The weather gets warm, the trees start to turn green and simultaneously something inside of us gently nudges us to hop online and browse for new cars.
As if the pollen flooding our noses isn't enough, the tax refund sitting in our checking combined with our aging car and the sun makes us wonder if it's time for that car upgrade – perhaps that new convertible even.
Recently, my wife and I were confronted with this exact scenario. Her 2012 Kia Forte was over eight years old, had 120,000 miles on it and needed $3,500 worth of work – yet was only worth about $2,000.
We knew it was time to get a new vehicle, but the real question was not so simple: Should I buy a new car, or should I buy a used car?
While the answer might seem, simple, it wasn't so evident initially due to all the factors we needed to consider. Which led me to write this article to help decide whether or not to buy a new or used car.
Should I buy a new car or used car?
In order to get to work, drive the kids around town and get to where we need to be, most Americans still drive. In fact, according to Forbes, 77% of people were still commuting to work in 2017 via their car.
So while personal finance writers like myself will tell you reasons to never buy new cars, obviously there may be times that make sense to buy a new car.
However, it is important to keep in mind that transportation can hit the wallet pretty hard. In fact, after housing, transportation ranks second as the most costly item in adult American's monthly budget.
There are times when our old reliable, just isn't so reliable anymore. Thus, we are left searching for a new vehicle to take us from place to place. We find ourselves asking, “Should I buy a new car or a used car?”
To answer this question, it's important to first start with assessing if a new car is needed by using this short litmus test list:
- Determine if buying a car is a true need or just a want.
- Mileage of your current car is over 150,000
- Current car is unreliable
- Maintenance costs are more than the car's current value
- Upgrade needed for family reasons (Mostly kids)
- Downsizing to a commuter-friendly car
- What is your budgeted purchase price?
- Have you considered certified preowned vehicles?
- Do you plan on financing your car or paying cash?
- Are you ready for a car salesman, negotiating, and paperwork?
So keeping those points in the back of your head lets first start with addressing the pros and cons of buying new cars and buying used cars!
Advantages of Buying a New Car
Common advantages of buying a new car:
- Brand new, low miles
- Low interest rates
- Factory warranty and perks
- Custom options
- Little to no maintenance costs early on
Disadvantages of Buying a New Car
Disadvantages of buying a new car:
- More expensive than buying a used car
- 10% immediate depreciation
- 20% depreciation during the first year of ownership
- Higher taxes and insurance
- Unknowns of new models and potential problems
Advantages of Buying a Used Car
Advantages of buying a used car:
- Less expensive vs. buying a new car
- Can still have a warranty when buying certified preowned cars
- Avoid new car depreciation
- Lower car value means less insurance and property tax costs
- Save more money overall
Disadvantages of Buying a Used Car
Disadvantages of buying a used car:
- It is used
- Unknown vehicle history and treatment
- Higher miles, mark-up, interest rates, and potential chance of problems
Financial Expert Advice on Car Buying:
Talk to most people with a financial background (Who isn't trying to sell you auto-lending) and they will tell you to always buy used vehicles.
The new car smell wears off in 6 months and buying 2-3 years used will knock the sticker price down 20-30%, not to mention saving on insurance and personal property taxes.
In fact, according to Money Savvy Mindset, a car is only worth 37% of what you paid for it 5 years later!!!
Or as self-made millionaire David Bach put it,
“Nothing you will do in your lifetime, realistically, will waste more money than buying a new car-David Bach, CNBC
All that being said, strong indications go towards used cars. Ideally, buying something with cash is the goal but most used vehicles still have factory warranties. Within 5-6 years a brand new car is worth 60% less on average.
However, there are cases where buying a brand new car might be something to consider as we mentioned earlier:
- Better financing rates (if you have to finance)
- Some makes are pretty cheap brand new (Ex: Kia)
- Factory Warranty
- Less maintenance costs
That being said, buying new should not jeopardize your savings rates, debt to income ratio, and never finance longer than 4-5 years max!
How much should your new car cost?
In 2019, there was an abundance of publicity surrounding the stat released indicating that 7 million people were 90 days behind on their car payments.
How is it possible that 7 million people are that close to defaulting on their car loan? Does it boil down to new car vs used car buying?
Poor budgeting and unfettered spending can be a factor, however, the biggest factor is a large majority of people are driving around a car that clearly they cannot afford. Most simply don't understand “How much car they can afford.”
Instead of setting a budget and buying a car, many would be car buyers visit a dealership, pick a car, and fit the car around their budget.
Use this general rule of thumb when buying a car that I once heard from a well versed financial planner:
Your car's value should never exceed 25% of your gross income.”
For example, a hypothetical family “A” makes $100,000 combined gross income. Therefore their new car purchase, be it used or brand new, should not exceed $25,000.
While this might be disappointing if you're in the market for a new car, making sure you stay within your means is vital. Procuring lending is not the problem when buying new cars, it is making the payments without negatively impacting your finances.
Car Buying Price Guidelines:
Having a rule of thumb that meets your financial needs will keep you on the right path. Addtionally, no more than 10% of your monthly income should go to transportation.
- Your car payment each month
- Property taxes if applicable
For help, use this complete car buying guide that helps you determine how much car you can afford.
What about leasing, should I lease a car?
What is something called that you pay for then give back? A rental. However, in the auto industry, it's called a lease.
Sure you can continue making payments and buy the rest of your lease out, however, leasing vehicles is almost never a good idea for typical car buyers. Leasing is only advantageous in specific situations or for business owners.
Pros to Leasing a Car
- Avoid major repairs
- Low monthly payment and interest
- Get a new car every few years
- Write off for business owners
Cons to Leasing a Car
- Always have continuous car payments
- Don't actually own the car, nor can you keep it
- Additional fees
- Driving and mileage limitations
While the temptation of a lower monthly minimum might seem nice, over time a lease will typically cost your more overtime and if you want to keep the car you have to finance the remaining balance!
Alternatives to buying a new car:
There are alternatives to buying new cars which include using public transportation, using ride-share apps, or using subscription car services.
Use Public Transportation:
Public Transportation is a great alternative to car ownership especially if you live/work in a dense urban area. Pros for public transportation include:
- Don't need car insurance
- Avoid car ownership and payments
- Don't have to worry about parking or paying for parking
- No vehicle maintenance concerns
Ride-sharing apps like Uber and Lyft are more popular than ever and they're revolutionizing how people get around. That being said, if you rely on ride-sharing chances are you will pay more than you might expect over the course of a month.
If you spend $10 a day on ride apps, you can easily approach $300 or more a month – without anything to show for it. That being said, the hassle of car ownership is non-existent when you use Uber or Lyft.
Look into Car Subscription Companies
Get a car on your phone, seriously.
Fair.com lets users get a car and pay month to month for that car. You can turn it in whenever and exchange the car for a different car whenever you want.
While this is a newer car chronology, similar to leasing but without the long term commitment, car subscriptions allow users to get a car when the need and keep it as long as they would like!
Drive a beater.
Don't overlook the money-saving costs if you drive an older car, also known as a “Beater.”
Tawnya, a personal finance writer and savings expert from Money Saved is Money Earned put it this way,
With frugalism in mind, the answer to why I drive a daily beater is simple: it still safely drives
It's ok to drive an older car to foucs on other financial goals you might have like saving money or paying off other debts. Just make sure your beater is:
- Simple to maintain
- Good on gas and emissions
Long term implications of buying a new car:
At the end of the day there are a few reasons to treat a new car purchase pretty seriously – not impulsively like I personally did in 2014. In no particular order, the biggest factors to consider before purchasing a vehicle include:
- Your debt to income ratio.
- Any future home purchases.
- Retirement savings.
- Positive cash flow per month.
- Weddings & Travel
- Your emergency fund
How a new car purchase impacts your financial security is really up to you. However, new cars are not assets or investments. When looking at future value instead of present value, cars are considered depreciating liabilities.
Aside from a monthly car payment impacting your positive cash flow and debt to income ratio, most people are literally driving around in their retirement plan.
Prior to ever buying a new car, be sure to make these money moves first:
- Create and fully fund your emergency fund
- Check your Debt to Income Ratio, especially if you want to buy a home in the near future
- Be sure you're contributing to your retirement accounts
- Make sure you can still save 10-20% of your income
Final Word on Buying New Cars:
Ultimately we decided to buy a certified pre-owned 2016 Nissan Altima with 23,000 miles on it. The ingredients we were looking for in a vehicle were:
- Low mileage, preferable certified-preowned
- Sedan and bigger (for eventual car-seats)
- No more than $14,000
- Something we could pay cash for
- Affordable gas & insurance
- Low maintenance & a warranty
While the allure of a nice shiny car was certainly tempting, factoring in depreciation, commuting, and gas – buying something that was reliable and affordable was our biggest priority.
Using the 25% gross income car value rule, we could afford a car that $40,000 – but that was way too high in our opinion. Most personal finance experts recommend keeping ALL transportation expenses below 10% of your monthly income.
We personally strive to keep ours at less than 4%. So whether you decide to go with a new car or a used car, the choice is ultimately yours.
Just make sure the next car purchase you make is a calculated one, you don't want to be driving around in your retirement plan!
Q: Should I buy a new car next year, or stick with used cars?
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $300,000 in student loans with his wife in less than five years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post, and many more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their newborn son, their chocolate lab named Morgan, working out, being outside, traveling, and helping others with their finances! In case you were wondering, Josh uses Personal Capital to track his net worth and his first investment account ever was an Acorns account 😎