving a few thousand dollars on the price, when buying a lightly used car, you need to consider what you’re sacrificing or what you’re giving up in exchange for those savings. Here is a typical analogy.
Say you’re buying a brand new Toyota RAP 4 that costs $40,000, and the three-year-old one that has 45,000 miles or 60,000 kilometers costs $36,000.
So you think you saved around $4,000 or around 10% on the purchase price by buying that used RAP 4.
But what have you sacrificed or given up in exchange? Well, you’re going to have a vehicle that’s lost most of its warranty protection.
It’s going to have a fair amount of wear and tear, which means that could be potential maintenance and repairs, like replacing the tires, replacing the brakes, and that thing. New Vs Used Car
At the end of the day, you’re going to have a three-year-old vehicle, which means that it’s already lost three years worth of value.
Is all of that really worth it just to save $4,000? Well, I don’t really think so. This is why when it comes to vehicles that are high value, again, this means popular compact cars, compact SUVs, hybrids, and so on, you are far better off just buying one that’s brand new, provided you’re paying a fair price.
Without any dealer markups, dealer add-ons, or any junk fees, you will be getting far better value for your money in the long run.
The very strong resale value that you get with these types of vehicles is obviously no help to someone who’s buying one used, but it does benefit you immensely when you’re buying one that’s brand new, especially if you need to sell it or decide to trade it in down the road, where you’re going to get a lot more value.
Making Informed Decisions in Today’s Market
Now, when does it make sense to buy a vehicle used?
when exactly does it make sense to purchase a used vehicle right now? Well, it might make sense to buy a used vehicle if you’re not paying a high financing rate or if you’re able to pay cash, and only when you’re saving enough money for it to make sense when compared to the price of the equivalent brand new model.
For example, if you’re a brand new Honda CRV that’s $45,000 and you can purchase a low mileage three-year-old one for, say, $35,000, close to a 25% drop, that’s something that might be worth considering.
It is especially worth considering if you can buy one from a Honda Certified Pre-owned or CPO program. New Vs Used Car
Most new car manufacturers have a Certified Pre-owned program or CPO program where you can buy a lightly used vehicle that’s been thoroughly reconditioned and inspected and often sold with a little bit of extra warranty protection through a new car dealer.
In the case of Honda, their CPO vehicles receive an extra two years of powertrain warranty coverage, up to seven years from the normal five years of coverage.
So this is an example where buying a lightly used vehicle does make sense because you’re saving enough money on the price when compared to the equivalent brand new one. New Vs Used Car
You’re getting a vehicle that doesn’t have too much wear terror. And most importantly, you’re getting a vehicle that’s been thoroughly inspected and has plenty of warranty protection. So overall, it does make quite a bit of sense.