Should I Buy a Used or New Car?

Should I Buy a Used or New Car?

Over the last fifteen years or so, Sarah and I have purchased three cars. One was a privately bought used car, another was a used car bought from a dealership, and yet another was a new car, obviously purchased from a dealership.

When we buy a car, we have one simple goal in mind: we want to drive it for as long as possible until it begins to seem unreliable and the amount of repairs needed to make it reliable again is sufficiently high and logistically challenging enough. The latter is usually a gut call, but it’s a pretty reliable gut call. We usually aim to get 250,000 miles out of an automobile, so we use that as a target number.

In the past, we’ve mostly bought late model used cars as the numbers seemed to point us to buying a car with about 70,000 to 80,000 miles on it was the best bang for the buck in terms of cost per mile if we’re aiming for 250,000 miles.

For example, if I’m looking to buy a minivan for our family and there’s a new one for $36,000 and a very similar used one for $23,000 with 80,000 miles on it, I figure I’m going to get 250,000 miles out of the new one and 170,000 out of the old one. Thus, I’m paying 14.4 cents per mile for the new car and only 13.5 cents per mile for the old car, plus the insurance on the older one is likely going to be cheaper, too. The old one is the better deal, right?

When we bought our only new car, it was a Prius and, at the time, there were tax benefits for buying a hybrid, which tilted the scale toward a new car for commuting purposes. The rest of the time, we’ve stuck with buying late model used cars.

But is that always the right choice?

Lately, Sarah and I have been starting to think about replacing her Prius for her work commute. It’s around the 200,000 mark. Soon, we will have a third driver in our family (yep, my oldest will be behind the wheel soon) and our intent is to allow him to use the Prius as long as it is reliable and so far it seems to be. Thus, our motivation is partly driven by the sense that we may need to replace it soon and also by the eventual desire to have a car for our oldest to drive.

Because of that, we’ve both been looking at specific options for replacing the Prius, and what we’ve discovered is that most of the time, buying used cars right now is actually more expensive on that “price per mile” calculation that I mentioned earlier than a very similar new model.

To give you a specific example, we were considering replacing her Prius with a newer model for her commute, as her Prius has served her very well. Given the features she wanted, we found several at $24,000 listed by the dealer, so let’s just assume that’s the final price and we can’t negotiate it further (we’d obviously aim to do so, but let’s keep it simple). If we bought that car for $24,000, we’d be aiming to drive it for 250,000 miles, so we’d be paying 9.6 cents per mile over the lifetime of that car.

We started looking for used Priuses with similar features and they were all coming out at around the same cost per mile, if not a little higher, assuming we’re driving it to 250,000 miles.

We were able to find pretty new used cars that, like one for $19,000 with 45,000 miles on it, which adds up to about 9.2 cents per mile – about the same as the new one – and other similar deals at similar mileage.

As I explored more, I found the same thing to be true over and over again: the used car market for cars from reliable manufacturers and brands seems to have gone up enough in price that if your intent is to maintain it well and drive it to near the end of its life, you’re not getting a huge savings right now by buying late model used. You pay less, of course, but the actual cost per mile of driving it to 250,000 miles or so is about the same as driving a new car to 250,000 miles or so.

So, which should you buy?

A new car often comes with a higher initial insurance premium because the cash value of a new car is higher than a used one, so the insurance company is out more. However, if the new model has significant safety features beyond what the old one offers, this can offset the insurance rate. The best thing you can do is call your insurer and get quotes in advance of the purchase – ask what the rate for a five year old car is versus a new car of the same or similar model.

At the same time, a new car comes with a warranty and, typically, the first 100,000 miles are the most reliable ones with the lowest maintenance costs. While most cars these days do reliably run up to the 200,000 (or higher) mile mark, the earlier miles when everything in the car is new are generally going to be much more reliable unless there’s a genuine flaw with the car, which is usually covered under the warranty. Also, since everything is new, you’re not paying for significant maintenance for a while with a new car, whereas you’re usually somewhere in the midst of the maintenance schedule with a used car and thus are much closer to more expensive maintenance options.

Another factor is financing. If you can buy a used car with cash but have to finance a new car, then the used car is going to have a heads up in terms of being better for you financially. You want to avoid having to get a car loan if you can.

In the end, here’s my approach: I’m going to shop around for both new and used cars from manufacturers I trust, and if I find a used car that’s notably less expensive per mile, then I’ll pick it up, but if I can’t find that, I’m probably buying new because I think the value of the warranty and the early reliability outshines the potential savings on insurance in most cases.

Again, your mileage may vary on this. You may have different goals for your car buying that don’t center around driving a car to 250,000 miles and you may be aiming for things besides reliability and safety and fuel efficiency, which are my main concerns when shopping for a car. However, given the approach we use and the factors we look at and what we’re noticing in the used car market right now, this is the approach we’re going to stick with during this car buying cycle.

However, regardless of what you decide for yourself, keep these things in mind.

First, avoid financing your car if at all possible. You should strive to get yourself in a cycle where you’re able to pay for replacement cars out of pocket. This means that when you have a car paid off, move to putting the money from that car payment into a savings account for your next car.

Second, know what you want in a car and research that in advance before stepping onto a lot. Are you aiming for comfort above all? Flashiness? Or are you mostly concerned about reliability and safety? Figure out what you want before shopping around. I strongly encourage you to go to the library and find recent car buying issues of Consumer Reports to get a good bead on what the different models available are like and what CR recommends. They do an extremely good job of writing comparative car reviews and pointing out key factors like which brands are reliable and which features actually matter. Couple that with some time spent on the websites of a variety of dealerships in your area.

Third, look at cars directly sold by their owner, but be careful. There are many legitimate reasons why people do this, but there are also people trying to dump a lemon and get some cash back for it and even some people who are trying to run a scam.

In the end, keep in mind that it’s up to you to find the best deal – a dealer’s not going to tell you what the best deal is. For what we’re looking for – a reliable car model with good safety features and fuel efficiency that will last to 250,000 miles or so – we’ve found that new and used models are pretty comparable in price per mile. This may not exclusively be true for all models, so look carefully.

Good luck.

The post Should I Buy a Used or New Car? appeared first on The Simple Dollar.

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