Should I buy a new or used car?

Should I buy a new or used car? This is a question that often comes up when purchasing a car. It’s a big financial decision. In fact, buying a car is one of the largest expenses that people make outside of purchasing a home. For many, a car is a necessity, albeit an expensive one as there are many costs associated with car ownership. There are loan payments, fuel costs, depreciation, car registration, insurance, maintenance, and repairs. I will give you a rundown of my experience with car ownership, both new and used, and hopefully, it will help provide you with some guidance.

Buying my first car for cash

Back in 2008, I bought a brand new Honda Fit with the proceeds from the sale of my previous car as well as some cash I saved up over the years. I was very excited about this new car because gas prices were steep, and this car got excellent gas mileage. Not only that, but it was also relatively inexpensive to insure and maintenance was super cheap. I ended up driving that car for five years, racking up over 110k miles. It was hands down the best car I have ever owned. There was no reason for me to get rid of it, but for whatever reason, I thought I needed something more.

Time for a status upgrade

After five years of driving the Honda Fit, I decided it was time for an upgrade. There was nothing wrong with the car, but I felt like I needed something more. Maybe a way to keep up with the Joneses? Whatever it was, I traded in my fully paid off Honda for a brand new 2013 Ford Fusion with all the bells and whistles. I had researched this car for quite some time, often going back and forth on whether or not I should buy it. One test drive and I was sold.

Given my budget, I wanted to keep my monthly payments to a minimum, so I decided to go with a low mileage lease for 36 months. I went from no payments to $320 a month for a $30,000 car. And guess what? I felt great driving off the lot. The car was bigger, faster, and more luxurious.

I was very excited about my new car for the first few months, but eventually, it became the norm again. The “new car high” eventually wore off, and I was stuck paying $320 a month to get around town when I did the same before for $0. I also quickly learned that my new Ford wasn’t any near as reliable as my Honda. By the time my lease neared its end, I had been towed six times, had an alternator replaced, and spent weeks driving loaner cars because my Ford spent a good amount of time in the shop for recall repairs. Eventually, I had enough. I worked with Ford and ended up trading the car in early for a new lease, this time a Ford Focus.

Another new car

So here I was, 3 years later, getting another lease. This time the payments were higher due to a lower down payment and credit score. $374 a month to drive a $26,000 car back and forth to work. Remember that not too long ago I was driving around in a fully paid off car that did its job fantastically. Two cars later and I’m still paying. Let that sink in for a minute. If you’re looking for the answer to “should I buy a new or used car”, do you currently one that gets the job done? If so, think about whether you really need to buy another car or not. I wish I had thought this through when I decided to buy a car that in all actuality, I really didn’t need. Of course, everything is 20/20 in hindsight.

Back to the Ford Focus. This was an economical car that I still own today, although the start was very rough. The Focus came with a dual-clutch automatic transmission that was plagued with issues. The car would stutter and vibrate when accelerating from a stop and would sometimes momentarily lose power altogether. After several trips to the dealership, they figured out what the issue was and re-flashed the transmission, and soon enough I was back on my merry way. Apparently, it wasn’t just me having this problem. Ford eventually extended the warranty on my transmission to 150k miles, so I ended up purchasing the car after the lease ended. The lease buyout, with the extended transmission warranty and optional extended warranty, set me back $361/month for 48 months.

Ending the cycle

Why did I buy out my lease instead of looking for another car? I wanted to end the payment cycle. I knew my Focus in and out as I had been the only owner. Ford also extended my transmission warranty out to 150k miles. If I signed up for another lease, I’d be stuck with more payments with nothing to show at the end. If I were to buy a used car, I would have no way of knowing whether it was good or not. Given my alternatives, buying out the lease was in my mind the best path forward.

Buying a used car for my wife

Eventually, the time came for my wife to buy a car. We had been sharing the Focus but now that she had a new job on the other side of town, we were in need of a second car. Given my previous experience with buying cars, I was particularly interested in the answer to the question, “should I buy a new or used car”. We looked at a handful of new cars but none of them fit comfortably into our budget for what we were looking for. We then started looking into used car options and eventually settled on a used Ford Escape with 100k miles on it. The dealer gave us the option to add an extended warranty, which we took. The total cost came to about $9,500. We put $4,000 down and financed the rest, resulting in a monthly payment of $150 per month.

Have a mechanic check out the car prior to purchase

When buying a used car, be sure to have a mechanic inspect it prior to purchasing. Within 30 days of driving off the lot, the transmission went out. After paying the $100 deductible, the extended warranty paid for the replacement. Although it took weeks to replace, we got a new transmission, and the car has been fantastic ever since. Within a year, we paid off the car with money we got back on our tax returns. We then used the $150 that we were paying to accelerate paying off my Ford Focus. That should be paid off completely this month.

Aside from the transmission replacement in the used Ford Escape, we’ve been very pleased with the car. It does everything we need it to do and it’s been cheap to maintain, especially given it’s got nearly 130K miles on the odometer. So, to answer your question. Should I buy a new or used car? It depends.

Advantages of buying a used car

Do you currently have a car that works?

If you already have a car that gets the job done, why go through the expense of buying a new one? Is it really necessary? I ask this because I too had an itch to buy something new. But here’s the thing. That “new car feel” only lasted a few months for me. Eventually, it felt like any other car I’ve owned. That “new” feeling resulted in me going from no car payment to paying $300+ per month for the next 8 years. No fun.

So, If you’re thinking of buying a new car, ask yourself if you really need it. According to Auto Trader, the average age of a modern car is 11.4 years and the average time people keep a new vehicle is around six years. If your car still works for what you need it for, consider holding onto it longer, especially if you have other more pressing financial obligations, like high-interest debt to pay off.

Factor in depreciation

You’ve probably heard that cars lose their value the moment they are driven off the lot. In fact, according to Carfax, cars lose about 10% of their value within a month of leaving the dealership. Yikes! That means a lot of car buyers are underwater on their auto loans as soon as they buy their car. And guess what? It keeps dropping after that. The $30,000 car you buy today might only be worth $10,000 by the time your loan term ends. One way to combat this is to buy a car that’s two to three years old that has already gone through the early depreciation. Plus, given how much more reliable cars are today than in the past, that used car could last you quite a long time.

Remember, not all cars depreciate the same. Some cars do very well at holding their value, while others not so much. If you haven’t already, check out Kelley Blue Book’s Cost to Own Calculator. They factor in typical car ownership expenses as well as depreciation and give you an idea of what the 5 year cost to own is for most cars out there.

Lower car insurance rates

Used cars typically cost less to insure than new cars, which makes sense. Sometimes this cost can be significant. It’s typically cheaper for an insurance company to replace an older car than it is a newer one. Hence, the cheaper cost of insurance. Lower rates mean more money in your pocket at the end of the month.

Modern cars are reliable

If you’re worried about reliability, there’s comfort in knowing that cars are more reliable now than ever before. For example, my parents own a Honda and a Lexus, each of which has clocked over 300k miles and still going strong. Both cars are fully paid off and get the job done.

If you’re still concerned about the reliability of used cars, you can always consider an extended warranty. Some people are against extended warranties, but in my experience, they’ve more than paid for themselves. I’ve been able to buy used cars with extended warranties while still paying way less than a new car.

Cheaper registration

Many states base registration costs on the vehicle’s age. As cars get older, they become cheaper to register. For example, when my car was new, it cost about $300 per year to register. After six years, I pay $130 per year.

Less financial stress

Used cars are cheaper than their new counterparts. If you’re working on paying off high-interest debt like credit cards, buying a less expensive used car can free up some of your budget which in turn can be used to more aggressively pay down other debts. Paying less may also result in more peace of mind knowing you have additional flexibility in your budget.