There Are Pros And Cons To Both Approaches
The real question is: how much money are you working with? Could you purchase a new car outright without having to finance it? Well, in that scenario buying new can be a fine idea. If you don't have $15k to $30k just lying around, though, you might want to consider going the "pre-owned" route. There are financing options available for new and used vehicles, but oftentimes what you end up spending is greater than is strictly necessary owing to interest. There are pros and cons to consider:
- New Car Pros: A Better Vehicle With A Warranty And Slight Equity
- New Car Cons: Interest Diminishes Equity And Expands Cost
- Used Car Pros: Less Expensive, The Potential For Greater Equity
- Used Car Cons: Quality, Utility, Appearance, and The Unexpected
New Car Pros: A Better Vehicle With A Warranty And Slight Equity
A new car looks suave, it has the latest features, it will come with a warranty that is bracketed by time and mileage, and you'll have immediate equity if you pay for it when you buy it. If you're financing the vehicle, when you finally own it, you will also have a level of equity. Depending on how well you manage the vehicle, you could see some of your investment recaptured upon sale.
New Car Cons: Interest Diminishes Equity And Expands Cost
You're likely not going to ever get all your money back when you sell a car you bought new. If your car were $30k, the moment you buy it, it loses $3k in value. Depreciation hits hard, and by five years' time, most vehicles have lost about 60% of their equity. We're going to round up to give you the best idea, but look at it this way: a car worth $30k when you bought it will be worth something like $10k to $12k after five years.
A 60 month financing package usually takes five years, and the average monthly payment is $500 a month without interest. In five years' time, you pay in $35k (at around 5.76% interest, the national average), and what you're left with is between $10k and $15k in equity, depending on the details. If you sell it for that much, you can't get back what you paid in. So unless you buy outright, you'll lose equity on a new car.
Used Car Pros: Less Expensive, The Potential For Greater Equity
With a used car, you can find a vehicle for $5k that will last you five years, and then you might be able to sell it for $1k or $2k. It's not much, but it's a higher Return On Investment (ROI) than the new vehicle. This is because you get more use for less money. So though the new car sells for more after you've paid it off, you've had to pay more in order to totally absorb that "pay day". With the used car you paid for when you bought it, provided you can get a year or two out of it, you're in the green. When you average it out, at $500 a month in terms of financing, annually you pay $6k minimum to own a new car. Buy used for less than that, and you've almost beat the system.
Used Car Cons: Quality, Utility, Appearance, and the Unexpected
That said, used cars will have problems. They'll have mechanical issues. They will have bells and whistles that no longer work. There's almost always some hidden issue that doesn't pop up till you're in the middle of a cross-country road trip. You can't do much about that with a used car, the game is knowing enough before you buy to assure you get your use out of the vehicle before it tanks on you. Also, if you finance a used car, the interest is almost double.
Making The Best Choice For Your Situation
So what's best? Well, if you can buy outright, go the new route. If you can finance, the new route can work for you, but you'll likely pay in more than you have to. Buying outright is best with used vehicles, also; though financing is going to be less of an issue going with that approach. Still, since problems that are unexpected may arise, you're wise to buy outright in the used scenario. As a rule of thumb, the sweet spot for a used vehicle in terms of longevity will be $7,500 to $10k. You might find some good deals at $5k, too, but things have gotten a little more expensive in the last few years